Chrysler 2006 Annual Report Download - page 55

Fiat Group Consolidated Financial Statements at December 31, 2006 -Notes 107
Additional qualitative information on the financial risks
to which the Group is exposed is provided in Note 34.
Scope of consolidation
The consolidated financial statements of the Group as of
December 31, 2006 include Fiat S.p.A. and 419 consolidated
subsidiaries in which Fiat S.p.A., directly or indirectly, has a
majority of the voting rights, over which it exercises control,
or from which it is able to derive benefit by virtue of its power
to govern corporate financial and operating policies.
The total number of consolidated subsidiaries at December 31,
2006 decreased by 38 compared with that at December 31, 2005.
Excluded from consolidation are 81 subsidiaries that are either
dormant or generate a negligible volume of business: their
proportion of the Group’s assets, liabilities, financial position
and earnings is immaterial. In particular,44 such subsidiaries
are accounted for using the cost method; and represent 0.1
percent of Group revenues, 0.0 percent of stockholders’ equity
and 0.1 percent of total assets.
Interests in jointly controlled entities (64 companies, including
37 entities of Fiat Auto Financial Services group) are accounted
for using the equity method, except for one investment
accounted for using proportionate consolidation, although
the amounts involved in this case are not significant. The
combined balances of the Group’sshare in the principal
balance sheet items of joint ventures accounted for using
the equity method are as follows:
(in millions of euros) At December 31, 2006 At December 31, 2005
Non-current assets 1,992 1,064
Current assets 8,777 1,413
Total assets 10,769 2,477
Debt 7,781 710
Other liabilities 1,687 1,062
There is a significant increase in these balances at December
31, 2006 due to the inclusion at that date of the balances of the
Fiat Auto Financial Services group (the “FAFS” group), a joint
venture created at the end of 2006 with Sofinco (belonging to
the Crédit Agricole group), as described further in the notes.
Union market for the Fiat Auto and Commercial Vehicles
Sectors, and in North America for the Agricultural and
Construction Equipment Sector.
Financial assets are recognised in the balance sheet net
of write-downs for the risk that counterparties will be unable
to fulfil their contractual obligations, determined on the basis
of the available information as to the creditworthiness of the
customer and historical data.
Liquidity risk
The Group is exposed to funding risk if there is difficulty in
obtaining finance for operations at any given point in time.
The cash flows, funding requirements and liquidity of Group
companies are monitored on a centralised basis, under the
control of the Group Treasury. The aim of this centralised
system is to optimise the efficiency and effectiveness of the
management of the Group’s capital resources
In order to minimise the cost of financing and to ensure that
funding is obtainable, Group Treasury has the committed credit
facilities described in Note 28.
Interest rate risk and currency risk
As a multinational group that has operations throughout the
world, the Group is exposed to market risks from fluctuations
in foreign currency exchange and interest rates.
The exposure to foreign currency risk arises both in connection
with the geographical distribution of the Group’sindustrial
activities compared to the markets in which it sell products,
and in relation to the use of external borrowing denominated
in foreign currencies.
The Group utilises external borrowing and the sale of financial
receivables as asset-backed securities through securitisations
to fund its industrial and financial activities. Changes in
interest rates could have the effect of either increasing
or decreasing the Group’s net result.
Fiat Group Consolidated Financial Statements at December 31, 2006 -Notes 106
The Group regularly assesses its exposure to interest rate
and foreign currency risk through the use of derivative
financial instruments in accordance with its established risk
management policies.
The Group’s policy permits derivatives to be used only for
managing the exposure to fluctuation in exchange and interest
rates connected to monetary flows and assets and liabilities,
and not for speculative purposes.
The Group utilises derivative financial instruments designated
as fair value hedges, mainly to hedge:
■the exchange rate risk on financial instruments denominated
in foreign currency;
■the interest rate risk on fixed rate loans and borrowings.
The instruments used for these hedges are mainly currency
swaps, forward contracts, interest rate swaps and combined
interest rate and currency financial instruments.
The Group uses derivative financial instruments as cash flow
hedges for the purpose of pre-determining:
■the exchange rate at which forecasted transactions
denominated in foreign currencies will be accounted for;
■the interest paid on borrowings, both to match the fixed
interest received on loans (customer financing activity), and to
achieve a pre-defined mix of floating versus fixed rate funding
structured loans.
The exchange rate exposure on forecasted commercial flows
is hedged by currency swaps, forward contracts and currency
options. Interest rate exposures are usually hedged by interest
rate swaps and, in limited cases, by forward rate agreements.
Counterparties to these agreements are major international
financial institutions with high credit ratings.
Information on the fair value of derivative financial instruments
held at the balance sheet date is provided in Note 22.
This operation led to the derecognition of the assets and
liabilities held by entities previously controlled by the Fiat
Group and transferred to the joint venture as of December 28,
2006. In particular, Non-current assets have increased mainly
as a consequence of the inclusion of the leased assets of
renting companies belonging to FAFS, while Current assets
have increased as a consequence of the inclusion of the
receivables from the financing activities of the financial
services companies; the item Debt has increased significantly
due to the inclusion of the debt of those financial services
companies.
The following summary income statement excludes the results
of the operations of the FAFS group, as the joint venture was
established at the end of 2006. Prior to the joint venture, on
this date, the entities were consolidated on a line-by-line basis
for companies still belonging to the Fiat Group, and where
accounted for using the equity method for associated
companies belonging to the Fidis Retail Italia group. After the
joint venture was formed, all entities are accounted for using
the equity method.
The combined balances of the Group’s share in the principal
income statement items of jointly controlled entities accounted
for using the equity method are as follows:
(in millions of euros) 2006 2005
Net revenues 4,000 3,464
Trading profit 110 59
Operating result 93 59
Result before taxes 87 56
Net result 50 34
Twenty-nine associates are accounted for using the equity
method, while 31 associates, that in aggregate are of minor
importance, and are stated at cost. The main aggregate
amounts related to the Fiat Group interests in associates
are as follows:
(in millions of euros) At December 31, 2006 At December 31, 2005
Total assets 2,680 7,482
Liabilities 2,167 6,432
(in millions of euros) 2006 2005
Net revenues 1,145 1,280
Net result 78 71