Chrysler 2006 Annual Report Download - page 159

B. Employee benefits
The employees’ severance indemnity (Trattamento di Fine
Rapporto or TFR)which was accounted for under Italian
accounting principles in accordance with specific legal
requirements is considered to be a defined benefit obligation
under IAS 19 – Employee Benefits and consequently has been
recalculated using the Projected Unit Credit Method.
In addition Fiat S.p.A. grants various forms of benefits to its
employees and former employees (termination incentives,
compensation, bonuses) in connection with previous or
current, local company or individual, employment agreements,
for which obligations are measured under IAS 19 in a manner
different from that used previously under Italian accounting
principles.
The application of IAS 19 has led to an overall increase in
stockholders’ equity at January 1, 2005 and in the 2005 net
result.
Finally Fiat S.p.A. accounts for employee benefits using the
corridor approach and has elected to present the interest
component of defined benefit employee plans in the item
“net financial income (expense)”, with the resulting increase
in financial expenses for 2005.
C. Write-off of deferred costs
(excluding the financial expenses of
the “Mandatory Convertible Facility”)
Under Italian accounting principles Fiat S.p.A. capitalised and
amortised certain costs (mainly start-up and extension costs)
which require a different accounting treatment under IFRS.
In addition, costs incurred in connection with increases in
capital stock, which are also deferred and amortised under
Italian accounting principles, are recognised under IFRS as a
deduction from equity in accordance with IAS 32 – Financial
Instruments: Disclosure and Presentation.
The adoption of IFRS has therefore led to a decrease in
stockholders’ equity at January 1, 2005 and to an increase
in the 2005 net result as the result of the reversal of the
Appendix Transition of the Parent Company Fiat S.p.A. to International Financial Reporting Standards (IFRS)314
amortisation charged to the Income Statement under Italian
accounting principles.
D. Treasury stock
In accordance with Italian accounting principles Fiat S.p.A.
accounted for treasury stock as an asset, recognising related
valuation adjustments and gains or losses on disposal in the
Income Statement.
Under IAS 32 treasury stock is deducted from stockholders’ equity
and any subsequent changes must also be recognised in equity.
The adoption of IFRS has therefore led to to a decrease in
stockholders’ equity at January 1, 2005 and in the 2005 net
result as the result of the reversal of the reinstatement of
treasury stock and of gains realised on disposal.
E. Measurement of derivative financial instruments
Starting from 2001 Fiat S.p.A. adopted IAS 39 – Financial
Instruments: Recognition and Measurement,to the extent
that is was considered consistent and not in contrast with the
general principles established by Italian law and regulations
governing financial statements. In particular, taking into
account the restrictions of Italian laws and regulations, it was
determined that IAS 39 was immediately applicable at that date
only in part and in reference to the designation of derivative
financial instruments as either “hedging instruments” or “
non-hedging instruments”, and with respect to the symmetrical
accounting of the result of the measurement of the hedging
instrument and the result attributable to the hedged item
(hedge accounting). The transactions which were entered into
within the extent of the company’s risk management policies
and which qualified for hedge accounting were classified as
“hedges”, while the others, although set up for the purpose
of managing risk exposure (as speculative operations are
not permitted as a policy), were designated as “trading”
transactions.
The main differences between Italian accounting principles
and IFRS may be summarised as follows:
instruments) – under Italian accounting principles these
instruments were measured at market value and if this was less
than contractual value the difference was recognised in the
Income Statement in accordance with the concept of prudence.
IAS 39 also requires the difference to be recognised when
market value exceeds contractual value. The accounting
treatment for foreign currency financial instruments under
Italian accounting principles was however in compliance with
IAS 39.
Fiat S.p.A. entered into a “Total Return Equity Swap”
agreement in 2005 to hedge the risk of a significant increase
in the Fiat share price above the exercise price of the stock
options granted to the Managing Director. At January 1, 2005
the Swap had a negative fair value that was recognised in the
financial statements prepared in accordance with Italian
accounting principles (a treatment in line with IFRS); at
December 31, 2005, however,the Swap had a positive fair
value which was not recognised under Italian accounting
principles and which therefore led to an increase in the 2005
net result for IFRS purposes.
F. Measurement at fair value of the investment
in Mediobanca
Investments in other companies classified as financial fixed
assets were measured at cost in the financial statements of
Fiat S.p.A. prepared in accordance with Italian accounting
principles; the carrying amount was adjusted for impairment
losses which were then reinstated in subsequent years if the
reasons underlying the impairment no longer subsisted.
Under IAS 39 – Financial Instruments: Recognition and
Measurement investments in other companies classified as
non-current financial assets and which are not held for trading
are measured at fair value if this can be determined, and the
resulting gains or losses resulting from changes in fair value are
recognised directly in equity until the assets are sold or impaired;
at that time cumulative gains and losses previously recognised in
equity are included in the Income Statement for the period.
The investment in Mediobanca S.p.A. held by the company is
classified as an available-for-sale financial asset, with its fair
value being determined from its Stock Exchange quotation at
Appendix Transition of the Parent Company Fiat S.p.A. to International Financial Reporting Standards (IFRS) 315
■Financial instruments designated as “hedging instruments”
–under Italian accounting principles the instrument is
measured symmetrically with the underlying hedged item.
As a result when the underlying hedged item is not adjusted
to fair value in the financial statements there is no requirement
to adjust the financial instrument. Similarly, where the hedged
item has not yet been recognised in the financial statements
(hedging of future cash flows), the valuation of the hedging
instrument at fair value is deferred.
Under IFRS:
–In the case of a fair value hedge the gains or losses arising
from remeasuring the hedging instrument at fair value are
recognised in the Income Statement, while the gains or losses
on the hedged item attributable to the hedged risk adjust the
carrying amount of the hedged item and are similarly
recognised in income. No impact consequently arises on net
profit or loss or stockholders’ equity from the adoption of IFRS
(except for any ineffective portion of the hedge), while
adjustments impact the carrying values of hedging instruments
and hedged items. Fiat S.p.A. has not entered any agreements
of this nature which have led to an impact on the periods
presented or which require the redetermination of the amounts
under IFRS.
–In the case of a cash flow hedge (hedging of future cash flows)
the portion of the gain or loss on the hedging instrument that
is determined to be an effective hedge is recognised directly in
equity through the statement of changes in equity, and the
ineffective portion of the gain or loss is recognised in the
Income Statement. Consequently differences between Italian
accounting principles and IFRS can only have an effect on
stockholders’ equity for the effective portion. In this respect the
impact on stockholders’ equity of the forward rate agreements
entered into by Fiat S.p.A. to hedge the risk of an increase in
interest rates on the variable part of the interest payable on the
Mandatory Convertible Facility is reflected in stockholders’
equity at January 1, 2005. These agreements had a negative
fair value at that date, not recognised under Italian accounting
principles, but which is recognised under IFRS with a
consequent decrease in stockholders’ equity.
■Financial instruments designated as “non-hedging
instruments” (except for foreign currency derivative financial