Mr. David R Humphrey
Branch Chief
Division of Corporate Finance
US Securities and Exchange Commission
450 Fifth Street N.W.
Washington, DC. 20549
USA
27 January 2006
Dear Mr. Humphrey
Thank you for your letter of December 28, 2005, containing comments with respect
to the Form 20-F for the fiscal year ended December 31, 2004 (the "2004
Form 20-F") of AB Volvo ("Volvo", "the Company"). Having now had the
opportunity to carefully consider your comments, I have set out below our
responses. For your convenience, we have included the Staff's comments in
italics, followed by our responses.
Cash flow statement presentation
Classification of the cash flow effects of customer-financing receivables from
the sale of inventory in investing activities in Volvo Corporation's
consolidated statement of cash flow does not appear to comply with the
requirements of SFAS 95. Paragraph 22a of SFAS 95 states that cash receipts from
the sales of goods or services are operating cash flows. Paragraph 22a clarifies
that classification as an operating activity is required regardless of whether
those cash flows stem from the collection of the receivable from the customer or
the sale of the customer receivable to others; regardless of whether those
receivables are on account or stem from the issuance of a note; and regardless
of whether they are collected in the short-term or the long-term. It is
important to note that SFAS 102 did not change this requirement. SFAS 102
addressed in part whether loans made by financial and similar institutions were
sufficiently similar to product inventory of non-financial institutions such
that the cash flow effects of those loans should be classified in the statement
of cash flows in the same way as the cash flow effects from the sale of
inventory, as operating activities. SFAS 102 did not alter the requirement in
paragraph 22a to classify cash receipts from the sale of inventory as operating
activities. As the SFAS 95 basis for conclusions indicates in paragraphs 93 to
96, the FASB considered and rejected classifying any portion of the cash
receipts from sale of inventory as investing activities.
If you present in Volvo Corporation's consolidated statement of cash flows
inventory cash flows between the registrant and/or its consolidated subsidiaries
as an investing cash outflow and an operating cash inflow in the period Volvo
Corporation sells inventory, and there is no cash inflow to Volvo Corporation on
a consolidated basis from the inventory sale, we believe such a presentation
represents an error in Volvo Corporation's consolidated financial statements.
AB Volvo Response:
We confirm to the Staff that there are certain sales transactions between the
Volvo Industrial & Commercial ("I&C") divisions and Volvo Financial Services
("VFS") where cash is transferred between VFS and I&C in connection with assets
that are financed by VFS. These sales transactions are eliminated in our
consolidated cash flow statement.
Similarly, if you present cash receipts from customer-financing receivables
generated by the sale of inventory as investing activities in Volvo
Corporation's consolidated statements of cash flows; we believe such
classifications represent errors. Such errors, if material, may require
restatement of Volvo Corporation's historical financial statements.
AB Volvo Response:
Volvo is required to prepare its financial statements in accordance with
International Financial Reporting Standards ("IFRS") for the first time in our
Annual Report for 2005. In conjunction with preparation for this and in response
to the Staff's comment, we have reviewed our cash flow presentation from an IFRS
perspective. As a result of this we have concluded that a reclassification in
the cash flow statement of the item "Customer-financing receivables, net" from
investing activities to operating activities is required. Such an adjustment
would reduce cash flows from operating activities by SEK 7.4 billion in 2004 and
increase investing activities by the same amount. This adjustment would not
impact any other part of our consolidated cash flow statement.
The majority of cash flows included within "Customer-financing receivables, net"
relate to transactions where the sale of inventory by a dealer has been financed
by VFS.
Under IFRS we now believe that all of these cash flows should be reflected as
part of cash flows from operating activities, in accordance with paragraphs 14
and 15 of IAS 7.
Under US GAAP however, where cash has been received from a dealer for the sale
of a truck independently of finance being provided by VFS, we believe that this
would represent a cash inflow from operating activities. If VFS were to
subsequently provide customer financing to facilitate the purchase of the same
product from the dealer, we believe that in accordance with paragraph 17 of FAS
95, this would be treated as a cash outflow from investing activities, and
subsequent cash inflows from the financing would also be treated as investing
activities. Such a difference, if material, between IFRS and US GAAP will be
discussed in our 2005 financial statements.
Please tell us whether our understanding of your policy and its effects are
correct. If they are correct, please tell us in your response how you plan to
address the matters raised above.
AB Volvo Response:
We expect to release our 2005 preliminary results announcement, including
cash-flow information, on February 3, 2006. Our 2005 annual report and accounts
will be mailed to shareholders in early March 2006 and our filing on Form 20-F
containing our 2005 financial statements will follow.
Our 2005 financial statements will be prepared in accordance with IFRS (our
"IFRS Financial Statements") and we will reclassify the Customer-financing
receivables, net, to be included in Cash flows from operating activities. The
comparative year, 2004, will be reclassified accordingly. These financial
statements will include the following reclassified adjusted cash flow statement,
please see enclosure A.
Our IFRS Financial Statements will include a narrative discussion of significant
differences between IFRS and US GAAP that are applicable to AB Volvo, along with
a reconciliation of net income and shareholder's equity between IFRS and US
GAAP. In accordance with the requirements of Item 18 of Form 20-F, we will not
present a US GAAP cash flow reconciliation as our consolidated cash flow
statement will be prepared in accordance with IAS 7, Cash flow Statements.
Please also confirm our understanding, if true, that "other" receivables do not
relate to the sale of inventory by Volvo Corporation.
AB Volvo Response:
In response to the Staff's comment, Volvo can confirm that the major part of
"Other receivables" does not relate to the sale of inventory.
Finally, please tell us whether you enter into sales-type leases with dealers
and, if so, how you present such cash flows on the consolidated statements of
cash flows and why.
AB Volvo Response:
The Company supplementally advises the Staff that Volvo does not enter into
sales-type leases with dealers.
Closing comments
I hope that our responses to your comments are satisfactory, and that our
proposal to revise the disclosure in our 2005 preliminary results announcement,
2005 Swedish Annual Report and in our 2005 Form 20-F is acceptable to you.
Please do not hesitate to call me, at +46 31 66 10 06, or Mikael Hagstrom, Head
of Group Accounting, at + 46 31 66 13 26, if you have any questions regarding
the matters outlined above.
Thank you for your consideration of this submission.
Yours sincerely,
AB VOLVO
/s/ Par Ostberg
Par Ostberg
Senior Vice President & Chief Financial Officer
Copies to:
Securities and Exchange Commission
- ----------------------------------
Beverly Singleton
PricewaterhouseCoopers
- ----------------------
Olof Herolf, Stockholm
David Schmid, London
Enclosure A
To illustrate the re-classified cash-flow statement, based on Volvo's latest
quarterly report.
As presented in the quarterly report Re-classified Customer Finance receivables, net
In the Volvo Annual Report sub-totals for Investing and Financing Activities are presented.
- -----------------------------------------------------------------------------------------------------------------------------------
Cash-flow statement Third quarter First nine months Cash-flow statement Third quarter First nine months
SEK billion 2005 2004 2005 2004 SEK billion 2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------------------------
Operating activities Operating activities
Operating income 4,0 3,1 13,9 9,6 Operating income 4,0 3,1 13,9 9,6
Depreciation and Depreciation and
amortization 2,5 2,6 7,2 7,9 amortization 2,5 2,6 7,2 7,9
Other non-cash items 0,4 0,3 0,1 0,1 Other non-cash items 0,4 0,3 0,1 0,1
Change in working capital (2,6) (6,0) (8,4) (6,3) Change in working capital (2,6) (6,0) (8,4) (6,3)
Customer Finance
receivables, net (1,2) (0,9) (4,9) (4,4)
Financial items and income Financial items and income
taxes (1,0) (0,2) (1,3) (0,8) taxes (1,0) (0,2) (1,3) (0,8)
----------------------------- -----------------------------
Cash flow from operating Cash flow from operating
activities 3,3 (0,2) 11,5 10,5 activities 2,1 (1,1) 6,6 6,1
Investing activities Investing activities
Investments in fixed assets (2,5) (1,7) (6,7) (4,9) Investments in fixed assets (2,5) (1,7) (6,7) (4,9)
Investment in leasing Investment in leasing
vehicles (0,7) (0,8) (3,0) (3,2) vehicles (0,7) (0,8) (3,0) (3,2)
Disposals of fixed assets Disposals of fixed assets
and leasing vehicles 0,7 0,7 2,0 1,8 and leasing vehicles 0,7 0,7 2,0 1,8
Customer Finance
receivables, net (1,2) (0,9) (4,9) (4,4)
----------------------------- -----------------------------
Operating cash flow (0,4) (2,9) (1,1) (2,0) Operating cash flow (0,4) (2,9) (1,1) (2,0)
Investments in shares, net (0,1) 0,0 0,2 15,0 Investments in shares, net (0,1) 0,0 0,2 15,0
Adquired and divested Adquired and divested
operations 0,1 0,0 0,3 0,0 operations 0,1 0,0 0,3 0,0
Interest-bearing Interest-bearing
receivables incl receivables incl
marketable securities 1,2 1,7 3,6 (6,7) marketable securities 1,2 1,7 3,6 (6,7)
---------------------------- ----------------------------
Cash flow after net Cash flow after net
investments 0,8 (1,2) 3,0 8,1 investments 0,8 (1,2) 3,0 8,1
Financing activities Financing activities
Change in loans, net 0,5 0,3 2,9 (7,4) Change in loans, net 0,5 0,3 2,9 (7,4)
Dividend paid to AB Volvo Dividend paid to AB Volvo
shareholders 0,0 0,0 (5,1) (3,4) shareholders 0,0 0,0 (5,1) (3,4)
Repurchase of own shares - - (1,8) - Repurchase of own shares - - (1,8) -
Other 0,0 0,0 0,0 0,0 Other 0,0 0,0 0,0 0,0
----------------------------- -----------------------------
Change in liquid funds Change in liquid funds
excl translation excl translation
differences 1,3 (0,9) (1,0) (2,7) differences 1,3 (0,9) (1,0) (2,7)
Translation difference on Translation difference on
liquid funds 0,0 0,0 1,0 0,2 liquid funds 0,0 0,0 1,0 0,2
----------------------------- -----------------------------
Change in liquid funds 1,3 (0,9) 0,0 (2,5) Change in liquid funds 1,3 (0,9) 0,0 (2,5)
- -----------------------------------------------------------------------------------------------------------------------------------