IFRS 16 policies, judgements, estimates, and certain lessee and lessor disclosures


AB Volvo (publ) – Annual report – 31 December 2020

Industry: automotive

14 LEASING

ACCOUNTING POLICY

Volvo Group as the lessor

Leasing contracts are defined in two categories, operating and finance leases, depending on the contracts’ financial implications.

Operating leases are offered from Financial Services (contractual operating leases) and from Industrial Operations (rental fleet agreements). Sales with residual value commitments (buybacks and tradebacks) are also accounted for as operating lease transactions when the customer has a significant economic incentive to exercise the option to return the vehicle and the control therefore has not been transferred to the customer. Operating lease agreements are recognized as tangible assets in assets under operating leases and are valued at cost less accumulated depreciation and impairment, if needed. The cost of an asset comprises the acquisition value and any initial direct costs related to the contract. Depreciation of the asset is recognized on a straight-line basis over the contract period. During the period the depreciable amount is adjusted through the income statement by depreciations or write-downs to correspond to the estimated future realizable value to reflect residual value risks at the end of the contract period. Lease income is equally distributed over the contract period and recognized within net sales.

Read more in Note 7 Revenue, about sales with residual value commitments.

Read more in Note 13 Tangible assets, about residual value risks related to assets under operating lease.

Finance leases are offered from Financial Services. As Industrial Operations manufacture the vehicles which are leased from Financial Services to the customers, the Volvo Group is acting as a manufacturer lessor. Hence, a finance lease asset gives rise to a selling profit which is recognized within Industrial Operations. Finance lease contracts are recognized as non-current and current customer-financing receivables within Financial Services. The asset is measured at an amount equal to the net investment in the finance lease contract corresponding to the gross investment (future minimum lease payments and unguaranteed residual value) discounted with the rate in the finance lease contract and reduced by unearned finance income and allowance for expected credit losses. Assessment of allowance for expected credit losses is reflected in the valuation of customer-financing receivables and recognized at initial recognition and reassessed during the contract period. Lease income is recognized as interest income within net sales in Financial Services. Variable lease payments not dependent on an index or rate are recognized as income as they occur. Payments received from finance lease contracts are distributed between interest income and amortization of the receivable.

Read more in Note 15 Customer-financing receivables, about finance leases.

Volvo Group as the lessee

Lease contracts are recognized as right-of-use (RoU) assets as well as interest-bearing lease liabilities in the balance sheet. Lease liabilities are recognized within other loans and are measured by the present value of future lease payments. The lease payments are discounted by using a rate reflecting what the Volvo Group would have to pay to borrow funds to acquire a similar asset, with similar collateral and similar term. RoU assets are presented as tangible assets and are valued at cost less accumulated depreciation and impairment, if needed. The cost of an RoU asset contains the initial amount of the lease liability adjusted for any lease payments made before the commencement date, less any lease incentives received. Moreover, any initial direct costs are included as well as an estimate of costs to be incurred in dismantling, removing or restoring the underlying asset. The leased asset is depreciated on a straight-line basis over the lease term, or over the useful life of the underlying asset if the ownership is transferred to the Volvo Group at the end of the lease term. The lease expense is recognized as depreciation of the asset within operating income and interest expense within the finance net. Payments made are distributed between interest paid and amortization of the lease liability.

Lease contracts with the Volvo Group as the lessee are primarily contracts of real estate (such as office buildings, warehouses and dealer premises), company cars and production related assets. For real estate and company car leases, service components are normally a considerable portion of the contracts and are therefore separated. The service components are recognized as operating expenses and not included in the RoU asset and the lease liability. For other lease contracts, both the leased asset and services are included in the RoU asset and the lease liability.

If a lease contract includes variable lease payments not dependent on an index or rate, or include a low value asset or has a lease term that is twelve months or less, the lease payments are recognized as operating expenses as they occur.

During 2020, IASB added an exemption for lessees regarding accounting for Covid-19 related rent concessions. The Volvo Group does not apply the exemption since the lease modifications that have been negotiated as a direct result of the Covid-19 pandemic in the Volvo Group during the year have not been material.

SOURCE OF ESTIMATION UNCERTAINTY AND CRITICAL JUDGMENTS

Measurement of lease liabilities and right-of-use assets

When entering a lease contract, judgments related to contract scope, lease term and interest rate used when discounting future lease payments are made which affects the measurement of the lease liability and the RoU asset.

Assessment of contract scope includes judgments whether a leased asset and/or a service component is identified in the contract. In combined contracts, the total contract amount is allocated between the leased asset and the service by using a market stand-alone price.

When determining the lease term of a contract, judgments are also required. The lease term includes the non-cancellable period. If the Volvo Group is reasonably certain to use an option to extend the lease, or not to use an option to terminate the lease in advance, this is also considered. The contracts contain a range of different conditions. Extension and termination options are mainly related to real estate leases. Thus, all relevant facts and circumstances that create an economic incentive to include optional periods are evaluated. The importance of the underlying asset in the operations and its location, availability of suitable alternatives, significant leasehold improvements, level of rentals in optional periods compared to market rates as well as past practice are examples of factors included in the assessment. Lease terms are negotiated on an individual basis and are reassessed if an option is exercised.

Judgments are also required to determine the interest rate when discounting future lease payments and whether the interest rate implicit in the lease can be readily determined and thereby used, or if the Volvo Group’s incremental borrowing rate should be used.

Volvo Group as the lessor

During 2020, the profit from sale of vehicles subject to finance leases amounted to SEK 2,863 M (3,959) and was recognized within Industrial Operations.

As of December 31, 2020, future lease income from non-cancellable finance and operating leases (minimum lease fees excluding sales with residual value commitments) amounted to SEK 70,293 M (75,198).

Read more in Note 15 Customer-financing receivables about finance leases.

Volvo Group as the lessee

1 Non-current and current lease liabilities amounting to SEK 377 M (0) and SEK 124 M (0) respectively have been reclassified to liabilities held for sale,

Read more in Note 3 Acquisitions and divestments of shares and operations.

During 2020, total cash outflow related to leases amounted to SEK 3,231 M (3,283), with a distribution of SEK 975 M (1,249) within operating cash flow and SEK 2,256 M (2,034) within financing activities.

1 Refer to the assets leased by the Volvo Group which are later sub-leased to customers as operating lease.

2 Additions to RoU assets mainly relate to new lease contracts signed.

3 RoU assets amounting to SEK 689 M (451) have been reclassified to assets held for sale,

Read more in Note 3 Acquisitions and divestments of shares and operations.