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3.1.3. Impairment of assets (IAS 36)
Under IAS 36, the amount in the balance sheet for intangible
assets, property, plant and equipment and goodwill should not
exceed the higher of the present value of future cash flows or the
market value. This amount, referred to as the value in use, is tested
once there are indications of an impairment loss, and reviewed at
each accounting close. This test must be carried out at least once
a year.
When IFRS standards are adopted, the concept of asset
impairment applies for the first time to a new concept:
Cash Generating Units (CGUs), rather than exclusively to individual
assets as defined under French standards. The Michelin Group
CGUs are based on the operational organization per market.
They represent the smallest group of assets that generates
cash flows largely independently of those generated by other
groups of assets.
Therefore, an impairment loss was recorded at the date of
transition where the recoverable amount of a CGU was lower
than the net carrying amount of the intangible assets, property,
plant and equipment and the residual goodwill allocated to it.
With regard to goodwill, under IFRS, the impairment loss
calculation now replaces systematic straight-line depreciation.
3.1.4. Other standards
Other IFRS standards have either a limited impact or no impact
on Michelin:
• Development costs (IAS 38)
IAS 38 lays down that research costs must be recognized as an
expense and that development expenditure must be capitalized
if the Company can show that it simultaneously meets a list of
six criteria.
At Michelin, the development of finished products falls into two
phases: the development of new product ranges prior to
approval by carmakers and development subsequent to the
approval of finished products.
The transition to IFRS standards has no impact on the Group’s
accounts since development costs:
• Relating to the first phase do not meet all of the 6 capitalization
criteria set out in the standard prior to the carmaker’s approval
and the decision to market the product.
• Relating to the engoing improvement of products carried out
subsequent to the placing of tires on the market cannot,
by definition, be capitalized. Development costs thus continue
to be recognized as an expense.
• Securitization (IAS 27 & 39), intangible assets (IAS 38),
financial instruments (IAS 32 and 39), stock options (IFRS 2)
These items continue to be accounted for in the same manner
as under French standards:
• In fact, Michelin Group has been consolidating ad hoc
securitization entities since January 1, 2000. Since then,
receivables sold and securitized have been included as assets
in the balance sheet and financing obtained in
consideration recorded as debt.
• It should also be noted that Michelin has no intangible asset
that does not meet the definition under IAS 38. Therefore, no
intangible asset needs to be reclassified as goodwill.
• Finally, it should be recalled that obligations relating to the
identification, classification, measurement and presentation
of financial instruments (IAS 32 and 39) will not be effective until
January 1, 2005.
With regard to stock options, IFRS 2 provides for, amongst other
things, the recognition as an expense (in personnel costs) of
benefits arising from stock option plans granted by the Group
after November 7, 2002.
3.2. Major impact in terms
of presentation
The presentation of Michelin’s financial statements is also
affected by the switch to IFRS standards and, in particular, by the
application of IAS 18 (sales), IAS 1 (balance sheet and statement
of income) and IAS 7 (statement of cash flow).
The major impact is on the Group’s turnover.
3.2.1. Sales (IAS 18)
Under French standards, the definition of turnover was based on
a fundamentally legal approach to the various types of billing.
For Michelin, the application of the IFRS substance over form
concept in which the economic substance takes precedence over
the legal form means that:
• The presentation of sales net of all rebates that can be directly
allocated to them (cooperative advertising, merchandising,
etc...);
• The reclassification, under other headings in the statement of
income, of the turnover not directly related to the business
(billing of semi-finished, waste material or the provision
of services).
To the extent that it only involves reclassifications, there is no
effect on income from operations or on net income.