Scania annual report 2003

Fair value of financial instruments
The carrying amount of interest-bearing assets and liabilities in the
balance sheet may deviate from their fair value, among other things as
a consequence of changes in market interest rates.
There is also a fair value for items that are not recognised in the balance
sheet, such as hedging instruments that do not correspond to net
assets in the balance sheet and that meet the requirements for hedge
accounting. To establish the fair value of financial assets and liabilities,
official market quotations have been used for those assets and liabilities
that are traded in an active market.
In those cases where market quotations do not exist, fair value has
been established by discounting future payment flows at current market
interest rates and exchange rates for similar instruments. Fair value of
financial instruments such as accounts receivable, accounts payable
and other non-interest-bearing financial assets and liabilities that are
recognised at acquisition value, minus any write-downs, is regarded as
coinciding with the carrying amount, and these instruments are therefore
not included in the table below.
2003
Carrying
Fair
amount value 1
Assets
Long-term holdings of securities 2 56 69
Long-term interest-bearing receivables 3 11,796 11,917
Interest-bearing current receivables 3 7,502 7,887
Short-term investments 704 703
Cash and bank balances 1,212 1,212
Currency forward contract for hedging
of net foreign investments 4 –1 –1
Currency derivatives for hedging of
future cash flows related to operating
activities 4, 5 54 113
Currency derivatives for hedging
of loans etc 4 58 58
Currency interest rate swaps 4 –62 –64
Interest rate-related derivatives 4 223 641
Total assets 21,542 22,535
Liabilities
Short-term borrowing 5,380 5,369
Long-term borrowing 20,827 22,370
Total liabilities 26,207 27,739
1 Interest-bearing financial assets and liabilities have been discounted to market
interest rates, without taking credit margins into account.
2 In the balance sheet under “Holdings in associated companies etc”.
3 Operating leases amounting to SEK 6,604 m. are not included in the table.
4 In the balance sheet under “Other current receivables”.
5 Fair value of hedging instruments that were not included in the balance sheet
on the closing date totalled SEK 76 m.
In some cases, carrying amount of assets with fixed interest rates exceeded
fair value as a consequence of changes in market interest rates.
Write-downs of these assets occur only when there is reason to believe
that the counterparty will not fulfil its contractual commitments, not as a
consequence of changes in market interest rates.
Accounting and valuation
Financial assets are recognised in the balance sheet on the sales or
transaction date at their acquisition value, which is equivalent to fair
value on that date. After the acquisition date, financial fixed assets are
valued at accrued acquisition value after subtracting probable credit
losses. Financial current assets are valued at the lower of accrued
acquisition value and market value.
Financial liabilities are recognised in the balance sheet at accrued
acquisition value. Premiums or deficits, including transaction costs, are
accrued over the life of the loan. Financial assets and liabilities in foreign
currencies are reported at the closing day rate.
Scania uses derivative instruments to control changes in exchange
rates and interest rates. Expected future payments in foreign currencies
are hedged mainly by selling currencies in forward contracts. Unrealised
gains or losses on contracts intended for hedging purposes are not
recognised continuously in the income statement, but only on the same
date as the result of the hedged flow. In currency hedging of receivables
and liabilities with forward contracts, Scania uses the exchange rate on
the date the currency hedging occurs at the valuation of the underlying
receivable or liability. The difference between the spot market rate and
the forward rate when the contract is entered into is accrued over the
life of the contract. Option premiums received and paid are accrued in a
corresponding way.
Scania uses interest rate swaps to achieve the desired interest rate
refixing period. Interest income and expenses related to interest rate
swaps are accrued continuously according to the contract terms. To
adapt borrowing to the desired funding currency, currency swaps are
used. When a loan in one currency has been converted to another currency
by means of swap agreements, the loan and the swap agreement
are valued at the exchange rate prevailing on the closing day for the new
currency.
Hedging of net assets in foreign subsidiaries occurs only to the extent
that a subsidiary has significant monetary assets in local currency. The
exchange rate difference in the forward contract is reported directly
against shareholders’ equity. The interest rate portion of the forward
contract is accrued over the life of the contract and is reported among
financial income and expenses.
Derivatives for which the requirements for hedge acounting are not
fulfilled are valued in the balance sheet at the lower of acquisition value
and fair value.
The main reason why the fair value of interest-bearing assets and liabilities
exceeded the carrying amount is that general interest rates were
lower at year-end than when the contracts were entered into.
73 ANNUAL REPORT 2003