AB Volvo (publ) – Annual report – 31 December 2017
NOTE 31 CHANGES IN VOLVO GROUP FINANCIAL REPORTING 2018
Implementation of new accounting standards
As from January 1, 2018 Volvo Group applies IFRS 9 Financial instruments and IFRS 15 Revenue from Contracts with Customers. These standards are applied retrospectively but with the difference in relation to presenting comparative financial information for 2017.
Opening balance 2017
For IFRS 15, the opening balance for 2017 is adjusted in accordance with the new standard and the transition effect is recognized as a decrease in equity with SEK 712 M. The reported financial information for 2017 is restated accordingly for comparison purposes. For IFRS 9, the opening balance for 2017 has not been affected.
IFRS 9 Financial instruments
IFRS 9 is divided in three parts: Classification and Measurement, Impairment and Hedge Accounting, and replaces the current IAS 39 Financial Instruments: recognition and measurement. All financial instruments within the Volvo Group are classified and valued at amortized cost, except marketable securities, derivatives and holding of shares, which are classified and valued at fair value through the income statement. The new rules regarding classification and valuation have no impact on the Volvo Group. The new hedge accounting rules are not affecting the Volvo Group as no hedge accounting is applied.
The impact of the new standard is related to impairment and the new expected credit loss model. Volvo Group applies the simplified approach to measure lifetime expected credit losses. Compared with the former applied incurred loss model, the new requirements imply an earlier recognition of credit losses. Historical information is used regarding credit loss experience to forecast future credit losses. In addition, current and forward-looking information is used to reflect current and future conditions. The new model increased loss allowance by SEK 500 M mainly affecting customer-financing receivables negatively within Financial Services with a corresponding decrease in equity amounting to SEK 371 M (net of tax) as of January 1, 2018.
Read more in Note 30 Financial instruments regarding accounting policy for 2017.
The effect from the transition to IFRS 9 is presented on page 176–177 in the restated balance sheet and net financial position as of January 1, 2018.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 replaces IAS 11 Construction contracts, IAS 18 Revenue and the related interpretations IFRIC 13, 15, 18 and SIC-31. IFRS 15 represents a new framework for recognizing revenue from contracts with customers and with additional disclosure requirements.
The major impact of implementation of IFRS 15 is related to sales transactions of vehicles with various residual value commitments, e.g. buybacks and tradebacks, and the assessment if control has been transferred from Volvo Group to the customer.
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 customer is considered to have a significant economic incentive to exercise the residual value commitment to return the vehicle, revenue is recognized over the residual value commitment period as an operating lease transaction in accordance with IAS 17.
Various factors are assessed when considering if significant economic incentives exist, such as repurchase price in relation to the expected market value at the date of the repurchase and historical return rates. These are new criteria compared with the former revenue recognition model, where the residual value was compared with the sales price. The accounting model has not changed, however the criteria for when to apply the model are different.
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. Hence, a major portion of revenue and margin is recognized at inception of the contract. A refund liability and an asset related to the right to recover the vehicle from the customer on settling the refund liability are recognized in the balance sheet. If the vehicle is not returned the refund liability is recognized as revenue and the asset is expensed. This is a change compared to the former model, where full revenue is recognized at the inception of the contract with a contingent liability.
The effect of the two new models is a later recognition of revenue with an increase of assets with SEK 6,516 M mainly related to assets under operating lease and right of return assets and an increase of liabilities with SEK 7,725 M mainly related to deferred leasing income and residual value liabilities as of December 31, 2017. The corresponding effect is a net decrease in equity with SEK 1,209 M (net of tax) consisting of opening balance effect of SEK 712 M and a decrease of Income for the period for 2017 with SEK 497 M, whereof SEK 650 M affecting Operating income for 2017.
Read more in Note 7 Revenue regarding accounting policy for 2017.
The effect from the transition to IFRS 15 is presented on page 168–176 with restatements on net sales, operating income and operating margin divided by segment and quarter. Further is a presentation of income statement per quarter and full year for 2017, the opening balance sheet for 2017 and balance sheet per quarter and year to date.
Accounting policy for customer-financing receivables and receivables as from January 1, 2018
Customer-financing receivables (Note 15)
Installment credits, dealer financing and other receivables within customer-finance receivables have contractual cash flows that are solely payments of principal and interest and are held as part of a business model whose objective is to collect contractual cash flows. They are valued at amortized cost in accordance with the effective interest method. For information on recognition and classification on financial leasing see Note 14 Leasing. Volvo Group is applying the simplified expected credit loss model for customer finance receivables, under which the loss allowance is measured at an amount equal to lifetime expected credit losses and is recorded at initial recognition. Changes to credit loss reserves are recognized in Other operating income and expense.
Receivables (Note 16)
Receivables are classified and measured at amortized cost. Volvo Group is applying the simplified expected credit loss model on accounts receivables, under which the loss allowance is measured at an amount equal to lifetime expected credit losses and is recorded at initial recognition. Changes to credit loss reserves are recognized in Other operating income and expense.
Accounting policy for revenue as from January 1, 2018
Revenue (Note 7)
The Volvo Group’s recognized net sales pertain mainly 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 received payment is allocated between the different vehicles and services.
Interest income related to finance leasing and installment credit contracts are recognized as net sales within Financial Services during the underlying contract period.
The below table includes a description of vehicles and services in terms of nature, timing of recognizing revenue and payment terms.