Å kodaAuto ANNUAL REPORT 2006 - Skoda Auto

1.18 Critical accounting estimates and assumptions
The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom
equal the related actual results. The estimates and assumptions are continuously assessed by management. The estimates and
assumptions are based on historical experience and other factors, including the realistic assessment of future developments. The estimates
and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the
next financial year are discussed below.
Provision for warranty claims
The Company recognises provisions for warranty claims at the moment of sale. The amount of the provision for individual models is
determined on the basis of a professional estimate of the number of failures during the warranty period (2–10 years) and the single failure
costs, also considering specifics of particular countries. Changes in those presumptions can significantly influence the profit. These
estimates are revised annually based on historical data about the number of failures and their repair-costs. The amount of the provisions
for warranty claims is monitored during the year and the detailed analysis of the provision according to the single types, production years,
guarantee types and the sales regions is prepared at the year-end (Note 17).
Provision for disposal of end-of-life vehicles
The Company recognises the provision for scrapping according to EU guideline no. 200/53/EG on the basis of the following parameters:
– The registered cars in the Czech Republic;
– The official statistics and expected costs for the car’s ecological scrapping; and
– The legal requirements valid in the Czech Republic.
Uncertainty is caused by the cost of scrapping, cost of steel, material, etc. The amount of provision for disposal of end-of-life vehicles is
disclosed in note 17.
Useful life of fixed assets
The Company conducts its primary business activities within automotive sector that involves significant investments into fixed assets.
As a result, estimates of useful lives affecting allocation of depreciable amounts of fixed assets and changes of these estimates can
significantly influence the profits. The management reviews the useful lives at least at each financial year-end and, if expectations differ
from previous estimates, the changes are accounted for as a change in accounting estimate in accordance with IAS 8.
1.19 Financial risk management
The Company operating in the automotive industry in most countries around the world carries out activities that result in a variety of
financial risks. In 2006 the Company’s operations in this sector experienced a significant turnover increase the protection of which makes it
necessary to anticipate future developments and guard against potential risks.
The Board of Directors is regularly informed about the current positions of financial risks; whereas, the overall supervision is ensured by
periodical meetings on liquidity and the financial risks. The objective is to minimise these risks. This is carried out by a flexible hedging
strategy using diversified financial instruments. All the hedging activities are, in line with the concern guidelines, agreed and executed in
cooperation with the parent company VOLKSWAGEN AG.
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