2006 Annual Report - Fiat SpA

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components, engines, and production systems) are recognised as an asset if and only if all of the following conditions are met: the development costs can be measured reliably and the technical feasibility of the product, volumes and pricing support the view that the development expenditure will generate future economic benefits. Capitalised development costs comprise only expenditures that can be attributed directly to the development process. Capitalised development costs are amortised on a systematic basis from the start of production of the related product over the product‘s estimated life, as follows: N° of years Cars 4 - 5 Trucks and buses 8 Agricultural and construction equipment 5 Engines 8 - 10 Components and Production Systems 3 - 5 All other development costs are expensed as incurred. Intangible assets with indefinite useful lives Intangible assets with indefinite useful lives consist principally of acquired trademarks which have no legal, regulatory, contractual, competitive, economic, or other factors that limits their useful lives. Intangible assets with indefinite useful lives are not amortised, but are tested for impairment annually or more frequently whenever there is an indication that the asset may be impaired. Other intangible assets Other purchased and internally-generated intangible assets are recognised as assets in accordance with IAS 38 – Intangible Assets, where it is probable that the use of the asset will generate future economic benefits and where the costs of the asset can be determined reliably. Such assets are measured at purchase or manufacturing cost and amortised on a straight-line basis over their estimated useful lives, if these assets have finite useful lives. 96 Fiat Group Consolidated Financial Statements at December 31, 2006 - Notes Other intangible assets acquired as part of an acquisition of a business are capitalised separately from goodwill if their fair value can be measured reliably. Property, plant and equipment Cost Property, plant and equipment are stated at acquisition or production cost and are not revalued. Subsequent expenditures and the cost of replacing parts of an asset are capitalised only if they increase the future economic benefits embodied in that asset. All other expenditures are expensed as incurred. When such replacement costs are capitalised, the carrying amount of the parts that are replaced is recognised in the income statement. Property, plant and equipment also include vehicles sold with a buy-back commitment, which are recognised according to the method described in the paragraph Revenue recognition if the buy-back agreement originates from the Trucks and Commercial Vehicles Sutor. Assets held under finance leases, which provide the Group with substantially all the risks and rewards of ownership, are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the financial statement as a debt. The assets are depreciated by the method and at the rates indicated below. Leases where the lessor retains substantially all the risks and rewards of ownership of the assets are classified as operating leases. Operating lease expenditures are expensed on a straight-line basis over the lease terms. Depreciation Depreciation is calculated on a straight-line basis over the estimated useful life of the assets as follows: Depreciation rates Buildings 2% - 10% Plant and machinery 8% - 30% Industrial and commercial equipment 15% - 25% Other assets 10% - 33% Land is not depreciated. Leased assets Leased assets include vehicles leased to retail customers by the Group’s leasing companies under operating lease agreements. They are stated at cost and depreciated at annual rates of between 15% and 25%. Investment property Real estate and buildings held in order to obtain rental income are carried at cost less accumulated depreciation (charged at annual rates of between 2.5% to 5%) and impairment losses. Impairment of assets The Group reviews, at least annually, the recoverability of the carrying amount of intangible assets (including capitalised development costs) and tangible assets, in order to determine whether there is any indication that those assets have suffered an impairment loss. If indications of impairment are present, the carrying amount of the asset is reduced to its recoverable amount. An intangible asset with an indefinite useful life is tested for impairment annually or more frequently, whenever there is an indication that the asset may be impaired. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. The recoverable amount of an asset is the higher of fair value less disposal costs and its value in use. In assessing its value in use, the pre-tax estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is recognised when the recoverable amount is lower than the carrying amount. Where an impairment loss on assets other than goodwill subsequently no longer exists or has decreased the carrying amount of the asset or cash-generating unit is increased to the revised estimate of its recoverable amount, but not in excess of the carrying amount that would have been recorded had no impairment loss been recognised. A reversal of an impairment loss is recognised in the income statement immediately. Financial instruments Presentation Financial instruments held by the Group are presented in the financial statements as described in the following paragraphs. Investments and other non-current financial assets comprise investments in non-consolidated companies and other noncurrent financial assets (held-to-maturity securities, noncurrent loans and receivables and other non-current availablefor-sale financial assets). Current financial assets include trade receivables, receivables from financing activities (retail financing, dealer financing, lease financing and other current loans to third parties), current securities, and other current financial assets (which include derivative financial instruments stated at fair value as assets), as well as cash and cash equivalents. In particular, Cash and cash equivalents include cash at banks, units in liquidity funds and other money market securities that are readily convertible into cash and are subject to an insignificant risk of changes in value. Current securities include short-term or marketable securities which represent temporary investments of available funds and do not satisfy the requirements for being classified as cash equivalents; current securities include both available-for-sale and held for trading securities. Financial liabilities refer to debt, which includes asset-backed financing, and other financial liabilities (which include derivative financial instruments stated at fair value as liabilities), trade payables and other payables. Fiat Group Consolidated Financial Statements at December 31, 2006 - Notes 97
Measurement Investments in unconsolidated companies classified as non-current financial assets are accounted for as described in the section Basis of consolidation. Non-current financial assets other than investments, as well as current financial assets and financial liabilities, are accounted for in accordance with IAS 39 – Financial Instruments: Recognition and Measurement. Current financial assets and held-to-maturity securities are recognised on the basis of the settlement date and, on initial recognition, are measured at acquisition cost, including transaction costs. Subsequent to initial recognition, available-for-sale and held for trading financial assets are measured at fair value. When market prices are not available, the fair value of available-forsale financial assets is measured using appropriate valuation techniques e.g. discounted cash flow analysis based on market information available at the balance sheet date. Gains and losses on available-for-sale financial assets are recognised directly in equity until the financial asset is disposed or is determined to be impaired, at which time the cumulative gains or losses, including that previously recognised in equity, are included in the income statement for the period. Gains and losses arising from changes in fair value of held for trading financial instruments are included in the income statement for the period. Loans and receivables which are not held by the Group for trading (originated loans and receivables), held-to-maturity securities and all financial assets for which published price quotations in an active market are not available and whose fair value cannot be determined reliably, are measured, to the extent that they have a fixed term, at amortised cost, using the effective interest method. When the financial assets do not have a fixed term, they are measured at acquisition cost. Receivables with maturities of over one year which bear no interest or an interest rate significantly lower than market rates are discounted using market rates. 98 Fiat Group Consolidated Financial Statements at December 31, 2006 - Notes Assessments are made regularly as to whether there is any objective evidence that a financial asset or group of assets may be impaired. If any such evidence exists, an impairment loss is included in the income statement for the period. Except for derivative instruments, financial liabilities are measured at amortised cost using the effective interest method. Financial liabilities hedged by derivative instruments are measured in accordance with hedge accounting principles applicable to fair value hedges: gains and losses arising from remeasurement at fair value, due to changes in relevant hedged risk, are recognised in the income statement and are offset by the effective portion of the loss or gain arising from remeasurement at fair value of the hedging instrument. Derivative financial instruments Derivative financial instruments are only 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 in accordance with IAS 39 at fair value. When derivative financial instruments qualify for hedge accounting, the following accounting 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 recognised 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 recognised 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 recognised in the income statement. ■ Cash flow hedge – Where a derivative financial instrument is designated as a hedge of the exposure to variability in future cash flows of a recognised asset or liability or a highly probable forecasted transaction and could affect income statement, the effective portion of any gain or loss on the derivative financial instrument is recognised directly in equity. The cumulative gain or loss is removed from equity and recognised in the income statement at the same time as the economic effect arising from the hedged item affects income. The gain or loss associated with a hedge or part of a hedge that has become ineffective is recognised in the income statement immediately. When a hedging instrument or hedge 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 stockholders’ equity and is recognised in the income statement at the same time as the related transaction occurs. If the hedged transaction is no longer probable, the cumulative unrealised gain or loss held in stockholders’ equity is recognised in the income statement immediately. 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 Fiat 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. Fiat Group Consolidated Financial Statements at December 31, 2006 - Notes 99
Page 1 and 2: Annual Report Consolidated and Stat
Page 3 and 4: But it does move. Galileo Galilei
Page 5 and 6: Letter from the Chairman and the Ch
Page 7 and 8: The Fiat Group The Fiat Group perfo
Page 9 and 10: Stockholders Financial communicatio
Page 11 and 12: in 2003, and now the Panda Hydrogen
Page 13 and 14: The meeting with the EWC Selected C
Page 15 and 16: Revenues by Business Area (in milli
Page 17 and 18: The breakdown of trading profit by
Page 19 and 20: Investment income was 156 million e
Page 21 and 22: If working capital is restated to i
Page 23 and 24: Financial Services Revenues (in mil
Page 25 and 26: Statement of Changes in Net Industr
Page 27 and 28: strategic consistency, economic fea
Page 29 and 30: The Board of Directors, at its meet
Page 31 and 32: There can be no motion without some
Page 33 and 34: Fiat Auto - Fiat, Alfa Romeo, Lanci
Page 35 and 36: Maserati Operating Performance In 2
Page 37 and 38: Trucks and Commercial Vehicles Ivec
Page 39 and 40: Fiat Powertrain Technologies Operat
Page 41 and 42: Metallurgical Products - Teksid Pro
Page 43 and 44: Motion for Approval of the Financia
Page 45 and 46: Consolidated Income Statement (*) (
Page 47 and 48: Statement of Changes in Stockholder
Page 49: partially from the market: the rema
Page 53 and 54: charges for risk provisions and wri
Page 55 and 56: Union market for the Fiat Auto and
Page 57 and 58: Composition and principal changes I
Page 59 and 60: Net financial expenses in 2006 (exc
Page 61 and 62: Year of expiry Total at December Be
Page 63 and 64: The net carrying amount of Intangib
Page 65 and 66: 14. Property, plant and equipment I
Page 67 and 68: In 2005 Changes in accumulated depr
Page 69 and 70: esulting in a reduction of 1,213 mi
Page 71 and 72: Receivables from financing activiti
Page 73 and 74: (the residual debt of the Exchangea
Page 75 and 76: The reconciliation of the number of
Page 77 and 78: A summary of outstanding stock opti
Page 79 and 80: Under the CNH EIP, performance-base
Page 81 and 82: 26. Provisions for employee benefit
Page 83 and 84: Changes in the present value of Pos
Page 85 and 86: ■ Commercial risks - This provisi
Page 87 and 88: 31, 2006 (872 million euros at Dece
Page 89 and 90: Fidis Retail Italia (FRI) All the r
Page 91 and 92: Other and Magneti Business elimina-
Page 93 and 94: Credit risk The maximum credit risk
Page 95 and 96: The increase over the prior year re
Page 97 and 98: ■ Current trade receivables of 78
Page 99 and 100: The book value at the disposal date
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198 Appendix The Companies of the F
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Subsidiaries consolidated on a line
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% of Group % of consoli- Interest %
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Subsidiaries accounted for using th
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234 Financial Review of Fiat S.p.A.
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(*) (*) Income Statement Balance Sh
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Income Statement pursuant to Consob
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When an impairment loss on assets s
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Provisions The company recognises p
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4. Other operating income Other ope
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Net income from derivative financia
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12. Property, plant and equipment T
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15. Other non-current assets At Dec
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Regarding changes in 2005, the Mand
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A summary of outstanding stock opti
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The amounts recognised in the Incom
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The item Payables to Group companie
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These relate to: ■ guarantees of
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Counterparty Other Current Other No
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32. Significant non-recurring trans
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Fees paid to Members of the Board o
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Financial statement format Fiat S.p
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Deferred tax assets Reclassificatio
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Reconciliation of net profit (loss)
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B. Employee benefits The employees
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Auditors’ Reports Auditors’ Rep
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Reports of the Board of Statutory A
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that numerous transactions involvin
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Motion for Approval of the Financia
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Motion to amend Articles 9, 11, 12,
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Stockholders Meeting and will be ef
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Graphic design Atelier Roger Pfund,
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2006 Annual Report - Fiat SpA

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