2006 Annual Report - Fiat SpA

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21. Current securities Current securities consist of short-term or marketable securities which represent temporary investments, but which do not satisfy all the requirements for being classified as cash equivalents. In particular: (in millions of euros) At December 31, 2006 At December 31, 2005 Current securities available-for-sale 90 317 Current securities for trading 134 239 Total Current securities 224 556 During 2006, this item decreased by 332 million euros as a consequence of a changed mix in the temporary investment of funds and for 102 million euros as a consequence of the disposal of B.U.C. 22. Other financial assets and Other financial liabilities These items include the measurement at fair value of derivative financial instruments at the balance sheet date. In particular: At December 31, 2006 At December 31, 2005 Positive fair Negative fair Positive fair Negative fair (in millions of euros) value value value value Fair value hedges: - Exchange rate risk - Forward contracts and Currency swaps 1 (1) 26 (16) - Interest rate risk - Interest rate swaps and Forward rate agreement 129 (11) 307 (26) - Interest rate and exchange rate risk - Combined interest rate and currency swaps – – 9 (1) - Other derivatives – (5) – – Total Fair value hedges 130 (17) 342 (43) Cash flow hedge: - Exchange rate risks - Forward contracts, Currency swaps and Currency options 129 (61) 48 (95) - Interest rate swaps and Forward rate agreement 15 (8) 2 (3) Total Cash flow hedges 144 (69) 50 (98) Derivatives for trading 108 (19) 62 (48) Other financial assets/(liabilities) 382 (105) 454 (189) The fair value of derivative financial instruments is determined by taking into consideration market parameters at the balance sheet date and using valuation techniques widely accepted in the financial business environment. In particular: ■ the fair value of forward contracts and currency swaps is determined by taking the prevailing exchange rate and interest rates in the two currencies at the balance sheet date; ■ the fair value of currency options is determined using valuation techniques based on the Black-Scholes model or binomial models and market parameters at the balance sheet date (in particular exchange rates, interest rates and volatility rates); 140 Fiat Group Consolidated Financial Statements at December 31, 2006 - Notes ■ the fair value of interest rate swaps and forward rate agreements is determined by using the discounted cash flow method; ■ the fair value of derivative financial instruments acquired to hedge interest rate risk and exchange rate risk is determined using the exchange rates prevailing at the balance sheet date and the discounted cash flow method; ■ the fair value of equity swaps is determined using market prices at the balance sheet date; ■ the fair value of the equity option is determined using the Black-Scholes or binomial models, with market parameters (in particular the price of the underlying, interest rates, expected future dividends and volatility) being measured at the balance sheet date. The overall decrease in Other financial assets from 454 million euros at December 31, 2005 to 382 million euros at December 31, 2006, and the decrease in Other financial liabilities from 189 million euros at December 31, 2005 to 105 million euros at December 31, 2006, is due not only to the changes in exchange rates and interest rates over the period, but also to the expiry of certain hedging operations relating principally to bonds that have been reimbursed. As this item consists principally of hedging instruments, the change in their value is compensated by the change in the value of the hedged item. Derivates for trading consist principally of the following types: ■ Currency derivatives acquired to hedge receivables and payables expressed in foreign currency that are not considered by fair value hedges. ■ Derivatives relating to Fiat shares (Equity Swap) which are described further below. At December 31, 2006, the notional amount of outstanding derivative financial instruments is as follows: (in millions of euros) At December 31, 2006 At December 31, 2005 Exchange rate risk management 7,702 5,992 Interest rate risk management 8,249 10,544 Interest rate and exchange rate risk management – 204 Other derivative financial instruments 2,154 1,805 Total notional amount 18,105 18,545 At December 31, 2006, the notional amount of Other derivative instruments consists of, amongst the others: ■ For 220 million euros (70 million euros at December 31, 2005) the notional amount of the two equity swaps, expiring in 2007, stipulated to hedge the risk of an increase in the Fiat share price above the exercise price of stock options granted in 2004 and 2006 to the Chief Executive Officer (see Note 25). At December 31, 2006, the Equity Swaps have a total positive fair value of 79 million euros (a positive value of 8 million euros at December 31, 2005). Although these equity swaps were entered into for hedging purposes, they do not qualify for hedge accounting under IFRS and accordingly are defined as trading derivative financial instruments. ■ For 1,282 million euros (1,432 million euros at December 31, 2005), the notional amount of call options on General Motors common stock purchased in 2004 in order to hedge the risk implicit in the Convertible Bond still outstanding at that time Fiat Group Consolidated Financial Statements at December 31, 2006 - Notes 141
(the residual debt of the Exchangeable bond linked to GM ordinary shares). Following the repayment of the majority of this bond (Note 28), these options are classified as trading instruments, even though they were originally purchased for hedging purposes, and are measured at their fair value which at December 31, 2006 and 2005 was essentially nil. These options expired unexercised in January 2007, at the same time as the total extinguishment of the Exchangeable loan. ■ For 385 million euros (303 million euros at December 31, 2005), the notional amount of derivatives embedded in certain bonds with a return linked to stock market indices or inflation rates, as well as the notional amount of the related hedging derivatives, which convert this to market rate variability. There are no significant situations at the date of preparation of these financial statements for which hedging exceeds the hedged future flows (overhedging). Cash flow hedges The economic effects mainly refer to the management of the exchange risk. The policy of the Fiat Group for managing exchange risk normally requires that future cash flows from trading activities which will occur for accounting purposes within the following twelve months, and from orders acquired (or contracts in progress), whatever their due dates, to be hedged. As a result, it is considered reasonable to suppose that the hedging effect arising from this and recorded in the cash flow hedge reserve will be recognised in income, almost entirely during the following year. Where a derivative financial instrument is designated as a hedge of the exposure to variability in 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 profit and loss account 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 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. In 2006 the Group transferred to income gains of 6 million euros (gains of 44 million euros in 2005) net of tax effect previously recognised directly in equity presented in the following line items: (in millions of euros) 2006 2005 Exchange rate risk - Increase in Net revenues 21 49 - Decrease/(Increase) in Cost of sales (33) 8 - Result from investments 6 – Interest rate risk - Financial income (expenses) 1 (15) Taxes income (expenses) 11 2 Total recognised in the income statement 6 44 The ineffectiveness of cash flow hedges was not material for the years 2006 and 2005. 142 Fiat Group Consolidated Financial Statements at December 31, 2006 - Notes Fair value hedge Gains and losses resulting from the measurement of interest rate derivative financial instruments using fair value hedging rules and the gains and losses arising from the hedged item are shown in the following table: (in millions of euros) 2006 2005 Interest rate risk - Net gains (losses) on qualifying hedges (107) (105) - Fair value changes in hedged items 106 105 Net gains (losses) (1) – The effect of fair value hedges related to exchange rate risk and on other derivative instruments was not material for the years 2006 and 2005. 23. Cash and cash equivalents Cash and cash equivalents include: (in millions of euros) At December 31, 2006 At December 31, 2005 Cash at banks 6,104 4,529 Cash with a pre-determined use 627 706 Money market securities 1,005 1,182 Total Cash and cash equivalents 7,736 6,417 Amounts shown are readily convertible into cash and are subject to an insignificant risk of changes in value. The carrying amount of cash and cash equivalent is to be considered in line with their fair value at the balance sheet date. Cash with a pre-determined use consists principally of cash whose use is restricted to the repayment of the debt related to securitisations classified in the item Asset-backed financing. The credit risk associated with Cash and cash equivalents is limited, as contracts are entered into with primary national and international financial institutions. 24. Assets and Liabilities held for sale At December 31, 2006, the items Assets and Liabilities held for sale of respectively 332 million euros and 309 million euros include the carrying amount of the assets and the liabilities of the subsidiaries Meridian Technologies Inc. and Ingest Facility S.p.A.; the agreements for the sale of these subsidiaries were signed in 2006 and at the balance sheet date were still subject to the necessary approvals. The items also include the assets and liabilities at carrying amount of the Indian business of Fiat Auto that will be transferred to the joint venture with Tata Motors currently being set up. At December 31, 2005, the items Assets and Liabilities held for sale included the assets and liabilities of the subsidiary Atlanet S.p.A. at carrying values respectively of 119 million euros and 110 million euros: an agreement for the sale of this subsidiary was signed with the British Telecom group in 2005 and approved by the antitrust authorities in February 2006. Fiat Group Consolidated Financial Statements at December 31, 2006 - Notes 143
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Annual Report Consolidated and Stat
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But it does move. Galileo Galilei
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Letter from the Chairman and the Ch
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The Fiat Group The Fiat Group perfo
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Stockholders Financial communicatio
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in 2003, and now the Panda Hydrogen
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The meeting with the EWC Selected C
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Revenues by Business Area (in milli
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The breakdown of trading profit by
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Investment income was 156 million e
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Page 29 and 30: The Board of Directors, at its meet
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Page 67 and 68: In 2005 Changes in accumulated depr
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Page 77 and 78: A summary of outstanding stock opti
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Page 89 and 90: Fidis Retail Italia (FRI) All the r
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Page 93 and 94: Credit risk The maximum credit risk
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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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