For-profit organization - Research Paper Example

Volvo: New Accounting Principles in For-Profit Enterprises [ID Volvo's changes to accounting rules, especially as regards hedging accounting, indicates the salience of internal conflict to accounting. Alternatives are considered and options recommended. Body Volvo has adopted a number of new accounting standards in line with new laws, regulations and principles (Volvo, 2010). “As from January 1, 2005, AB Volvo applies the International Financial Reporting Standards (IFRS) as adopted by the EU, for the group consolidation”.

It is illustrative to examine the difficulties behind adopting this particular accounting procedure. The Volvo Group has a number of divisions: Volvo Trucks, Volvo Buses, Volvo Construction, Volvo Penta, Volvo Aero and Volvo Financial Services. Volvo is primarily a vehicle and automobile manufacturer, but its finance website offers leases and finance solutions, meaning that accounting is doubly important for the firm (Volvo AB, 2011). Volvo had an excellent year across all departments: “During the fourth quarter of 2010, the Volvo Group continued to grow at a good pace with higher sales in all regions, improved profitability and a very strong cash flow.

Year-on-year sales were up 23% to SEK 73.4 billion. Operating income improved to SEK 5.5 billion and the operating cash flow from Industrial operations amounted to SEK 15.1 billion. As a result of improved profitability and strong cash flow, net debt in the Industrial operations is now down to 37% of shareholders’ equity, which is in accordance with our objective”. The new principles Volvo has had to adopt include changing accounting to comply with the IFRS 3 Business combinations, which requires them to change reporting of future acquisitions and expand the reportage of “transaction costs, contingent considerations and step acquisitions”; comply with IAS Amendment 27, which changes the reportage of ownership as regards assets the parent company retains or loses; and has changed the way that it hedges firm flows, hedging only “whereof the major part is realized within 6 months”.

The latter is the most important change for the company: Hedge accounting is not applied which allows “unrealized gains and losses from fluctuations in the fair values of the contracts” to be reported in the Group headquarter functions. This improved the Group's operating income, but has two impacts for the other departments. First: A department that has many profitable contracts is having its success vis-a-vis other departments lowered in the official accounting statement; similarly, a department with many losing contracts can shift the burden to the main Group.

Second: The financial group has to apply hedging accounting far more often, as the major part is realized within six months in extremely short-term transactions not characteristic of a car company. Note that the new growth that the company experienced was partially due to accounting changes, which may also give inaccurate information to shareholders. Volvo should have provided shareholders a report that had the prior accounting options so that they have a consistency of information that allows them to see if their investment is paying off.

In addition, while changing the way hedging funds works was appropriate for the Group, contract values should still be noted on the individual departments to evaluate success. References Volvo. (2010). Accounting principles. Retrieved 2/6/2011 from: http://www3.volvo.com/investors/finrep/interim/2010/q3/eng/ otherinformation/accounting_princ ipl.html Volvo AB. (2011). Finance That Works For You. Retrieved 2/6/2011 from http://www.vfsco.com/financialservices/global/en-gb/pages/Home+page.aspx