Chrysler 2008 Annual Report Download - page 115

Fiat Group Consolidated Financial Statements at 31 December 2008114
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 shareholders’ equity and is
recognised in the income statement at the same time as the
underlying transaction occurs. If the hedged transaction is no
longer probable, the cumulative unrealised gain or loss held in
shareholders’ equity is recognised in the income statement
immediately.
Hedges of a net investment – If a derivative financial
instrument is designated as a hedging instrument for a net
investment in a foreign operation, the effective portion of the
gain or loss on the derivative financial instrument is recognised
in equity. The cumulative gain or loss is reclassified from equity
to profit or loss on the disposal of the foreign operation.
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 Group sells a significant part of its financial, trade and tax
receivables through either securitisation programs or factoring
transactions.
A securitisation 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 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 a first 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.
The measurement of construction contracts is based on the
stage of completion determined as the proportion that cost
incurred to balance sheet date bear to the estimated total
contract cost. These items are presented net of progress
billings received from customers. Any losses on such contracts
are fully recorded in the income statement when they become
known.