Chrysler 2004 Annual Report Download - page 50

REPORT ON
OPERATIONS
01
48
underlying hedged item. Therefore, where the hedged item
has not been adjusted to fair value in the financial statements,
the hedging instrument has also not been adjusted. Similarly,
where the hedged item has not yet been recorded in the
financial statements (hedging of future flows), the valuation
of the hedging instrument at fair value is deferred.
Under IFRS:
– In the case of a fair value hedge, the gain or loss from
remeasuring the hedging instrument at fair value shall be
recognized in the income statement and the gain or loss
on hedged item attributable to the hedge risk shall adjust
the carrying amount of the hedged item and be
recognized in the income statement. Consequently, no
impact will arise on net income (except for the ineffective
portion of the hedge, if any) and on net equity, while
adjustments will impact the carrying values of hedging
instruments and hedged items.
– In the case of a cash flow hedge (hedging of future flows),
the portion of gain or loss on the hedging instrument that
is determined to be an effective hedge shall be recognized
directly in equity through the statement of changes in
equity; the ineffective portion of the gain or loss shall be
recognized in the income statement. Consequently, with
reference to the effective portion, only a difference on net
equity will arise between Italian GAAP and IFRS.
■Instruments designated as “non-hedging instruments”
(except for foreign currency derivative instruments) - under
Italian GAAP, these instruments are valued at market value
and the differential, if negative compared to the contractual
value, is recorded in the income statement, in accordance
with concept of prudence. Under IAS 39 also the positive
differential should also be recorded on the other hand. With
reference to foreign currency derivative instruments, instead,
the accounting treatment adopted under Italian GAAP is in
compliance with IAS 39.
In this context, as mentioned in the Italian GAAP consolidated
financial statements as of December 31, 2003, Fiat was party
to a Total Return Equity Swap contract on General Motors
shares, in order to hedge the risk implicit in the Exchangeable
Bond on General Motors shares. This swap, despite being
entered into for hedging purposes, could not be treated
in hedge accounting and accordingly was defined as non-
hedging instrument. Consequently, the positive fair value
of the instrument as of December 31, 2003, amounting to
0.4 billion euros, had not been recorded under Italian GAAP.
During 2004, Fiat closed the contract, realizing a gain of
0.3 billion euros.
In the IFRS restatement, the above mentioned positive fair
value at December 31, 2003 will be recognized in opening
equity, while, following the unwinding of the swap, a negative
adjustment of the same amount will be recorded in the 2004
income statement.
N. TREASURY STOCK
In accordance with Italian GAAP, the Group accounts for
treasury stock as an asset and records related valuation
adjustments and gains or losses on disposal in the consolidated
statements of operations.
Under IFRS treasury stock shall be deducted from stockholders’
equity and all movements in treasury stock shall be recorded in
stockholders’ equity rather than in the income statement.
O. STOCK OPTIONS
Under Italian GAAP, with reference to share-based payment
transactions, no obligations or compensation expenses are
recognized.
In accordance with IFRS 2 – Share-based Payment, the full
amount fair value of stock options on the date of grant must
be expensed. Changes in fair value after the grant date have no
impact on the initial measurement. The compensation expense
corresponding to the options’ fair value shall be recognized in
payroll costs on a straight-line basis over the period from the
grant date to the vesting date, with the offsetting credit
recognized directly in equity.
It should be mentioned that the Group will apply the transitional
provision stated by IFRS 2 and therefore will apply this standard
to all stock options granted after November 7, 2002 and not yet
vested at the effective date of IFRS 2 (January 1, 2005). No
compensation expense is required to be recognized for stock
options granted prior to November 7, 2002.
P. A DJUSTMENTS ON THE VALUATION OF INVESTMENTS
IN ASSOCIATES
These adjustments will represent the effect of the IFRS
adjustments on the Group portion of the net equity of
associates accounted for using the equity method.
Q. SALES OF RECEIVABLES
The Fiat Group sells a significant part of its finance, trade
and tax receivables through either securitization programs
or factoring transactions.
A securitization transaction entails the sale without recourse of
a portfolio of receivables to a securitization vehicle. This special
purpose entity finances the purchase of the receivables by
issuing asset-backed securities (i.e. securities whose repayment
and interest flow depend upon the cash flow generated by
the portfolio). Asset-backed securities are divided into classes
according to their degree of seniority and rating: the most
senior classes are placed with investors on the market; the junior
class, whose repayment is subordinated to the senior classes,
is normally subscribed for by the seller. The residual interest in