MICHELIN - 2008 ANNUAL REPORT

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FOREIGN CURRENCY TRANSLATION Presentation and functional currency The financial statements of the Group’s entities are measured using their functional currency, which is the currency of the primary economic environment in which they operate and which corresponds for most of them to their local currency. The consolidated financial statements are presented in euros (EUR), which is the Company’s functional currency. Transactions Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at closing exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement. Exchange differences on equity investments classified as availablefor-sale financial assets are included in the fair value reserve in equity until the investment is sold. Translation The financial statements of Group entities that have a functional currency different from the Group’s presentation currency are translated into euro as follows: assets and liabilities are translated at the closing rate at the date of the balance sheet, income and expenses are translated at the average rate of the period (as it is considered a reasonable approximation to actual rates), and all resulting exchange differences are recognized as a separate component of equity. Cash flows are also translated at the average rate of the period. When an entity is disposed, the translation differences accumulated in equity are recycled in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of an entity are treated as assets and liabilities of the entity and translated at the spot rate of the transaction date. EXCHANGE RATES OF MAJOR CURRENCIES Against the euro: Closing rates Average rates 31 December 2008 31 December 2007 Year ended 31 December 2008 Year ended 31 December 2007 US dollar (USD) 1.413 1.475 1.471 1.371 Swiss franc (CHF) 1.493 1.656 1.587 1.643 British pound (GBP) 0.977 0.738 0.797 0.684 Canadian dollar (CAD) 1.720 1.442 1.561 1.469 Polish zloty (PLN) 4.171 3.603 3.515 3.783 Brazilian real (BRL) 3.295 2.627 2.677 2.666 Japanese yen (JPY) 127.5 165.1 152.4 161.2 Chinese yuan (CNY) 9.648 10.77 10.23 10.42 DERIVATIVES Derivative financial instruments are used to manage financial exposures. All derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently measured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as an hedging instrument, and if so, the nature of the item being hedged (hedging policy below). All changes in fair value of derivatives not designated as hedging instruments are recorded as financial income or expense in the period in which they arise. Fair values are based on market values for listed instruments or on mathematical models, such as option pricing models and discounted cash flow calculations for unlisted instruments. These models take into account market data. Embedded derivatives are recognized separately if not closely related to the host contract. HEDGING Some derivative financial instruments are eligible for hedge accounting and are therefore designated as either: hedges of the fair value of recognized assets or liabilities or a firm commitment (fair value hedges); hedges of highly probable forecast transactions (cash flow hedges); or hedges of net investments in foreign operations. Some other derivatives, while providing effective economic hedges under the Group’s financial policies, cannot qualify or have not been designated for hedge accounting (derivatives policy). Fluctuations of these derivatives fair values must therefore be accounted for in the income statement. For example, foreign currency derivatives that are used to hedge the currency exposure of financial assets and liabilities are not designated as hedging instruments. The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategies. The Group also documents its assessment, both at inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values of hedged items. Changes in the fair value of derivatives are accounted for differently depending on the type of hedge: Fair value hedges Changes in fair value of derivatives are recorded in the income statement, together with any changes in the fair value of the hedged assets or liabilities that are attributable to the hedged risk. 90 2008 Consolidated Financial Statements of Michelin Group
Cash flow hedges The effective portion of changes in the fair value of derivatives is recognized in equity. The gain and loss relating to the ineffective portion is recognized immediately in the income statement. Amounts accumulated in equity are recycled in the income statement in the period when the hedged item affects the income statement. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at the time remains in equity and is recognized when the forecast transaction is ultimately recognized in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. Hedges of net investments in foreign operations These hedges are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the hedge is recognized in equity; the gain or loss relating to the ineffective portion is recognized immediately in the income statement. Gains and losses accumulated in equity are included in the income statement when the foreign operation is disposed of. EBITDA ADJUSTED The Group defines EBITDA adjusted as operating income before (i) non-recurring income and expenses and (ii) depreciation of property, plant and equipment (PP&E) and amortization of intangible assets, including goodwill, and any related impairment charge. REVENUE RECOGNITION The amount of revenue is measured at the fair value of the consideration received, or receivable, taking into account the amount of any trade discounts allowed by the Group entities or any commercial incentives linked to sales. Deferred rebates are accrued based on past experience and expected payments. Sales are recognized as follows: Sales of goods Revenue from sales of goods is recognized when the Group has transferred to the buyer the significant risks and rewards of ownership of the goods, retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold and will receive the economic benefits associated to the transaction. Due to the nature of the products, the general sales conditions, the logistics incoterms and the insurance contracts, the revenue is usually recognized when the goods leave the Group premises. Sales of services Revenue from sales of services is recognized by reference to the stage of completion of the transaction at the balance sheet date, when this stage can be measured reliably and if the economic benefits associated with the transaction will flow to the Group. Financial income is recognized as follows: Interest income Interest income is recognized on a time-proportion basis using the effective interest rate method. Dividend income Dividend income is recognized when the right to receive payment is established. COST OF SALES Cost of sales comprizes the costs of manufacturing products and the costs of goods purchased for resale. It includes the cost of purchase of material, the cost of production directly related to the manufactured products and all the production overheads, based on the normal capacity of production facilities. Production overheads include depreciation of property, plant and equipment, amortization of intangible assets relating to production and write-downs of inventories. Cost of sales also includes a relevant portion of general overheads to the extent that they are directly attributable to bringing the manufactured products to their present location and condition. RESEARCH AND DEVELOPMENT Research cost cannot be capitalized. Development cost shall be capitalized as intangible assets when the conditions relating to the commercial and technical feasibility, the ability to allocate reliably the costs and the probability to generate future economic benefits are fulfilled. Development costs are annually reviewed in order to determine whether the criteria of recognition as intangible assets are met. NON RECURRING INCOME AND EXPENSES Unusual, abnormal or infrequent significant items of income and expenses are separately disclosed on the face of the income statement. They are fully described in the notes. INCOME TAX Income tax expense includes both current and deferred taxes, plus any withholding tax on the royalties and the distribution of retained earnings within the Group, except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Current tax is based on the results of Group companies and is calculated according to local rules including any adjustments to tax payable in respect of previous years. Deferred tax is provided, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amount in the consolidated financial statements, using enacted or substantially enacted tax rates that are expected to prevail when the temporary differences reverse. No deferred tax asset or liability is recognized on initial recognition of transactions that are not business combinations and that do not affect taxable profit. Deferred tax assets are recognized to the extent that it is probable that future taxable profits will be available against which the tax losses carried forward and the temporary differences can be utilized. Deferred tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the timing of reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in a foreseeable future. INTANGIBLE ASSETS Goodwill Goodwill includes both the excess of the cost of an acquisition over the fair value of the acquired assets and liabilities at the date the acquisition is committed and the excess of the cost of purchased minority shares over the carrying value of the purchased noncontrolling interests. Other Information Additional Information Consolidated Financial Statements The Managing Partners’ Report Michelin at a Glance 2008 Consolidated Financial Statements of Michelin Group 91
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2008 ANNUAL REPORT
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Tire Lifecycle: a technological and
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Michelin Durable Technologies: a cl
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Tire Lifecycle Phase 2: Raw Materia
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Tire Lifecycle Phase 3: Manufacturi
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Tire Lifecycle Phase 4: The usage p
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Michelin plays an active role in or
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Innovation, safety, quality, perfor
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Profile 117,565 employees (110,252
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Michel Rollier’s Message Dear Mad
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Management The Company is led by Me
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le Control message de Michel Rollie
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Strategy Competitive Edge, Growth,
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Regulations that promote fuel-effic
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Streamlining inventory and logistic
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A new approach to costs Buying bett
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A brand promise and six commitments
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2008 Figures The Economic Environme
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Michelin Key Figures Sales declined
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The Michelin Share Michelin Share P
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Page 46 and 47: 11 th consecutive success for Miche
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Page 50 and 51: Truck and Bus & Related Distributio
Page 52 and 53: The Dutch army chose Michelin Follo
Page 54 and 55: MICHELIN X One wins America Over…
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Page 62 and 63: 650 publications and 15.5 million m
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Page 68 and 69: ROCE (Return On Capital Employed) A
Page 70 and 71: CONSOLIDATED KEY FIGURES AND RATIOS
Page 72 and 73: Proposed Resolutions As part of the
Page 74 and 75: Report of the Chairman of the Super
Page 76 and 77: Nevertheless, in practice, the char
Page 78 and 79: - risk-prevention measures, - perso
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Page 82 and 83: Through the Design to Cost approach
Page 84 and 85: Notes to the consolidated financial
Page 86 and 87: Consolidated balance sheet (in EUR
Page 88 and 89: Consolidated cash flow statement (i
Page 90 and 91: interests to be recorded in equity
Page 94 and 95: Goodwill is not subject to amortiza
Page 96 and 97: The fair value of the liability por
Page 98 and 99: are hedged on a selective basis acc
Page 100 and 101: Currency Translation Risk A breakdo
Page 102 and 103: 5 Segment reporting Business segme
Page 104 and 105: 9 Non-recurring income and expense
Page 106 and 107: 12 Earnings per share Basic earnin
Page 108 and 109: Goodwill The amounts allocated to t
Page 110 and 111: FINANCE LEASES Capitalized property
Page 112 and 113: The breakdown by currency and matur
Page 114 and 115: The contractual amounts of the non
Page 116 and 117: Deferred tax assets are recognized
Page 118 and 119: 21 Current financial assets The ca
Page 120 and 121: 25 Financial liabilities The carry
Page 122 and 123: LOANS FROM FINANCIAL INSTITUTIONS A
Page 124 and 125: Movement of defined benefit net lia
Page 126 and 127: Change in the financial situation o
Page 128 and 129: The main assumptions (pay increases
Page 130 and 131: Changes in the financial situation
Page 132 and 133: A one-percentage-point change in th
Page 134 and 135: 27.2. SHARE PURCHASE PLANS In 2008,
Page 136 and 137: 30 Details of the cash flow stateme
Page 138 and 139: KEY MANAGEMENT AND SUPERVISORY BOAR
Page 140 and 141: Companies Registered office Nature
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Companies Registered office Nature
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35.2. Companies consolidated using
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Experts, managers, cross-sectional
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Michelin’s Corporate Governance:
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Mission The scope of the Committee
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2 - Summary Table of the Compensati
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5 - Performance bonus shares grante
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● Long Term Incentive The status
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Statement of operations on Michelin
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Risk Management Operating Risk Mana
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● “Property Damages”, with a
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Breakdown of male and female employ
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Profit-sharing and variable pay pro
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Safety at the workplace For all Mic
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mentoring new hires. This last acti
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The principles applied by the Purch
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The 2008 detailed results on the si
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2.5 Resource consumption Energy The
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3. DATA RECAP TABLE The last column
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data with the supporting documents.
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In its capacity as major player in
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General information regarding Compa
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The Bylaws do not provide for an ob
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GRANTED BY THE JOINT SHAREHOLDERS M
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(In number of shares with a nominal
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Free share allocations Since the Jo
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Undiluted basis Group share of equi
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Additional Information regarding Ma
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2007 Joint executive chairman of EA
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Balance Sheet at 31 December, 2008
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Statement of income 2008 (in EUR) 2
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Notes to the Balance Sheet and the
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Provisions Nature of provisions (in
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Prepaid income and expenses Prepaid
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Inventory of securities held as at
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Statement of changes in shareholder
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Appropriation of 2008 net income (i
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Statutory Auditors’ Special Repor
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Annual Information Document Press r
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Information published in a French n
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Design and production: W & CIE Copy
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INVESTOR RELATIONS Valérie Magloir
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MICHELIN - 2008 ANNUAL REPORT

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