annual report - FIAT SpA

� Cash flow hedges – 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 the income statement, the effective portion of any gain or loss on the derivative financial instrument
is recognised directly in other comprehensive income. The cumulative gain or loss is removed from other
comprehensive income 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 other comprehensive income and is recognised in the
income statement at the same time as the underlying transaction occurs. If the hedged transaction is no longer
probable, the cumulative unrealised gain or loss held in other comprehensive income is recognised in the
income statement immediately.
� Hedges of a net investment – If a derivative financial instrument is designated as a hedging instrument for a net
investment in a foreign operation, the effective portion of the gain or loss on the derivative financial instrument
is recognised in other comprehensive income. The cumulative gain or loss is reclassified from other
comprehensive income to profit or loss on the disposal of the foreign operation.
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 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 asset 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 statement of financial position as Assetbacked
financing. Gains and losses relating to the sale of such assets are not recognised until the assets are removed
from the Group statement of financial position.
Inventories
Inventories of raw materials, semi finished products and finished goods, (including assets leased out under operating
leases and assets sold under a buy-back commitment that are held for sale) 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 slowmoving
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.
The measurement of construction contracts is based on the stage of completion determined as the proportion that
cost incurred to the balance sheet date bears to the estimated total contract cost. These items are presented net of
progress billings received from customers. Any losses on such contracts are fully recorded in the income statement
when they become known.
Fiat Group Consolidated Financial Statements at 31 December 2010 118