MICHELIN - 2008 ANNUAL REPORT

Employee share purchase plans
The Group may offer to substantially all of its employees to
subscribe to a share purchase plan that allow them to purchase
Michelin shares through a reserved capital increase.
These shares, which are subject to certain restrictions relating
to their sale or transfer, are purchased by the employees at the
subscription price measured as the average of the opening market
price for Michelin shares over the 20 days preceding the date the
price is set with a maximum discount of 20%. The benefit to the
employees equals the difference between the fair value of the
purchased shares (after allowing for the five-year lock-up cost)
and the price paid by the employee, multiplied by the number of
shares subscribed.
The benefit granted to the employees is immediately expensed
by the Group as no vesting period applies and is booked under
Employee benefit costs – Equity compensation benefits.
PROVISIONS
Provisions are recognized when a legal or constructive obligation
has been incurred which will probably lead to an outflow of
resources that can be reasonably estimated.
Restructuring provisions are recognized when the Group has a
detailed formal plan that has been announced.
Provisions are recorded at the net present value for the estimated
cash outflows.
TRADE PAYABLES
Trade payables are recognized initially at fair value and
subsequently measured at amortized cost using the effective
interest method.
4 Financial risk management
4.1. FINANCIAL RISK MANAGEMENT POLICY
Organization of financial risk management
Financial risk control, measurement and supervision is carried out
under the responsibility of the Group’s finance function, at the
company and geographic zone level, and at the Group level by
the Group Finance Department. The Group Finance Department
reports directly to the Group’s financial management.
One of the Group Finance Department’s ongoing missions includes
the formulation of financial risk management policy, monitored
on the basis of a full array of internal standards, procedures and
referentials. Geographic zone financial managers are in charge
of the implementation of the Group’s financial risk management
policy by the company finance managers. In addition, compliance
with financial risk policy is assessed through internal audit
reviews to evaluate risk control efficiency and identify means of
improvement.
All strategic decisions concerning Group financial risk hedging
policy are taken by the Group’s financial management. As a
general rule, the Group strictly limits the use of derivatives to the
sole purpose of hedging clearly identified exposures.
In 2008, a financial risk committee was created whose mission
is to establish and validate policies governing the management
of financial risk, the identification and evaluation of this risk and
the validation and control of financial hedging instruments. The
risk committee meets on a monthly basis and includes members
of the Group’s financial management and of the Group Finance
Department.
4.1.1. Liquidity Risk
The Group Finance Department is responsible for ensuring the
financing of the Group’s liquidity position at the lowest cost. The
Group raises financial resources on the capital markets through
long–term financial instruments (bond issues), bank resources
(loans and credit lines), as well as commercial paper programs
and the securitization of accounts receivables. The levels of
the confirmed credit lines and available cash in-hand are fixed
by taking into account the forecast for treasury requirements
including a security margin to cope with economic uncertainties.
These long-term backup credit lines are essentially concentrated
at the financial holding company. Except in the case of particular
obligations related to the specificities of local financial markets,
Michelin’s operating subsidiaries have access to ample short-term
non-confirmed credit lines from banks to meet their day-to-day
financing requirements, as well as access to the financial holding
company’s confirmed credit lines in order to deal with major
contingencies.
The management of liquidity risk is based on management
rules and standards defined at Group level in order to meet the
financing needs in the normal course of business as well as in the
event of exceptional circumstances.
Short–term financing requirements are managed at local level by
each treasury entity. Medium, long term and strategic financing
requirements are managed by the financial holding company.
As a matter of prudent financial policy, the Group has always
guarded against the inclusion in its financial contracts of
covenants providing for ratios or “material adverse change” that
could affect its ability to mobilize loans or affect their term. As at
31 December 2008 no such clause featured in Group borrowings
whatsoever. A number of contracts, however, included “negative
pledge” and “cross default” clauses, but these were qualified by
thresholds and exemptions.
4.1.2. Currency risk
Transaction Currency Risk
Group subsidiaries continually calculate their accounting foreign
exchange exposure in relation to their functional currency and
hedge it systematically. A number of temporary exemptions
can, however, be granted by the Group Finance Department
where justified under exceptional market conditions. Foreign
currency payables and receivables of the same type and with
similar maturities are netted off and only the net exposure is
hedged. This is normally carried out through the financial holding
company, or, alternatively, through a bank. The financial holding
company in turn assesses its own resulting exposure and hedges
it with its banking partners. The main hedging instruments used
are forward currency contracts, of which the majority have short
maturities of around three months. Constant monitoring of
exchange gains and losses as well as regular audits ensure that
the hedging policy is adhered to by all Group entities.
Currency risk monitoring and hedging is based on Group internal
referentials.
A transactional exchange risk alert system is in place through out
the Group and implemented by the Group Finance Department,
whose responsibility includes ensuring proper monitoring and
management of exchange risk. These exposures are followed on
a monthly basis on a detailed management report.
Currency Translation Risk
Equity investments in foreign subsidiaries are booked in the
functional currency of the holding company. These investments,
which are not included in the holding company foreign exchange
position, are financed in the currency of the holding company.
Future cash flows from these long-term investments (dividends,
fees for R&D services and trademark licenses and capital increases)
Other Information
Additional Information Consolidated Financial Statements The Managing Partners’ Report Michelin at a Glance
2008 Consolidated Financial Statements of Michelin Group 95