Chrysler 2012 Annual Report Download - page 259

Fiat S.p.A.
Statutory
Financial
Statements
at 31 December
2012
Notes
258
Derivative financial instruments
Derivative financial instruments are 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 at fair value in accordance with IAS 39.
When derivative financial instruments qualify for hedge accounting, the following 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 recognized asset or liability that is attributable to a particular risk and could affect the income statement, the gain or loss from
remeasuring the hedging instrument at fair value is recognized 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 recognized in the income statement
Cash flow hedge – Where a derivative financial instrument is designated as a hedge against variability in future cash flows of an
existing asset or liability or a transaction considered highly probable that could impact the income statement, the effective portion
of the gain or loss on the hedging instrument is recognized directly in equity. Any cumulative gain or loss is reversed from equity
and recognized in the income statement in the same period in which the hedged transaction is recognized. The gain or loss
associated with a hedge or part of a hedge that has become ineffective is recognized in the income statement immediately. When a
hedging instrument or hedge relationship is terminated, but the hedged transaction has not yet occurred, any gain or loss previously
recognized in equity is recognized through profit and loss at the time the hedged transaction occurs. If the hedged transaction is no
longer probable, the cumulative unrealized gain or loss recognized in equity is immediately transferred to the income statement
If hedge accounting cannot be applied, the gains or losses from the fair value measurement of derivative financial instruments are
recognized immediately in the income statement.
Inventory
Inventory consists of contract work in progress related, in particular, to long-term construction contracts between Fiat S.p.A. and Treno
Alta Velocità – T.A.V. S.p.A. (merged into Rete Ferroviaria Italiana S.p.A. from 31 December 2010) under which Fiat S.p.A. as general
contractor coordinates, organizes and manages the work.
Work in progress refers to activities carried out directly and is recognized through measurement of the total contract income on a
percentage completion basis, with the incremental portion of the work performed to date being recognized in the period. The cost-to-
cost method is used to determine the percentage of completion of a contract (by dividing the costs incurred by the total costs forecast
for the whole construction).
Any losses expected to be incurred on contracts are fully recognized in the income statement and as a reduction in contract work in
progress when they become known.
Any advances received from customers for services performed are presented as a reduction in inventory. If the value of advances
received exceeds inventory, any excess is recognized as advances under other debt.
Transfer of receivables
The Company derecognizes receivables when, and only when, it no longer has the contractual right to the cash flows from an asset,
or the receivable is transferred. When the Company transfers a receivable:
if it transfers substantially all the risks and rewards of ownership, it derecognizes the receivable and recognizes any rights and
obligations created or retained in the transfer separately as assets or liabilities
if it retains substantially all the risks and rewards of ownership of the receivable, it continues to recognize the receivable