AB Volvo (publ) – Annual report – 31 December 2018
The recognized net sales in Industrial Operations pertain to revenues from sales of vehicles and services. Revenue from vehicles and services are recognized when control has been transferred from Volvo Group to the customer. Control refers to the customers’ ability to use vehicles or services in its operations and to obtain the associated cash flow. Vehicles and services may be sold separately or as a combined offer. In combined offers where the vehicle and services are separable from each other and the customer can benefit from the vehicle and the service independently, the transaction price is allocated between vehicles and services based on stand-alone selling price according to price lists.
The recognized net sales in Financial Services pertain to interest income related to finance leases and installment credits and income from operating lease contracts. Interest income are recognized during the underlying contract period and income from operating leasing is recognized over the leasing period.
The below table includes a description of vehicles and services in terms of nature, timing of recognizing revenue and payment terms.
Read more in Note 6 Segment reporting regarding net sales by segment and market.
Vehicles include sales of new vehicles, machinery and engines as well as sales of used vehicles, machines, trailers, superstructures and special vehicles. A standard contractual warranty is included as part of the sales, read more in Note 21 Other provisions. The customer can pay for the vehicle at the point of sale or defer the payment by entering into agreements such as installment credits and finance lease.
Revenue is recognized when the control of the vehicle has been transferred to the customer, normally when the vehicle has been delivered to the customer. The value of rebates, returns and variable sales price have been considered as part of the revenue recognition. The variable sales price such as residual value guarantees is assessed at contract inception with continuous reassessment at each reporting period.
If the sale of the vehicle is combined with residual value commitment and there is a significant economic incentive for the customer to exercise the option, the control has not been transferred to the customer. The revenue and expense are recognized over the residual value commitment period in accordance with the rules for operating lease transactions. An asset, a Residual value liability, and a Deferred lease income are recognized in the balance sheet. The asset is depreciated over the contract period and the Deferred lease income is decreasing in the balance sheet during the contract period. The Residual value liability amount remains unchanged until the end of the contract period. During 2018, revenue from these operating lease transactions has been recognized with SEK 5,278 M.
If the customer is not considered to have a significant economic incentive to exercise the residual value commitment to return the vehicle, the revenue is recognized in accordance with the right of return model. Revenue corresponding to the sales amount less the buyback amount is recognized at the initial sale, as well as a proportionate share of cost of goods sold. The remaining revenue is recognized as a Refund liability and the remaining cost of goods sold as a Right of return asset during the commitment period. If the vehicle is not returned the Refund liability is recognized as revenue and the Right of return asset is recognized as cost of goods sold at the end of the commitment period.
Services include sale of spare parts, maintenance services, extended coverage and other aftermarket products. Revenue is recognized when the control of the service has been transferred to the customer, which is when the Volvo Group incurs the associated cost to deliver the service and the customer can benefit from the use of the delivered services. For spare parts, revenue is recognized when it is delivered to the customer.
For maintenance services and other aftermarket products, revenue is recognized during the contract period. When payment for maintenance contracts is received in advance, the payment is recognized as a contract liability.
Services also includes sales in Financial Services related to finance lease, installment credits and operating leases. During 2018, revenue from Financial Services operations amounted to SEK 13,070 M.
SOURCE OF ESTIMATION UNCERTAINTY AND CRITICAL JUDGEMENTS
Sales with residual value commitments and variable sales price
When the Volvo Group enters into sales transactions of vehicles with various residual value commitments (buybacks and tradebacks) the judgement whether control has been transferred from Volvo Group to the customer and at what point in time revenue shall be recognized is critical.
The criterion of transferring control is based on if the customer has a significant economic incentive to exercise the residual value commitment or not. If the repurchase price is higher than the assessed fair market value i.e. net realizable value at the end of the residual value commitment period, or if the average historical return rates indicate that it is probable that the customer will return the vehicle at the end of the commitment period, a significant economic incentive exist. Thus, the control has not been transferred and revenue is recognized over the commitment period as an operating lease. If it is assessed that the customer does not have a significant economic incentive to return the vehicle, the sales contract is accounted for in accordance with the right of return model. The assessment of transfer of control is performed at the inception of the contract and requires judgments. Other critical judgements relates to estimating the fair market value at the end of the contract and assessing variable sales price such as residual value guarantees. In assessing the variable sales price, the expected value method is used and revenue is recognized when it is highly probable that a reversal will not occur.
Read more in Note 21 Other provisions for a description of residual value risks and the assessment of fair market value.
Contract assets include revenue that has been recognized but not yet invoiced for work performed. The Right of return assets and Parts return assets represents the product cost for the assets that might be returned to the Volvo Group, refer to table 7:1 .
Read more in Note 16 Receivables
Contract liabilities include advance payments received from customers, e.g. advance payments for service contracts and extended coverage, for which revenue is recognized when the service is provided. Refund liabilities related to the right to return products and residual value guarantees are included with an amount that is expected to be paid to the customer, if the vehicle or spare part is returned. In service contracts, remaining performance obligations are found. The allocated transaction price for unsatisfied
performance obligations amounted to SEK 19,408 M as of December 31, 2018. The change in Contract and Refund liabilities are due to increased sales of service contract and extended coverage. During 2018, revenue has been recognized with SEK 13,091 M that was included in the Contract liabilities at the beginning of the period.
Read more in Note 22 Liabilities.