MICHELIN - 2008 ANNUAL REPORT

The fair value of the liability portion of a convertible bond is
determined using a market interest rate for an equivalent nonconvertible
bond. This amount is recorded as a liability on an
amortised cost basis until extinguished on conversion or maturity
of the bonds. The remainder of the proceeds is allocated to the
conversion option. This is recognised and included in shareholders’
equity, net of income tax effects.
To the extent that borrowings are hedged under qualifying fair
value hedges, the carrying value of the hedged item is adjusted for
the fair value movement attributable to the risk being hedged.
EMPLOYEE BENEFITS
Wages, salaries, social security contributions, paid annual leave
and sick leave, bonuses and non-monetary benefits are recognized
in the year in which the employees of the Group have rendered
the associated services.
Where long-term employee benefits, such as pension and other
post-employment benefits, are provided by the Group, a liability
or an asset and the related cost are recognized.
Pension and other post–employment benefits
Post-employment benefits are benefits payable after the
completion of employment. Group companies provide retirement
benefits for most of their employees, either directly or by
contributing to independently administered funds. The benefits
provided by the Group vary according to the legal, tax and
economic circumstances of each country and usually are based on
one or more factors such as employees’ remuneration, age and
years of service. The obligations relate both to existing retirees
and to entitlements of future retirees.
Group companies provide post-employment benefits under
defined contribution plans and defined benefit plans.
In the case of defined contribution plans, the company pays
fixed contributions to state or private insurance companies. Once
the contributions have been paid, the company has no legal
or constructive obligations to pay further contributions if the
fund does not hold sufficient assets to pay to all employees the
corresponding benefits.
The regular contributions are recognized as a periodic expense for
the year in which they are due and, as such, are included in the
cost of goods sold, selling expenses, research and development
expenses or general administration expenses.
As of today most of post-employment benefit plans are defined
benefit plans with a distinction to be made between externally
funded plans (mainly pension plans) with the assets of the
plan held separately in independently administered funds and
unfunded plans such as healthcare benefit plans and retirement
indemnities.
The measurement of the post-employment benefit liabilities, and
the related current service cost, is based upon the Projected Unit
Credit Method.
A defined benefit plan is a plan that defines an amount of
benefits that the Group is committed to pay to current and
former employees.
All defined benefit plans are subject to actuarial calculations
carried out annually for the largest plans and on regular basis
for other plans. These actuarial valuations are provided by
independent actuaries. Actuarial assumptions primarily regarding
discount rates, projected rates of remuneration growth, expected
growth of healthcare costs and long-term expected rates of
return on plan assets are incorporated in the actuarial valuations
and annually reviewed.
The liability or the asset recognized in the balance sheet in respect
of defined benefit plans is the present value of the defined benefit
obligation at the balance sheet date less the fair value of plan
assets taking into account any unrecognized actuarial gains or
losses and past service costs.
The present value of the defined benefit obligation is determined
by discounting the estimated future cash outflows using interest
rates of high-quality corporate bonds in the country of the
obligation and that have terms of maturity approximating to the
term of the related benefit liability.
A net asset is recognized only to the extent that it represents a
future economic benefit which is actually available to the Group
in the form of refunds from the plan or reductions in future
contributions to the plan.
When a defined benefit plan is subject to a Minimum Funding
Requirement (MFR), the Group determines whether paying these
contributions may give rise to a surplus in that defined benefit
plan. To the extent that the surplus in the plan exceeds the
economic benefits available, the Group recognizes immediately a
decrease in the defined benefit asset or an increase in the defined
benefit liability.
Actuarial gains or losses arise mainly from changes in actuarial
assumptions and differences between assumptions and actual
experiences. They are recognized in the income statement as a
component of the Group’s net periodic benefit plan cost only
to the extent that, as of the beginning of the year, their net
cumulative amount exceeds 10% of the greater of (1) the present
value of the defined benefit obligation or (2) the fair value of
the plan assets. In such case, the portion of actuarial gains or
losses recognized in the income statement is the resulting excess
divided by the expected average remaining working lives of the
employees participating in the plan.
Past service costs may arise when a new defined benefit plan is
set up or changes on payable benefits under an existing defined
benefit plan are introduced. They are recognized immediately
in the income statement if the benefits are vested. They are
amortized on a straight-line basis over the average period until
the benefits become vested if the benefits are not yet vested.
The Group’s net periodic benefit plan cost charged to the
operating income consists of current service cost, interest cost,
expected return on assets, curtailments and settlements, past
service costs as well as actuarial gains and losses to the extent
that they are recognized.
Share based payments
Employee share option plans
Benefits related to share options granted to the Managing Partner
and to some Group employees are measured, at grant date, using
a binomial model.
Grant date is the date the decision of the Partners on the number
of options is passed to the eligible employees including the
document describing the conditions attached to them.
The binomial model is based on the spot rate of the Company
shares (average quotation over the 20 days before grant date),
the exercise price, the historical volatility (over a period equal
to the expected lifetime of the option), a risk-free interest rate
(zero coupon state bonds with a maturity equal to the expected
lifetime of the option), and a stream of dividends based on market
expectations.
Benefits are spread over the period during which the services are
rendered. They are recognized in other operating income and
expenses.
94 2008 Consolidated Financial Statements of Michelin Group