Chrysler 2006 Annual Report Download - page 93

Fiat Group Consolidated Financial Statements at December 31, 2006 -Notes 183
Liquidity risk
Liquidity risk arises if the Group is unable to obtain under economic conditions the funds needed to carry out its operations.
The two main factors that determine the Group’s liquidity situation are on one side the funds generated by or used in operating
and investing activities and on the other the debt lending period and its renewal features or the liquidity of the funds employed
and market terms and conditions.
As described in the Risk management section, the Group has adopted a series of policies and procedures whose purpose is to
optimise the management of funds and to reduce the liquidity risk, as follows:
■centralising the management of receipts and payments, where it may be economical in the context of the local civil, currency
and fiscal regulations of the countries in which the Group is present;
■maintaining an adequate level of available liquidity;
■diversifying the means by which funds are obtained and maintaining a continuous and active presence on the capital markets;
■obtaining adequate credit lines; and
■monitoring future liquidity on the basis of business planning.
Details as to the repayment structure of the Group’s financial assets and debt are provided in Notes 19 and 28, which are entitled
respectively Current receivables and Debt.
Management believes that the funds and credit lines currently available, in addition to those funds that will be generated
from operating and funding activities, will enable the Group to satisfy its requirements resulting from its investing activities
and its working capital needs and to fulfil its obligations to repay its debts at their natural due date.
Exchange rate risk
The group is exposed to risk resulting from changes in exchange rates, which can affect its result and its equity.In particular:
■Where a Group company incurs costs in a currency different from that of its revenues, any change in exchange rates can affect
the operating result of that company.
In 2006, the total trade flows exposed to exchange rate risk amounted to the equivalent of 13% of the Group’s turnover (14% in 2005).
The principal exchange rates to which the Group is exposed are the following:
–EUR/USD, relating to sales in dollars made by Italian companies (in particular Ferrari and Maserati) to the North American market and
to other markets in which the dollar is the trading currency, and to the production and purchases of the CNH Sector in the Euro area;
–EUR/GBP, principally in relation to sales by Fiat Auto and Iveco on the UK market;
Credit risk
The maximum credit risk to which the Group is theoretically exposed at December 31, 2006 is represented by the carrying amounts
stated for financial assets in the balance sheet and the nominal value of the guarantees provided on liabilities or commitments
to third parties as discussed in Note 32.
Dealers and final customers are subject to specific assessments of their creditworthiness under a detailed scoring system;
in addition to carrying out this screening process, the Group also obtains financial and non-financial guarantees for credit granted
for the sale of cars, commercial vehicles and agricultural and construction equipment. These guarantees are further strengthened
by reserve of title clauses on financed vehicle sales to the sales network and on vehicles assigned under finance leasing
agreements.
Balances which are objectively uncollectible either in part or for the whole amount are written down on a specific basis if they
are individually significant. The amount of the write-down takes into account an estimate of the recoverable cash flows and the
date of receipt, the costs of recovery and the fair value of any guarantees received. General provisions are made for receivables
which are not written down on a specific basis, determined on the basis of historical experience and statistical information.
Out of Receivables for financing activities amounting to 11,743 million euros at December 31, 2006 (15,973 million euros
at December 31, 2005), balances totalling 159 million euros (205 million euros at December 31, 2005) have been written down on
an individual basis. Of the remainder, balances totalling 93 million euros (226 million euros at December 31, 2005) are past due up
to one month, while balances totalling 360 million euros are past due by more than one month (408 million euros at December 31,
2005). In the event of instalment payments, even if only one instalment is overdue, the whole amount of the receivable is classified
as such.
Out of Trade receivables and Other receivables totalling 7,783 million euros at December 31, 2006 (8,053 million euros at December
31, 2005), balances totalling 118 million euros (119 million euros at December 31, 2005) have been written down on an individual
basis. Of the remainder, balances totalling 406 million euros (400 million euros at December 31, 2005) are past due up to one
month, while balances totalling 554 million euros (613 million euros at December 31, 2005) are past due by more than one month.
The decrease in overdue balances is partly the result of the reduction in the portfolio as a consequence of the deconsolidation
of he companies whose operations were transferred to the FAFS joint venture and is partly the effect of the steps taken during
the year to collect these balances.
CNH Financial Services in Brazil (“Banco CNH”) participates in various agricultural development/subsidy programs of the Brazilian
government, provided through the Banco Nacional de Desenvolvimento Economico e Social (“BNDES”). Under such programs
BNDES provides credit lines to Banco CNH, at subsidized interest rates, such that Banco CNH can provide subsidized financing
to farmers for purchases of agricultural equipment. Because of the severe regional droughts and low local agricultural commodity
prices in Brazil, the Brazilian government granted a payment moratorium to certain of the farmers in the worst affected areas.
Under this industry wide payment moratorium program, the government rescheduled out the full remaining value of the affected
outstanding financing by one additional year and rescheduled the maturity and payments due on the credit lines provided to Banco
CNH, and all other financial services participants in the program, by the same amount. The total remaining value of the
outstanding financings and credit lines in 2006 that was rescheduled, was approximately 2.3 billion Reais (0.8 billion euros).
In addition, Banco CNH increased its credit loss provisions during the year, to provision for lower equipment residual values
over the longer loan amortization period.
Fiat Group Consolidated Financial Statements at December 31, 2006 -Notes 182