Chrysler 2006 Annual Report Download - page 51

Fiat Group Consolidated Financial Statements at December 31, 2006 -Notes 99
■Cash flow hedge –Where a derivative financial instrument
is designated as a hedge of the exposure to variability in future
cash flows of a recognised asset or liability or a highly
probable forecasted transaction and could affect income
statement, the effective portion of any gain or loss on the
derivative financial instrument is recognised directly in equity.
The cumulative gain or loss is removed from equity and
recognised in the income statement at the same time as the
economic effect arising from the hedged item affects income.
The gain or loss associated with a hedge or part of a hedge
that has become ineffective is recognised in the income
statement immediately.When a hedging instrument or hedge
relationship is terminated but the hedged transaction is still
expected to occur, the cumulative gain or loss realised to the
point of termination remains in stockholders’ equity and is
recognised in the income statement at the same time as the
related transaction occurs. If the hedged transaction is no
longer probable, the cumulative unrealised gain or loss held
in stockholders’ equity is recognised in the income statement
immediately.
If hedge accounting cannot be applied, the gains or losses
from the fair value measurement of derivative financial
instruments are recognised immediately in the income
statement.
Sales of receivables
The Fiat Group sells a significant part of its financial, trade
and tax receivables through either securitisation programs
or factoring transactions.
Asecuritisation transaction entails the sale of a portfolio of
receivables to a securitisation 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 the receivables retained by the seller is therefore
Measurement
Investments in unconsolidated companies classified as
non-current financial assets are accounted for as described
in the section Basis of consolidation.
Non-current financial assets other than investments, as well
as current financial assets and financial liabilities, are
accounted for in accordance with IAS 39 – Financial
Instruments: Recognition and Measurement.
Current financial assets and held-to-maturity securities are
recognised on the basis of the settlement date and, on initial
recognition, are measured at acquisition cost, including
transaction costs.
Subsequent to initial recognition, available-for-sale and held
for trading financial assets are measured at fair value. When
market prices are not available, the fair value of available-for-
sale financial assets is measured using appropriate valuation
techniques e.g. discounted cash flow analysis based on market
information available at the balance sheet date.
Gains and losses on available-for-sale financial assets are
recognised directly in equity until the financial asset is
disposed or is determined to be impaired, at which time
the cumulative gains or losses, including that previously
recognised in equity, are included in the income statement
for the period. Gains and losses arising from changes in fair
value of held for trading financial instruments are included
in the income statement for the period.
Loans and receivables which are not held by the Group for
trading (originated loans and receivables), held-to-maturity
securities and all financial assets for which published price
quotations in an active market are not available and whose
fair value cannot be determined reliably,are measured, to
the extent that they have a fixed term, at amortised cost, using
the effective interest method. When the financial assets do not
have a fixed term, they are measured at acquisition cost.
Receivables with maturities of over one year which bear no
interest or an interest rate significantly lower than market rates
are discounted using market rates.
Fiat Group Consolidated Financial Statements at December 31, 2006 -Notes 98
Assessments are made regularly as to whether there is any
objective evidence that a financial asset or group of assets
may be impaired. If any such evidence exists, an impairment
loss is included in the income statement for the period.
Except for derivative instruments, financial liabilities are
measured at amortised cost using the effective interest
method. Financial liabilities hedged by derivative instruments
are measured in accordance with hedge accounting principles
applicable to fair value hedges: gains and losses arising from
remeasurement at fair value, due to changes in relevant
hedged risk, are recognised in the income statement and are
offset by the effective portion of the loss or gain arising from
remeasurement at fair value of the hedging instrument.
Derivative financial instruments
Derivative financial instruments are only used for hedging
purposes, in order to reduce currency, interest rate and market
price risks. In accordance with IAS 39, derivative financial
instruments qualify for hedge accounting only when at the
inception of the hedge there is formal designation and
documentation of the hedging relationship, the hedge is
expected to be highly effective, its effectiveness can be reliably
measured and it is highly effective throughout the financial
reporting periods for which the hedge is designated.
All derivative financial instruments are measured in
accordance with IAS 39 at fair value.
When derivative financial instruments qualify for hedge
accounting, the following accounting treatment applies:
■Fair value hedge –Where a derivative financial instrument
is designated as a hedge of the exposure to changes in fair
value of a recognised asset or liability that is attributable to
aparticular risk and could affect the income statement, the
gain or loss from remeasuring the hedging instrument at fair
value is recognised in the income statement. The gain or loss
on the hedged item attributable to the hedged risk adjusts the
carrying amount of the hedged item and is recognised in the
income statement.
limited to the junior securities it has subscribed for. In
accordance with SIC-12 – Consolidation –Special Purpose
Entities (SPE), all securitisation vehicles are included in the
scope of consolidation, because the subscription of the junior
asset-backed securities by the seller entails its control in
substance over the SPE.
Furthermore, factoring transactions may be with or without
recourse to the seller; certain factoring agreements without
recourse include deferred purchase price clauses (i.e. the
payment of a minority portion of the purchase price is
conditional upon the full collection of the receivables), require
afirst loss guarantee of the seller up to a limited amount or
imply a continuing significant exposure to the receivables
cash flow. These kinds of transactions do not meet IAS 39
requirements for assets derecognition, since the risks
and rewards have not been substantially transferred.
Consequently,all receivables sold through both securitisation
and factoring transactions which do not meet IAS 39
derecognition requirements are recognised as such in the
Group financial statements even though they have been legally
sold; a corresponding financial liability is recorded in the
consolidated balance sheet as “Asset-backed financing”.
Gains and losses relating to the sale of such assets are not
recognised until the assets are removed from the Group
balance sheet.
Inventory
Inventories of raw materials, semi finished products
and finished goods are stated at the lower of cost and net
realisable value, cost being determined on a first in-first-out
(FIFO) basis. The measurement of inventories includes the
direct costs of materials, labour and indirect costs (variable
and fixed). Provision is made for obsolete and slow-moving
raw materials, finished goods, spare parts and other supplies
based on their expected future use and realisable value. Net
realisable value is the estimated selling price in the ordinary
course of business less the estimated costs of completion
and the estimated costs for sale and distribution.