Other Disclosures

 

 

Cash flows are presented in the cash flow statement classified into cash flows from operating activities, investing activities and financing activities, irrespective of the format of the balance sheet.

 

Cash flows from operating activities are derived indirectly from profit before tax. Profit before tax is adjusted to eliminate noncash expenses (mainly depreciation and amortization) and income. This results in cash flows from operating activities after accounting for changes in working capital.

 

Investing activities include additions to property, plant and equipment, and noncurrent financial assets, as well as to capitalized development costs. The changes in leasing and rental assets and in financial services receivables are also included here.

 

Financing activities include outflows of funds from dividend payments and redemption of bonds, as well as inflows from the issue of bonds and changes in other financial liabilities.

 

The changes in balance sheet items that are presented in the cash flow statement cannot be derived directly from the balance sheet, as the effects of currency translation and changes in the consolidated Group are noncash transactions and are therefore eliminated.

 

The changes in cash and cash equivalents due to changes in the consolidated Group structure relate to cash and cash equivalents of initially consolidated and deconsolidated companies.

 

In 2007, cash flows from operating activities include interest received amounting to €4,096 million (previous year: €3,879 million) and interest paid amounting to €2,934 million (previous year: €3,184 million). In addition, the share of profits and losses of equity-method investments (note 5) includes dividends amounting to €667 million (previous year €139 million). Dividends amounting to €497 million (previous year: €450 million) were paid to Volkswagen AG shareholders.

 

 

 

1. HEDGING GUIDELINES AND FINANCIAL RISK MANAGEMENT PRINCIPLES

 

The principles and responsibilities for managing and controlling the risks that could arise from financial instruments are defined by the Board of Management and monitored by the Supervisory Board. General rules apply to the Group-wide risk policy; these are oriented on the statutory requirements and the "Minimum Requirements for Risk Management by Credit Institutions".

 

Group Treasury is responsible for operational risk management and control. The Executive Committee for Liquidity and Foreign Currency is regularly informed about current financial risks. In addition, the Group Board of Management and the Supervisory Board are regularly updated on the current risk situation.

For more information, please see the Management Report.

 

2. CREDIT AND DEFAULT RISK

 

The credit and default risk arising from financial assets involves the risk of default by counterparties, and therefore comprises at a maximum the amount of the claims under positive fair value receivable from them. The risk arising from primary financial instruments is accounted for by recognizing bad debt losses. Cash and capital investments and derivatives are only entered into with prime-rated national and international counterparties. Risk is additionally limited by a limit system based on credit assessments by the international rating agencies.

There were no material concentrations of risk in fiscal year 2007 due to the global allocation of the Group’s business activities and the resulting diversification.

 

 

 

 

 

The Volkswagen Group performs a credit assessment of borrowers in all loan and lease agreements, using scoring systems for the high-volume business and rating systems for corporate customers and receivables from dealer financing. Receivables rated as good are contained in risk class 1. Receivables from customers whose credit rating is not good but have not yet defaulted are contained in risk class 2.

 

 

 

 

 

 

Collateral that met the recognition criteria under IFRSs was recognized in the balance sheet in the amount of €174 million in fiscal year 2007 (previous year: €186 million). This mainly relates to vehicles.

 

 

3. LIQUIDITY RISK

 

The solvency and liquidity of the Volkswagen Group is ensured at all times by rolling liquidity planning, a liquidity reserve in the form of cash, confirmed credit lines and globally available debt issuance programs.

 

The following overview shows the contractual undiscounted cash flows from financial instruments.

 

 

 

4. MARKET RISK

 

4.1 HEDGING POLICY AND FINANCIAL DERIVATIVES

 

During the course of its general business activities, the Volkswagen Group is exposed to foreign currency, interest rate, commodity price and fund price risk. Corporate policy is to limit or eliminate such risk by means of hedging. All necessary hedging transactions are executed or coordinated centrally by Group Treasury.

 

The following table shows the gains and losses on hedges:

 

 

The ineffective portion of cash flow hedges represents the income and expenses from changes in the fair value of hedging instruments that exceed the fair value of hedged items that are shown to be within the permitted range of 80% to 125% when measuring effectiveness. Such income or expenses are recognized directly in the financial result.

In 2007, €–485 million (previous year: €21 million) from the cash flow hedge reserve was transferred to the net other operating result and €–92 million (previous year: €–46 million) to the financial result.

 

The Volkswagen Group uses two different methods to present market risk from primary and derivative financial instruments in accordance with IFRS 7. A value-at-risk model is used to measure foreign currency and interest rate risk in the Financial Services Division, while market risk in the Automotive Division is determined using a sensitivity analysis. The value-at-risk calculation entails determining potential changes in financial instruments in the event of variations in interest and exchange rates using a historical simulation based on the last 250 trading days. Other calculation parameters are a holding period of 10 days and a confidence level of 99%. The sensitivity analysis calculates the effect on equity and profit by modifying risk variables within the respective market risks.

 

4.2 MARKET RISK IN THE FINANCIAL SERVICES DIVISION

 

Exchange rate risk in the Financial Services Division is mainly attributable to assets that are not denominated in the functional currency and from refinancing within operating activities. Interest rate risk relates to refinancing without matching maturities and the varying interest rate elasticity of individual asset and liability items. The risks are limited by the use of currency and interest rate hedges.

 

As of December 31, 2007, the value at risk for interest rate risk was €14 million (previous year: €25 million) and €24 million for foreign currency risk (previous year: €29 million).

 

The entire value at risk for interest rate and foreign currency risk at the Financial Services Division was €37 million (previous year: €36 million).

 

4.3 MARKET RISK IN THE AUTOMOTIVE DIVISION

 

4.3.1 Foreign currency risk

 

Foreign currency risk in the Automotive Division is attributable to investments, financing measures and operating activities. Currency forwards, currency options, currency swaps and cross-currency swaps are used to limit foreign currency risk. These transactions relate to the exchange rate hedging of all payments covering general business activities that are not made in the functional currency of the respective Group companies. The principle of matching currencies applies to the Group’s financing activities.

 

As part of foreign currency risk management, hedging transactions in 2007 related primarily to the US dollar, sterling, the Swiss franc, the Japanese yen, the Swedish krone and the Russian rouble.

 

All non-functional currencies in which the Volkswagen Group enters into financial instruments are included as relevant risk variables in the sensitivity analysis in accordance with IFRS 7.

 

If the relevant functional currencies had been measured 10% higher than the other currencies as of December 31, 2007, the hedging reserve in equity and the fair value of the hedges would have been €1,385 million higher (previous year: €1,388 million). If the relevant functional currencies had been measured 10% lower than the other currencies as of December 31, 2007, the hedging reserve in equity and the fair value of the hedges would have been €1,272 million lower (previous year: €947 million).

 

If the relevant functional currencies had been measured 10% higher than the other currencies as of December 31, 2007, profit would have been €638 million lower (previous year: €346 million). If the relevant functional currencies had been measured 10% lower than the other currencies as of December 31, 2007, profit would have been €685 million higher (previous year: €188 million higher).

 

4.3.2 Interest rate risk

 

Interest rate risk in the Automotive Division results from changes in market interest rates, primarily for medium- and long-term variable interest receivables and liabilities. Interest rate swaps, cross-currency swaps and other types of interest rate contracts are entered into to hedge against this risk under fair value or cash flow hedges, depending on market conditions. Intra-Group financing arrangements are normally structured to match the maturities of their refinancing.

 

Interest rate risk within the meaning of IFRS 7 is calculated for the Automotive Division using sensitivity analyses. The effects of the risk variables in the form of market rates of interest on the financial result and on equity are presented here.

 

If market interest rates had been 100 bps higher as of December 31, 2007, equity would have been €81 million (previous year: €62 million) lower. If market interest rates had been 100 bps lower as of December 31, 2007, equity would have been €91 million higher (previous year: €66 million).

 

If market interest rates had been 100 bps higher (lower) as of December 31, 2007, profit would have been €105 million (previous year: €126 million) higher (lower).

 

4.3.3 Commodity price risk

 

Commodity price risk in the Automotive Division results from price fluctuations and the availability of non-ferrous metals and precious metals. Forward transactions are entered into to limit these risks. No hedge accounting in accordance with IAS 39 is used for commodity price risk.

 

Hedging relates to substantial volumes, such as the commodities aluminum and copper, as well as the precious metals platinum, rhodium and palladium.

Commodity price risk within the meaning of IFRS 7 is presented using sensitivity analysis. These show the effect on profit of changes in risk variables in the form of commodity prices.

 

If the commodity prices of the hedged metals had been 10% higher (lower) as of December 31, 2007, profit would have been €158 million (previous year: €201 million) higher (lower).

 

4.3.4 Fund price risk

 

The Spezialfonds (special funds) launched using surplus liquidity are subject in particular to equity and bond price risk, which can arise from fluctuations in quoted market prices, stock exchange indices and market rates of interest. The changes in bond prices resulting from variations in the market rates of interest are quantified in sections 4.3.1 and 4.3.2, as are the measurement of foreign currency and other interest rate risks arising from the special funds. As a rule, we counter the risks arising from the special funds by ensuring a broad diversification of products, issuers and regional markets when investing funds, as stipulated by our Investment Guidelines. In addition, we use exchange rate hedges in the form of futures contracts when market conditions are appropriate. The relevant measures are centrally coordinated by Group Treasury and implemented in operations by the special funds’ risk management team.

 

As part of the presentation of market risk, IFRS 7 requires disclosures on how hypothetical changes in risk variables affect the price of financial instruments. Potential risk variables here are in particular quoted market prices or indices, as well as interest rate changes as bond price parameters.

 

If share prices had been 10% higher (lower) as of December 31, 2007, equity would have been €16 million (previous year: €178 million) higher (lower).

 

5. METHODS FOR MONITORING HEDGE EFFECTIVENESS

 

In the Volkswagen Group, hedge effectiveness is assessed prospectively using the critical terms match method and using statistical methods in the form of a regression analysis. Retrospective analysis of effectiveness uses effectiveness tests in the form of the dollar offset method or a regression analysis.

 

Under the dollar offset method, the changes in value of the hedged item expressed in monetary units are compared with the changes in value of the hedging instrument expressed in monetary units.

 

Where regression analysis is used, the change in value of the hedged item is presented as an independent variable, and that of the hedging instrument as a dependent variable. A hedge relationship is classified as effective if it has a coefficient of determination of R² > 0.96 and a slope factor b of between – 0.80 and – 1.25.

 

 

 

The hedged items in cash flow hedges are expected to be realized in accordance with the maturity buckets of the hedges reported in the table.

 

The fair values of the derivatives are estimated using market data at the balance sheet date as well as by appropriate valuation techniques. The following term structures were used for the calculation:

 

 

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