Scania - Annual Report 2006

Scania annual report 2006 66 Any gains that arise in conjunction with the divestment of financial instruments or redemption of loan liabilities are recognised in the income statement. The above are the main accounting principles that Scania applies to financial assets and financial liabilities. The exceptions from the above principles that are applied concern financial instruments included in hedging relationships. A more thorough description is provided for exceptions to the above principles in the “Hedge accounting” section. Hedge accounting Cash flow hedging Currency futures (hedging instruments) that were acquired for the purpose of hedging expected future commercial payment flows in foreign currencies (hedged items) against currency rate risks are recognised according to cash flow hedge accounting rules. This implies that all derivatives are accounted for in the balance sheet at fair value, and changes in the value of currency futures are recognised in a hedge reserve in equity. Amounts that have been recognised in the hedge reserve in equity are recognised in the income statement at the same time as the external sale is recognised as revenue, that is, when delivery to an external customer occurs. Fair value hedging Scania’s external financing occurs mainly via different borrowing programmes. To convert this borrowing to the desired interest rate refixing structure, interest rate derivatives are used. IA S 39 imposes very strict requirements in order to apply hedge accounting. For administrative reasons, Scania has thus chosen to apply hedge accounting only to a few large hedging relationships. These hedging relationships comprise fair value hedgings, where by means of interest rate derivatives (hedging instruments), Scania eliminates the risk that changes in the market interest rate will affect the value of the liabilities (hedged item). In these hedging relationships, the hedging instrument i.e. the derivative, is carried at fair value with regard to the risk that has been hedged. This means that the change in value of the derivative instrument and that of the hedged item meet in net financial items. As mentioned above, Scania has chosen not to apply hedge accounting to all hedging transactions. In cases where hedge accounting is not applied, because of the separate treatment of derivatives, which are carried at market value, and liabilities, which are carried at accrued cost, accounting volatility arises in net financial items. Financially speaking, Scania considers itself hedged and its risk management adheres to the Financial Policy approved by the Board of Directors. Provisions Provisions are reported if an obligation, legal or informal, exists as a consequence of events that occur. It must also be deemed likely that an outflow of resources will be required to settle the obligation and that the amount can be reliably estimated. Provisions for warranties for vehicles sold during the year are based on warranty conditions and the estimated quality situation. Provisions on service contracts are related to expected future expenses that exceed contractual future revenue. Provisions for residual value obligations arise as a consequence either of an operating lease or a delivery with a repurchase obligation. The provision must cover the current assessment that expected future market value will be below the price agreed in the lease contract or repurchase contract. In this case, a provision for the difference between these amounts is to be reported, to the extent that this difference is not less than an as yet unrecognised deferred gain. Assessment of future residual value risk occurs continuously over the contract period. For provisions related to pensions, see the description under “Employee benefits” below and in Note 17. For provisions related to deferred tax liabilities, see below under “Taxes”. Taxes The Group’s total tax consists of current tax and deferred tax. Deferred tax is recognised in case of a difference between the carrying amount of assets and liabilities and their fiscal value (“temporary difference”). Deferred tax assets minus deferred tax liabilities are recognised only to the extent that it is likely that they can be utilised. The tax effect attributable to items recognised directly in equity, such as changes in actuarial gains/losses, is recognised together with the underlying item directly in equity. Employee benefits Within the Scania Group, there are a number of both defined contribution and defined benefit pension and similar plans, some of which have assets that are managed by special foundations, funds or the equivalent. The plans include retirement pensions, survivor pensions, health care and severance pay. These are financed mainly by provisions to accounts and partially via premium payments. Plans in which Scania only pays fixed contributions and has no obligation to pay additional contributions if the assets of the plan are insufficient to pay all compensation to the employee are classified as defined contribution plans. The Group’s expenditures for defined contribution plans are recognised as an expense during the period when the employees render the services in question. Defined benefit plans are all plans that are not classified as defined contribution. These are calculated according to the “projected unit credit method”, for the purpose of fixing the present value of the obligations for each plan. Calculations are performed every year and are based on actuarial assumptions that are set on the closing day. The obligations are carried at the present value of expected disbursements, taking into account inflation, expected future pay increases and using a discount rate equivalent to the interest rate on top-rated corporate or government bonds with a remaining maturity corresponding to the obligations in question. For plans that are funded, the fair value of the plan assets is subtracted from the estimated present value of the obligation. Changes in pension obligations and managed assets, respectively, due to changes in actuarial assumptions or adjustments in actuarial parameters based on outcomes are recognised directly in equity (“actuarial gains and losses”). In the case of some multi-employer defined benefit plans, sufficient information cannot be obtained to calculate Scania’s share of the plans. For this reason, these plans are reported as defined contribution. For Scania, this applies to the Dutch Pensioenfonds Metaal en Techniek, which is administered via MN Services, and Bedrijfstakpensioenfonds Metaloelektro, which is administered via PVF Achmea, as well as the portion of the Swedish ITP occupational pension plan that is administered via the retirement insurance company Alecta. Most of the Swedish plan for salaried employees (the collectively agreed ITP plan) is financed by provisions to accounts, however, which is safeguarded via credit insurance from the mutual insurance company Försäkringsbolaget Pensionsgaranti (FPG) and administered by a common institution operated on behalf of the Swedish business sector, Pensionsregistreringsinstitutet (PRI). See also Note 17. Scania recognises special payroll tax related to actuarial gains and losses in the income statement. Scania follows the rules in IA S 19 on limiting the valuation of net assets, since these are never carried at more than the present value of available economic benefits in the form of repayments from the plan or in the form of reductions in future fees to the plan. This value is determined as present value taking into account the discount rate in effect. Income statement - classifications Research and development expenses This item consists of the research and development expenses that arise during the research phase and the portion of the development phase that does not fulfil the requirements for capitalisation, plus amortisation and any impairment loss during the period of previously capitalised development expenditures (see Note 11, “Intangible noncurrent assets”). Note 1, continued