| Summary of Significant Accounting Policies | 1. Summary of Significant Accounting Policies
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
NATURE OF OPERATIONS Through its operating subsidiaries, Autoliv is a
supplier of automotive safety systems with a broad range of product
offerings, including modules and components for passenger and
driver airbags, side airbags, curtain airbags, seatbelts, steering
wheels, passive safety electronics and active safety systems such
as night vision, radar, camera vision systems and position related
technologies. Autoliv is also a supplier of anti-whiplash systems,
pedestrian protection systems and child seats.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements have been
prepared in accordance with United States (U.S.) Generally Accepted
Accounting Principles (GAAP) and include Autoliv, Inc. and all
companies over which Autoliv, Inc. directly or indirectly exercises
control, which as a general rule means that the Company owns more
than 50% of the voting rights. Consolidation is also required when the Company has
both the power to direct the activities of a variable interest
entity (VIE) and the obligation to absorb losses or the right to
receive benefits from the VIE that could be significant to the
VIE. All intercompany accounts and transactions within
the Company have been eliminated from the consolidated financial
statements. Investments in affiliated companies in which the
Company exercises significant influence over the operations and
financial policies, but does not control, are reported using the
equity method of accounting. Generally, the Company owns between 20
and 50 percent of such investments.
BUSINESS COMBINATIONS Transactions in which the Company obtains control
of a business are accounted for according to the acquisition method
as described in Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) 805, Business Combinations.
The assets acquired and liabilities assumed are recognized and
measured at their fair values as of the date control is obtained.
Acquisition related costs in connection with a business combination
are expensed as incurred. Contingent consideration is recognized
and measured at fair value at the acquisition date and classified
as a liability based on appropriate GAAP.
USE OF ESTIMATES The preparation of consolidated financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosures of contingent assets and
liabilities at the date of the consolidated financial statements,
and the reported amounts of net sales and expenses during the
reporting period. The accounting estimates that require
management’s most significant judgments include the
estimation of retroactive price adjustments, valuation of stock
based payments, assessment of recoverability of goodwill and
intangible assets, estimation of pension benefit obligations based
on actuarial assumptions, estimation of accruals for warranty and
product liabilities, restructuring charges, uncertain tax
positions, valuation allowances and legal proceedings. Actual
results could differ from those estimates.
REVENUE RECOGNITION Revenues are recognized when there is evidence of a
sales agreement, delivery of goods has occurred, the sales price is
fixed or determinable and the collectability of revenue is
reasonably assured. The Company records revenue from the sale of
manufactured products upon shipment to customers and transfer of
title and risk of loss under standard commercial terms (typically
F.O.B. shipping point). In those limited instances where other
terms are negotiated and agreed, revenue is recorded when title and
risk of loss are transferred to the customer. Accruals are made for retroactive price adjustments
when probable and able to be reasonably estimated. Net sales exclude taxes assessed by a governmental
authority that are directly imposed on revenue-producing
transactions between the Company and its customers.
COST OF SALES Shipping and handling costs are included in Cost of
sales in the Consolidated Statements of Net Income. Contracts to
supply products which extend for periods in excess of one year are
reviewed when conditions indicate that costs may exceed selling
prices, resulting in losses. Losses on long-term supply contracts
are recognized when probable and estimable.
RESEARCH, DEVELOPMENT AND ENGINEERING (R,D&E) Research and development and most engineering
expenses are expensed as incurred. These expenses are reported net
of income from contracts to perform engineering design and product
development services. Such income is not significant in any period
presented. Certain engineering expenses related to long-term
supply arrangements are capitalized when defined criteria, such as
the existence of a contractual guarantee for reimbursement, are
met. The aggregate amount of such assets is not significant in any
period presented. Tooling is generally agreed upon as a separate
contract or a separate component of an engineering contract, as a
pre-production project. Capitalization of tooling costs is made
only when the specific criteria for capitalization of
customer-funded tooling are met or the criteria for capitalization
as Property, Plant & Equipment (P,P&E) for tools owned
by the Company are fulfilled. Depreciation on the Company’s
own tooling is recognized in the Consolidated Statements of Net
Income as Cost of sales.
STOCK BASED COMPENSATION The compensation costs for all of the
Company’s stock-based compensation awards are determined
based on the fair value method as defined in ASC 718,
Compensation—Stock Compensation. The Company records the
compensation expense for awards under the Stock Incentive Plan,
including Restricted Stock Units (RSUs) and stock options, over the
respective vesting period.
INCOME TAXES Current tax liabilities and assets are recognized
for the estimated taxes payable or refundable on the tax returns
for the current year. In certain circumstances, payments or refunds
may extend beyond twelve months, in such cases amounts would be
classified as non-current taxes payable or refundable. Deferred tax
liabilities or assets are recognized for the estimated future tax
effects attributable to temporary differences and carryforwards
that result from events that have been recognized in either the
financial statements or the tax returns, but not both. The
measurement of current and deferred tax liabilities and assets is
based on provisions of enacted tax laws. Deferred tax assets are
reduced by the amount of any tax benefits that are not expected to
be realized. A valuation allowance is recognized if, based on the
weight of all available evidence, it is more likely than not that
some portion, or all, of the deferred tax asset will not be
realized. Evaluation of the realizability of deferred tax assets is
subject to significant judgment requiring careful consideration of
all facts and circumstances. Current and non-current components of
deferred tax balances are reported separately based on financial
statement classification of the related asset or liability giving
rise to the temporary difference. If a deferred tax asset or
liability is not related to an asset or liability that exists for
financial reporting purposes, including deferred tax assets related
to carryforwards, the deferred tax asset or liability would be
classified based on the expected reversal date of the temporary
differences. Tax assets and liabilities are not offset unless
attributable to the same tax jurisdiction and netting is possible
according to law and expected to take place in the same period. Tax benefits associated with tax positions taken in
the Company’s income tax returns are initially recognized and
measured in the financial statements when it is more likely than
not that those tax positions will be sustained upon examination by
the relevant taxing authorities. The Company’s evaluation of
its tax benefits is based on the probability of the tax position
being upheld if challenged by the taxing authorities (including
through negotiation, appeals, settlement and litigation). Whenever
a tax position does not meet the initial recognition criteria, the
tax benefit is subsequently recognized and measured if there is a
substantive change in the facts and circumstances that cause a
change in judgment concerning the sustainability of the tax
position upon examination by the relevant taxing authorities. In
cases where tax benefits meet the initial recognition criterion,
the Company continues, in subsequent periods, to assess its ability
to sustain those positions. A previously recognized tax benefit is
derecognized when it is no longer more likely than not that the tax
position would be sustained upon examination. Liabilities for
unrecognized tax benefits are classified as non-current unless the
payment of the liability is expected to be made within the next 12
months.
EARNINGS PER SHARE The Company calculates basic earnings per share
(EPS) by dividing net income attributable to controlling interest
by the weighted-average number of common shares outstanding for the
period (net of treasury shares). When it would not be antidilutive
(such as during periods of net loss), the diluted EPS also reflects
the potential dilution that could occur if common stock were issued
for awards under the Stock Incentive Plan.
CASH EQUIVALENTS The Company considers all highly liquid investment
instruments purchased with an original maturity of three months or
less to be cash equivalents.
RECEIVABLES The Company has guidelines for calculating the
allowance for bad debts. In determining the amount of a bad debt
allowance, management uses its judgment to consider factors such as
the age of the receivables, the Company’s prior experience
with the customer, the experience of other enterprises in the same
industry, the customer’s ability to pay, and/or an appraisal
of current economic conditions. Collateral is typically not
required. There can be no assurance that the amount ultimately
realized for receivables will not be materially different than that
assumed in the calculation of the allowance.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company uses derivative financial instruments,
primarily forwards, options and swaps to reduce the effects of
fluctuations in foreign exchange rates, interest rates and the
resulting variability of the Company’s operating results. On
the date that a derivative contract is entered into, the Company
designates the derivative as either (1) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or of
an unrecognized firm commitment (a fair value hedge), (2) a hedge
of the exposure of a forecasted transaction or of the variability
in the cash flows of a recognized asset or liability (a cash flow
hedge) or (3) an economic hedge not applying special hedge
accounting pursuant to ASC 815. When a hedge is classified as a fair value hedge,
the change in the fair value of the hedge is recognized in the
Consolidated Statements of Net Income along with the offsetting
change in the fair value of the hedged item. When a hedge is
classified as a cash flow hedge, any change in the fair value of
the hedge is initially recorded in equity as a component of Other
Comprehensive Income (OCI) and reclassified into the Consolidated
Statements of Net Income when the hedge transaction affects net
earnings. All derivatives are recognized in the consolidated
financial statements at fair value. For certain other derivatives hedge accounting is
not applied either because non-hedge accounting treatment creates
the same accounting result or the hedge does not meet the hedge
accounting requirements, although entered into applying the same
rationale concerning mitigating market risk that occurs from
changes in interest and foreign exchange rates. For further details on the Company’s
financial instruments, see Notes 3 and 12.
INVENTORIES The cost of inventories is computed according to
the first-in, first-out method (FIFO). Cost includes the cost of
materials, direct labor and the applicable share of manufacturing
overhead. Inventories are evaluated based on individual or, in some
cases, groups of inventory items. Reserves are established to
reduce the value of inventories to the lower of cost or market,
with the market generally defined as net realizable value for
finished goods and replacement cost for raw materials and
work-in-process. Excess inventories are quantities of items that
exceed anticipated sales or usage for a reasonable period. The
Company has guidelines for calculating provisions for excess
inventories based on the number of months of inventories on hand
compared to anticipated sales or usage. Management uses its
judgment to forecast sales or usage and to determine what
constitutes a reasonable period. There can be no assurance that the
amount ultimately realized for inventories will not be materially
different than that assumed in the calculation of the reserves.
PROPERTY, PLANT AND EQUIPMENT Property, Plant and Equipment are recorded at
historical cost. Construction in progress generally involves
short-term projects for which capitalized interest is not
significant. The Company provides for depreciation of property,
plant and equipment computed under the straight-line method over
the assets’ estimated useful lives. Depreciation on capital
leases is recognized in the Consolidated Statements of Net Income
over the shorter of the assets’ expected life or the lease
contract terms. Repairs and maintenance are expensed as
incurred. The Company evaluates the carrying value of
long-lived assets other than goodwill when indications of
impairment are evident. Impairment testing is primarily done by
using the cash flow method based on undiscounted future cash flows.
Generally, the lowest level of cash flows for impairment assessment
is customer platform level.
GOODWILL AND INTANGIBLE ASSETS Goodwill represents the excess of the fair value of
consideration transferred over the fair value of net assets of
businesses acquired. Goodwill is not amortized, but is subject to
at least an annual review for impairment. Other intangible assets,
principally related to acquired technology and contractual
relationships, are amortized over their useful lives which range
from 3 to 25 years. As of December 31, 2015 and 2014, the Company
had goodwill of approximately $1.7 billion and $1.6 billion,
respectively. Of the goodwill amount, $1.4 billion and $0.3 billion
are associated with the Passive Safety and Electronics segments,
respectively. Approximately $1.2 billion of the Passive Safety
goodwill is associated with the 1997 merger of Autoliv AB and the
Automotive Safety Products Division of Morton International, Inc.
The Company performs its annual impairment testing in the fourth
quarter of each year. Impairment testing is required more often
than annually if an event or circumstance indicates that an
impairment, or decline in value, may have occurred. In conducting its impairment testing, the Company
compares the estimated fair value of each of its reporting units to
the related carrying value of the reporting unit. If the estimated
fair value of a reporting unit exceeds its carrying value, goodwill
is considered not to be impaired. If the carrying value of a
reporting unit exceeds its estimated fair value, an impairment loss
is measured and recognized by the amount which the carrying amount
of the goodwill exceeds the implied fair value of the goodwill
determined by assigning the fair value of the reporting unit to all
of the assets and liabilities of that unit. The estimated fair value of the reporting unit is
determined by the discounted cash flow method taking into account
expected long-term operating cash-flow performance. The Company
discounts projected operating cash flows using its weighted average
cost of capital, including a risk premium to adjust for market
risk. The estimated fair value is based on automotive industry
volume projections which are based on third-party and internally
developed forecasts and discount rate assumptions. Significant
assumptions include terminal growth rates, terminal operating
margin rates, future capital expenditures and working capital
requirements. To supplement this analysis, the Company compares
the market value of its equity, calculated by reference to the
quoted market prices of its shares, to the book value of its
equity. There were no impairments of goodwill from 2013
through 2015.
INSURANCE DEPOSITS The Company has entered into liability and recall
insurance contracts to mitigate the risk of costs associated with
product recalls. These are accounted for under the deposit method
of accounting based on the existing contractual terms.
WARRANTIES AND RECALLS The Company records liabilities for product recalls
when probable claims are identified and when it is possible to
reasonably estimate costs. Recall costs are costs incurred when the
customer decides to formally recall a product due to a known or
suspected safety concern. Product recall costs typically include
the cost of the product being replaced as well as the
customer’s cost of the recall, including labor to remove and
replace the defective part. Provisions for warranty claims are estimated based
on prior experience, likely changes in performance of newer
products and the mix and volume of products sold. The provisions
are recorded on an accrual basis.
RESTRUCTURING PROVISIONS The Company defines restructuring expense to
include costs directly associated with rightsizing, exit or
disposal activities. Estimates of restructuring charges are based on
information available at the time such charges are recorded. In
general, management anticipates that restructuring activities will
be completed within a timeframe such that significant changes to
the exit plan are not likely. Due to inherent uncertainty involved
in estimating restructuring expenses, actual amounts paid for such
activities may differ from amounts initially estimated.
PENSION OBLIGATIONS The Company provides for both defined contribution
plans and defined benefit plans. A defined contribution plan
generally specifies the periodic amount that the employer must
contribute to the plan and how that amount will be allocated to the
eligible employees who perform services during the same period. A
defined benefit pension plan is one that contains pension benefit
formulas, which generally determine the amount of pension benefits
that each employee will receive for services performed during a
specified period of employment. The amount recognized as a defined benefit
liability is the net total of projected benefit obligation (PBO)
minus the fair value of plan assets (if any) (see Note 18). The
plan assets are measured at fair value. The inputs to the fair
value measurement of the plan assets are mainly level 2 inputs (see
Note 3).
CONTINGENT LIABILITIES Various claims, lawsuits and proceedings are
pending or threatened against the Company or its subsidiaries,
covering a range of matters that arise in the ordinary course of
its business activities with respect to commercial, product
liability or other matters (see Note 16). The Company diligently defends itself in such
matters and, in addition, carries insurance coverage to the extent
reasonably available against insurable risks. The Company records liabilities for claims,
lawsuits and proceedings when they are probable and it is possible
to reasonably estimate the cost of such liabilities. Legal costs
expected to be incurred in connection with a loss contingency are
expensed as such costs are incurred. The Company believes, based on currently available
information, that the resolution of outstanding matters, other than
the antitrust matters described in Note 16, after taking into
account recorded liabilities and available insurance coverage,
should not have a material effect on the Company’s financial
position or results of operations. However, due to the inherent uncertainty associated
with such matters, there can be no assurance that the final
outcomes of these matters will not be materially different than
currently estimated.
TRANSLATION OF NON-U.S. SUBSIDIARIES The balance sheets of subsidiaries with functional
currency other than U.S. dollars are translated into U.S. dollars
using year-end rates of exchange. The statement of operations of these subsidiaries
is translated into U.S. dollars at the average rates of exchange
for the year. Translation differences are reflected in equity as a
component of OCI.
RECEIVABLES AND LIABILITIES IN NON-FUNCTIONAL CURRENCIES Receivables and liabilities not denominated in
functional currencies are converted at year-end rates of exchange.
Net transaction gains/(losses), reflected in the Consolidated
Statements of Net Income amounted to $(11.0) million in 2015,
$(3.8) million in 2014 and $(26.3) million in 2013, and are
recorded in operating income if they relate to operational
receivables and liabilities or are recorded in other financial
items, net if they relate to financial receivables and
liabilities.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In November 2015, the Financial Accounting
Standards Board (FASB), issued Accounting Standards Update (ASU)
2015-17, Balance Sheet Classification of Deferred Taxes (Topic
740), which simplifies the presentation of deferred income taxes.
The amendments in this Update require that deferred tax liabilities
and assets be classified as noncurrent in a classified statement of
financial position. The amendments in this Update apply to all
entities that present a classified statement of financial position.
The current requirement that deferred tax liabilities and assets of
a tax-paying component of an entity be offset and presented as a
single amount is not affected by the amendments in this Update. For
public business entities, the amendments in this Update are
effective for financial statements issued for annual periods
beginning after December 15, 2016, and interim periods within
those annual periods. Earlier application is permitted for all
entities as of the beginning of an interim or annual reporting
period. The amendments in this Update may be applied either
prospectively to all deferred tax liabilities and assets or
retrospectively to all periods presented. The Company plans to
early adopt this standard prospectively in its interim reporting
for the period ended March 31, 2016. In September 2015, the FASB, issued the ASU
2015-16, Simplifying the Accounting for Measurement-Period
Adjustments (Topic 805), which requires an acquirer to recognize
adjustments to provisional amounts that are identified during the
measurement period in the reporting period in which the adjustment
amounts are determined. ASU 2015-16 requires the acquirer to
record, in the same period’s financial statements, the effect
on earnings of changes in depreciation, amortization, or other
income effects, if any, as a result of the change to the
provisional amounts, calculated as if the accounting had been
completed at the acquisition date. ASU 2015-16 requires an entity
to present separately on the face of the income statement or
disclose in the notes the portion of the amount recorded in
current-period earnings by line item that would have been recorded
in previous reporting periods if the adjustment to the provisional
amounts had been recognized as of the acquisition date. For public
business entities, the amendments in this update are effective for
fiscal years beginning after December 15, 2015, including
interim periods within those fiscal years. The amendments in this
update should be applied prospectively to adjustments to
provisional amounts that occur after the effective date of this
update with earlier application permitted for financial statements
that have not been issued. The Company early adopted this standard
as of December 31, 2015. The adoption of this standard had no
material impact for any periods presented. In May 2014, the FASB issued ASU 2014-09, Revenue
from Contracts with Customers (Topic 606), which will supersede
nearly all existing revenue recognition guidance under U.S. GAAP.
The core principle of the guidance is that an entity should
recognize revenue when it transfers promised goods or services to
customers in an amount that reflects the consideration to which the
company expects to be entitled in exchange for those goods or
services. The standard was originally to be effective for public
entities for annual and interim periods beginning after
December 15, 2016. In August 2015, the FASB issued ASU
2015-14, Revenue from Contracts with Customers (Topic 606), that
defers the effective date of ASU 2014-09 for all entities by one
year. Public business entities should apply the guidance in ASU
2014-09 to annual reporting periods beginning after
December 15, 2017, including interim reporting periods within
that reporting period. Earlier application is permitted only as of
annual reporting periods beginning after December 15, 2016,
including interim reporting periods within that reporting period.
The Company is currently in the process of evaluating which
adoption method to use and assessing the potential impact the new
standard will have on its operations and consolidated financial
statements.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330), which requires an entity to measure
inventory at the lower of cost and net realizable value. Net
realizable value is the estimated selling prices in the ordinary
course of business, less reasonably predictable costs of
completion, disposal, and transportation. Subsequent measurement is
unchanged for inventory measured using LIFO or the retail inventory
method. For public business entities, this update is effective for
fiscal years beginning after December 15, 2016, including
interim periods within those fiscal years. The amendments in this
update should be applied prospectively with earlier application
permitted as of the beginning of an interim or annual reporting
period. The Company plans to adopt this standard as of
January 1, 2017. The adoption of this standard is not expected
to have a material impact for any periods presented. In April 2015, the FASB, issued ASU 2015-03,
Interest—Imputation of Interest (Subtopic
835-30)—Simplifying the Presentation of Debt Issuance Costs,
that requires debt issuance costs related to a recognized debt
liability to be presented in the balance sheet as a direct
deduction from the debt liability rather than as an asset. For
public business entities, the final guidance will be effective for
fiscal years beginning after December 15, 2015; however, early
adoption (including in interim periods) is permitted. Upon
adoption, an entity must apply the new guidance retrospectively to
all prior periods presented in the financial statements. An entity
is also required in the year of adoption to provide certain
disclosures about the change in accounting principle, including the
nature of and reason for the change, the transition method, a
description of the prior-period information that has been
retrospectively adjusted and the effect of the change on the
financial statement line items (that is, debt issuance cost asset
and the debt liability). The Company plans to adopt this standard
beginning January 1, 2016. The adoption of this standard is
not expected to have a material impact for any periods
presented. In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic
205-40), Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern, which requires management
to evaluate whether there are conditions and events that raise
substantial doubt about an entity’s ability to continue as a
going concern. The standard will be effective for annual periods
after December 15, 2016 and for annual periods and interim
periods thereafter. Early adoption is permitted. The Company early
adopted the standard in its interim reporting for
September 30, 2014; however, the adoption of ASU 2014-15 had
no impact on the Company’s disclosures in the unaudited
condensed consolidated financial statements.
RECLASSIFICATIONS Certain prior-year amounts have been reclassified
to conform to current year presentation. |
