BMW 2007 Annual Report Download - page 89

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recognised individually based on the length of period
of the arrears. In the case of dealer financing receiv-
ables, the allocation of the dealer to a corresponding
rating category is also deemed to represent objec-
tive evidence of impairment. If there is no objective
evidence of impairment, impairment losses are
recognised on financial assets using a portfolio ap-
proach based on similar groups of assets. Company-
specific loss probabilities and loss ratios, derived
from historical data, are used to measure impairment
losses on similar groups of assets.
The recognition of impairment losses on receiv-
ables relating to the industrial business is also, as far
as possible, based on the same process applied to
the financial services business.
Impairment losses (write-downs and allowances)
on receivables are always recorded on separate
accounts and are not written off until the correspond-
ing receivables are derecognised.
Items are presented as financial assets to the
extent that they relate to financing transactions.
Derivative financial instruments are only used
within the BMW Group for hedging purposes to
reduce currency, interest rate and market price risks
from operations and any related financing require-
ments. All derivative financial instruments (such as
interest, currency and combined interest/currency
swaps as well as forward currency contracts) are
measured in accordance with IAS 39 at their fair
value, irrespective of their purpose or the intention
for which they are held. The fair values of derivative
financial instruments are measured using market
information and recognised valuation techniques.
In those cases where hedge accounting is applied,
changes in fair value are recognised either in income
or directly in equity under accumulated other equity
depending on whether the transactions are classi-
fied as fair value hedges or cash flow hedges. In
the case of fair value hedges, the results of the fair
value measurement of the derivative financial instru-
ments and of the related hedged items are recog-
nised in the income statement. In the case of fair
value changes from cash flow hedges which are used
to mitigate the future cash flow risk on a recognised
asset or liability or on forecast transactions, unrealised
gains and losses on the hedging instrument are
recognised initially directly in accumulated other
equity. Any such gains or losses are recognised sub-
sequently in the income statement when the hedged
item (usually external revenue) is recognised in the
income statement. The portion of the gains or losses
from fair value measurement not relating to the
hedged item is recognised immediately in the income
statement. If, contrary to the normal case within the
BMW Group, hedge accounting cannot be applied,
the gains or losses from the fair value measurement
of derivative financial instruments are recognised im-
mediately in the income statement.
In accordance with IAS 12 (Income Taxes), de-
ferred taxes are recognised on all temporary differ-
ences between the tax and accounting bases of as-
sets and liabilities and on consolidation procedures.
Deferred tax assets also include claims to future
tax reductions which arise from the expected usage
of existing tax losses available for carryforward, where
usage is probable. Deferred taxes are computed
using enacted or planned tax rates which are ex-
pected to apply in the relevant national jurisdictions
when the amounts are recovered.
Inventories of raw materials, supplies and goods
for resale are stated at the lower of average acquisi-
tion cost and net realisable value.
Work in progress and finished goods are stated
at the lower of average acquisition cost and net realis-
able value. Manufacturing cost comprises all costs
which are directly attributable to the manufacturing
process and an appropriate proportion of produc-
tion-related overheads. This includes production-
related depreciation and an appropriate proportion
of administrative and social costs.
Financing costs are not included in acquisition
or manufacturing cost.
Provisions for pensions and similar obligations
are recognised using the projected unit credit method
in accordance with IAS 19 (Employee Benefits).
Under this method, not only obligations relating to
known vested benefits at the reporting date are
recognised, but also the effect of future increases in
pensions and salaries. This involves taking account
of various input factors which are evaluated on a
prudent basis. The provision is derived from an inde-
pendent actuarial valuation which takes into account
all relevant biometric factors.
Actuarial gains and losses are recognised, net
of deferred tax, directly in equity.
The expense related to the reversal of discount-
ing on pension obligations and the income from the
expected return on pension plan assets are reported