Consolidated Statements of Shareholders' Equity
          Accumulated   Total1)
Additional other com- share-
Number Common paid in Retained prehensive Treasury holders'
(Dollars and shares in million) of shares stock capital earnings income (loss) stock equity
Balance at December 31, 2002 102.4 $102.4 $1,943.1 $239.9 $(92.0) $(133.4) $2,060.0
 
Comprehensive Income:
Net income 268.4 268.4
Net change in cash flow hedges 15.1 15.1
Foreign currency translation 147.2 147.2
Minimum pension liability (4.6) (4.6)
Total Comprehensive Income 426.1
Common stock incentives2) 0.4 0.4 6.1 3.7 10.2
Cash dividends (51.3) (51.3)
Repurchased treasury shares           (43.0) (43.0)
Balance at December 31, 2003 102.8 $102.8 $1,949.2 $457.0 $65.7 $(172.7) $2,402.0
 
Comprehensive Income:
Net income 326.3 326.3
Net change in cash flow hedges 5.1 5.1
Foreign currency translation 106.6 106.6
Minimum pension liability (2.9) (2.9)
Total Comprehensive Income 435.1
Common stock incentives2) 3.3 10.2 13.5
Cash dividends (70.3) (70.3)
Repurchased treasury shares           (143.9) (143.9)
Balance at December 31, 2004 102.8 $102.8 $1,952.5 $713.0 $174.5 $(306.4) $2,636.4
 
Comprehensive Income:
Net income 292.6 292.6
Net change in cash flow hedges 1.9 1.9
Foreign currency translation (138.9) (138.9)
Minimum pension liability 0.2 0.2
Total Comprehensive Income 155.8
Common stock incentives2) 1.8 4.6 6.4
Cash dividends (104.7) (104.7)
Repurchased treasury shares           (377.8) (377.8)
Balance at December 31, 2005 102.8 $102.8 $1,954.3 $900.9 $37.7 $(679.6) $2,316.1

1) See Note 13 for further details – includes tax effects where applicable.
2) See Notes 1 and 15 for further details – includes tax effects.
See Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
(Dollars in millions, except per share data)
1 Summary of Significant Accounting Policies
Nature of operations
Autoliv is a global automotive safety supplier with sales to all the leading car manufacturers.
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) and include Autoliv, Inc. and all companies in which Autoliv, Inc., directly or indirectly exercises control ("the Company"), which generally means that the Company owns more than 50% of the voting rights. Consolidation is also required when the Company is subject to a majority of the risk of loss from or is entitled to receive a majority of the residual returns or both from a variable interest entity's activities.
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 according to the equity method of accounting. Generally, the Company owns between 20 and 50 percent of such investments.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. 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 financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Policies
New accounting policies issued by the Financial Accounting Standards Board (FASB) which are effective on or after January 1, 2006, are the following:
Statement No. 151 Inventory Cost, an amendment of ARB No. 42, Chapter 4, was issued in November 2004 and is effective for fiscal years beginning after June, 2005. FAS-151 clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The application of FAS-151 is not expected to have any significant impact on earnings and financial position.
Revised statement No. 123 Share-Based Payment was issued in December 2004. On April 14, 2005, the SEC provided additional phased-in guidance regarding Statement No. 123 (R). Under the terms of this guidance the provisions are effective for the Company as of January 1, 2006. Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values (i.e. pro-forma disclosure is no longer an alternative to financial statement recognition). The application of FAS-123 (R) will not have a materially different impact than the pro-forma earnings disclosed in this note.
Stock Based Compensation
Under the Autoliv, Inc. 1997 Stock Incentive Plan (the "Plan") adopted by the Shareholders, and as further amended, awards have been made to selected executive officers of the Company and other key employees in the form of stock options and Restricted Stock Units ("RSUs"). All options are granted for 10-year terms, have an exercise price equal to the stock market price on the date of grant, and become exercisable after one year of continued employment following the grant date. Each RSU represents a promise to transfer one of the Company's shares to the employee after three years of service following the date of grant or upon retirement. The Plan provides for the issuance of up to 5,085,055 common shares for awards under the Plan. At December 31, 2005, 2,950,145 of these shares have been issued for awards. For stock options and RSUs outstanding and options exercisable at year end, see Note 15.
The Company applies APB Opinion 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock option plan. Accordingly, no compensation cost for stock option grants has been recognized in the Company's financial statements. The Company is, however, recording compensation expense for the RSUs over the service lives of the employees during the three-year vesting period. The total compensation expense for RSUs granted in 2005, 2004 and 2003 was $4.6 million, $3.6 million and $2.4 million, respectively.
Had compensation cost for all of the Company's stock-based compensation awards been determined based on the fair value of such awards at the grant date, consistent with the methods of FAS-123 "Accounting for Stock-Based Compensation", the Company's total and per share net income would have been as follows:
  2005 2004 2003
Net income as reported $292.6 $326.3 $268.4
Add: Compensation under intrinsic
value method included in
net income, net of tax 2.3 1.5 1.2
Deduct: Compensation under
fair value method for all
awards, net of tax (6.2) (4.5) (3.3)
Net income pro-forma $288.7 $323.3 $266.3
Earnings per share:
As reported, basic $3.28 $3.49 $2.83
As reported, assuming dilution $3.26 $3.46 $2.81
Pro-forma, basic $3.24 $3.46 $2.81
Pro-forma, assuming dilution $3.22 $3.43 $2.79

The weighted average fair value of options granted during 2005, 2004 and 2003 was estimated at $13.33, $11.11 and $5.55, respectively, using the Black-Scholes option-pricing model based on the following assumptions:
 200520042003
Risk-free interest rate3.7%3.0%2.8%
Dividend yield2.2%2.0%2.5%
Expected life in years555
Expected volatility33.0%33.0%33.0%
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.
Income statements are translated into U.S. dollars at the average rates of exchange for the year. Translation differences are reflected in other comprehensive income as a separate component of shareholders' equity.
Revenue Recognition
Revenues are recognized when there is evidence of a sales agreement, delivery of goods has occurred, the sales price is fixed and determinable and the collectibility of revenue is reasonably assured.
The Company records revenue from the sale of manufactured products upon shipment.
Accruals are made for retroactive price adjustments if probable and can be reasonably estimated.
Net sales include the sales value exclusive of added tax.
Cost of Sales
Shipping and handling costs are included in cost of sales. 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 estimable.