Chrysler 2007 Annual Report Download - page 111

Fiat Group Consolidated Financial Statements at December 31, 2007 - Notes110
that of assets to be disposed of when events and
circumstances warrant such a review. Management performs
this review using estimates of future cash flows from the use
or disposal of the asset and suitable discount rate in order to
calculate present value. If the carrying amount of a non-
current asset is considered impaired, the Group records an
impairment charge for the amount by which the carrying
amount of the asset exceeds its estimated recoverable
amount from use or disposal determined by reference to its
most recent corporate plans.
Residual values of assets leased out under operating
lease arrangements or sold with a buy-back
commitment
The Group reports assets rented or leased to customers
under operating leases as tangible assets. Furthermore, new
vehicle “sales” with a buy-back commitment are not
recognised as sales at the time of delivery but are accounted
for as operating leases if it is probable that the vehicle will
be bought back. The Group recognises income from such
operating leases over the term of the lease. Depreciation
expense for assets subject to operating leases is recognised
on a straight-line basis over the term of the lease in amounts
necessary to reduce the cost of the assets to its estimated
residual value at the end of the lease term. The estimated
residual value of the leased assets is calculated at the lease
inception date on the basis of published industry information
and historical experience.
Realisation of the residual values is dependant on the
Group’s future ability to market the assets under the then-
prevailing market conditions. The Group continually
evaluates whether events and circumstances have occurred
which impact the estimated residual values of the assets on
operating leases.
Sales allowance
At the later time of sale or the time an incentive is
announced to dealers, the Group records the estimated
impact of sales allowances in the form of dealer and
customer incentives as a reduction of revenue. There may be
numerous types of incentives available at any particular
time. The determination of sales allowances requires
management estimates based on different factors.
Product warranties
The Group makes provisions for estimated expenses related
to product warranties at the time products are sold.
Management establishes these estimates based on historical
information on the nature, frequency and average cost of
warranty claims. The Group seeks to improve vehicle
quality and minimise warranty claims, but it has also
extended contractual warranty periods for certain classes
of vehicles.
Pension and other post-retirement benefits
Group companies sponsor pension and other post-retirement
benefits in various countries. In the US, the United Kingdom,
Germany and Italy, the Group has major defined benefit
plans. Management uses several statistical and judgmental
factors that attempt to anticipate future events in calculating
the expense, the liability and the assets related to these
plans. These factors include assumptions about the discount
rate, expected return on plan assets, rate of future
compensation increases and health care cost trend rates. In
addition, the Group’s actuarial consultants also use
subjective factors such as withdrawal and mortality rates in
making relevant estimates.
Realisation of deferred tax assets arising from tax loss
carryforwards
As of December 31, 2007, the Group had gross deferred tax
assets arising from tax loss carryforwards of 4,431 million
euros and valuation allowances against these assets of 3,234
million euros. The corresponding totals at December 31, 2006
were 5,701 million euros and 4,551 million euros,
respectively. Management has recorded these valuation
allowances to reduce deferred tax assets to the amount that
it believes it is probable will be recovered.
Contingent liabilities
The Group is the subject of legal proceedings and tax issues
covering a range of matters, which are pending in various
jurisdictions. Due to the uncertainty inherent in such matters,
it is difficult to predict the final outcome of such matters.
The cases and claims against the Group often raise difficult
and complex factual and legal issues, which are subject to
many uncertainties and complexities, including but not
limited to the facts and circumstances of each particular