Chrysler 2003 Annual Report Download - page 77

76 Fiat Group Consolidated Financial Statements at December 31, 2003
Notes to the Consolidated Financial Statements
currency are translated at the exchange rate in effect at year
end. Resulting exchange gains and losses are included in the
statement of operations.
Taxes payable includes the tax charge for the current year
recorded in the statement of operations.
Accruals and deferrals
Accruals and deferrals are determined using the accrual method
based on the income and expense to which they relate.
Securitization of financial receivables
The Fiat Group has programs for discounting financial
receivables originated by the financial services companies
using securitization transactions. This discounting of financial
receivables calls for the sale without recourse of a portfolio
of financial receivables to a non-Group securitization vehicle.
This company finances the purchase of the portfolio by issuing
securities which it backs (Asset Backed Securities). The securities
issued are divided into two types having different characteristics:
the first is placed on the market, occasionally subdivided by
various classes of ratings, and subscribed to by investors; the
second, the reimbursement of which is subordinated to the first,
is subscribed to by the seller. The risk for the seller is limited
to the portion of the securities which it has subscribed. At the
end of each accounting period, therefore, such securities are
evaluated in relation to the performance of the receivables
sold and may be written down on the basis of this evaluation.
These securities are recorded in Financial receivables.
Lastly, these sales without recourse require the immediate
recognition of the present value of the future margin implicit
in the receivables sold, net of discounting costs. This net value
is included in the Value of production since it relates to revenues
arising out of the normal operations of the financial services
companies (to this end, the financial income of such companies
is included in revenues from sales and services, as described
in the relevant note).
Memorandum accounts
Derivative financial instruments
Financial instruments used to hedge exchange and interest rate
fluctuations and, in general, changes in the assets and liabilities,
are presented in Note 14. Derivative financial instruments are
recorded at inception in the memorandum accounts at their
notional contract amount.
Beginning in 2001 the Fiat Group adopted – to the extent that
it is consistent and not in contrast with general principles set
forth in the Italian law governing financial statements – the
international accounting standard IAS 39 “Financial Instruments:
Recognition and Measurement”, applicable beginning January
1, 2001. Such principle covers the accounting treatment of all
financial assets and liabilities in and off-balance sheet and, in
particular, states that derivative financial instruments should be
valued at fair value. Taking into account the restrictions under
Italian law and the evolution of the law now underway, the
Group maintains, consistently with Consob rulings, that IAS
39 is immediately applicable only in part and only in reference
to the designation of derivative financial instruments as
“hedging” or “non-hedging instruments” and with respect
to the symmetrical accounting of the result of the valuation of
the derivative hedging instrument and the result attributable
to the hedged item (“hedge accounting”). The transactions
which, according to the Group’s policy for risk management, are
able to meet the conditions stated by the accounting principle
for hedge accounting treatment are designated as hedging
transactions; the others although set up for the purpose of
managing risk (inasmuch as the Group’s policy does not permit
speculative transactions), have been designated as “trading”.
Details of the accounting treatment adopted are as follows.
For foreign exchange instruments designated as hedges,
the premium (or discount, representing the difference between
the spot exchange rate at the inception of the contract and
the forward exchange rate) is recorded in the statement of
operations, in Financial income and expenses, in accordance
with the accrual method. Differences between the value of such
instruments using the exchange rates at inception and those
at year end are also included in the statement of operations
to offset the exchange effects of the items being hedged. In
particular, for contracts put into place to hedge the exchange
risk of future transactions that are considered highly probable,
the effects of the alignment with the year-end exchange rate
are deferred until the year in which the underlying transactions
are recorded.
For interest rate instruments designated as hedges, the interest
rate differential is included in the statement of operations, in
Financial income and expenses, in accordance with the accrual
method, offsetting the effects of the hedged transaction.
Derivative financial instruments hedging interest rate
fluctuations that are designated as trading instruments are
valued at market value and the differential, if negative
compared to the contractual value, is recorded in the statement
of operations as Financial income and expenses, in accordance
with the concept of prudence.
The same prudent principle is followed in recording derivative
financial instruments to manage trading risks (for example
equity swaps) that do not meet the conditions for hedge
accounting treatment.
Statement of Operations
Revenue recognition
Revenues from sales and services are recognized on the accrual
basis net of returns, discounts, allowances and rebates.