Chrysler 2006 Annual Report Download - page 160

the Balance Sheet date. The adoption of IAS 39, therefore, led
to an increase in stockholders’ equity at both January 1, 2005
and December 31, 2005.
G. Recognition and measurement of financial liabilities
(the “Mandatory Convertible Facility”)
Financial liabilities at January 1, 2005 relate principally to the
“Mandatory Convertible Facility” which was measured in the
financial statements of Fiat S.p.A. prepared in accordance with
Italian accounting principles at the amounts received from the
lending banks. The various commissions due to the banks (for
financial arrangement, underwriting commitments, etc.) and paid
at agreed contractual dates (on inception, over the term and on
repayment) were recognised in the Income Statement on a
straight-line basis over the term of the loan (pro-rata temporis).
Under IAS 39 – Financial Instruments: Recognition and
Measurement,financial liabilities must initially be recognised at
fair value (being the amounts received from the banks), net of the
related transaction costs, and must subsequently be measured at
amortised cost using the effective interest method. The adoption
of IAS 39, therefore, led to the requirement to recompute expense
over the various years with a resulting net increase in
stockholders’ equity at January 1, 2005. This effect reversed on
the extinguishment of the Mandatory Convertible Facility in 2005
leading to a decrease in the 2005 net result.
H. Recognition of financial income from the conversion
of the “Mandatory Convertible Facility”
The Mandatory Convertible Facility Agreement provided for
either reimbursement by cash (which was possible only under
certain conditions, which were not actually satisfied at the date
Appendix Transition of the Parent Company Fiat S.p.A. to International Financial Reporting Standards (IFRS)316
that the agreement was terminated) or the mandatory
conversion of the facility into shares (at a contractually agreed
variable price, depending on the performance of the Fiat share
on the stock exchange), underwritten by the lending banks and
subsequently offered in option to stockholders. In the financial
statements of Fiat S.p.A. prepared in accordance with Italian
accounting principles, the conversion of the facility led to a
decrease of the debt and an increase in capital stock and
additional paid-in capital by an amount of 10.28 euros per
share, being the subscription price of the new shares, with
no effect on the Income Statement.
In the financial statements of Fiat S.p.A. prepared in
accordance with IFRS, the Mandatory Convertible Facility
should have been considered a financial liability with a
conversion feature that is considered to be an embedded
derivative and that should be separated from the debt
instrument at inception, with any subsequent changes in
fair value recognised in the Income Statement. Due to the
significant uncertainty as to whether gains on the
remeasurement to fair value of the embedded derivative would
actually have been realised, however,the fair value adjustment
has not been recognised over the life of the instrument.
Financial income from significant non-recurring transactions of
858 million euros was then recognised for IFRS purposes when
the uncertainty surrounding the ability to convert and realise
the gains was resolved, and namely at the time that the actual
conversion took place. This gain corresponds to the difference
between the subscription price of 10.28 euros per share and
the market value of 7.337 euros per share at the subscription
date, net of issuance costs.
This different accounting treatment has no effect on
stockholders’ equity.
Under IAS 39 – Financial Instruments: Recognition and
Measurement,the derecognition of financial assets is
permitted if and only if the risks and rewards of ownership
of the assets have been substantially transferred: as a result,
all receivables sold with recourse and a part of receivables
sold without recourse (in particular receivables from the tax
authorities) have been reinstated in the Balance Sheet.
M. Recognition of financial guarantee contracts
Under Italian accounting principles guarantees granted were
recognised in the memorandum accounts and only the
commissions received and any risk provisions were
recognised in the financial statements; risk provisions were
measured on the basis of the best estimate of the cost
required to fulfill the obligation existing at the Balance Sheet
date in the event of risks regarding the solvency of the
guaranteed entity.
Under IFRS (and with particular regard to IAS 39 as amended),
guarantees given are initially measured at fair value, adjusted
for any directly attributable transaction costs.
On first-time adoption of IFRS, Fiat S.p.A. accordingly
recognised the present value of the commissions receivable
for guarantees granted in non-current financial assets and
recognised the fair value of the contractual liabilities in non-
current debt, as there were no specific risk situations requiring
provisions to be recognised in accordance with IAS 37 –
Provisions, Contingent Liabilities and Contingent Assets.In
particular, since the guarantees given by Fiat S.p.A. (regarding
financial liabilities of other Fiat Group companies) are granted
at market conditions and generate commissions, it has been
concluded that the current value of the commissions which
were to be received represented the best estimate of the fair
value of the guarantees granted. As these amounts were the
same there was no effect on stockholders’ equity nor on the
result for the year ended December 31, 2005.
Appendix Transition of the Parent Company Fiat S.p.A. to International Financial Reporting Standards (IFRS) 317
I. Stock options
No obligation or cost was recognised for stock-based
compensation under Italian accounting principles.
IFRS 2 – Share-based Payment requires the total fair value
of stock options at the grant date to be recognised in the
Income Statement on a straight-line basis from the grant
date to the vesting date, with the offsetting credit recognised
directly in equity. Changes in fair value after the grant date
do not have any effect on the initial measurement.
In accordance with the transitional provisions of IFRS 2, Fiat
S.p.A. has applied the Standard to all stock options granted
after November 7, 2002 which had not yet vested by January 1,
2005, the effective date of the Standard; as a consequence
no cost has been recognised for stock-based compensation
granted prior to that date.
There was no effect on stockholders’ equity at January 1, 2005
from the application of IFRS 2, while there was a decrease in
the net result for 2005.
L. Sales of receivables
Fiat S.p.A. sells a significant part of its receivables through
factoring transactions.
Factoring transactions may be either with or without recourse
to the seller; certain factoring agreements without recourse
contain deferred price clauses (payment of a minority portion
of the purchase price is conditional upon the full collection of
the receivable), require a first loss guarantee of the seller up
to a limited amount or imply a continuing significant exposure
to the receivables cash flows.
Under Italian accounting principles all the receivables sold
under factoring transactions (both with or without recourse)
were derecognised.