IFRS Conversion Project Training Support V 310704

VALEO – IFRS Conversion Project
Worldwide Training Session

August – September 2004
IFRS Conversion project

Training session General agenda (1/2)
 Day 1 08:30 – 19:15

 Introduction 08:30 – 09:00
 Intangible (development costs) 09:00 – 12:00
 Lunch 12:00 – 13:00
 Tangible assets & specialized tooling 13:00 – 14:45

 Leases 14:45 – 15:30
 Impairment 15:45 – 17:45
 Revenues 18:00 – 18:45
 Inventories 18:45 – 19:15
IFRS conversion project

2
Training session General agenda (2/2)
 Day 2 08:00 – 18:00

 Financial instruments 08:00 –
11:00
 Current and deferred taxes 11:15 – 12:00
 Lunch 12:00 –
13:00
 Provisions 13:00 –
15:45
 Employee Benefits 16:00 –
18:00

3
Training Session – DAY 1
- Introduction
1. Intangibles (development costs) p.
2. Tangible assets and specialized tooling p.

3. Leases p.
4. Impairment p.
5. Revenue p.
6. Inventories p.

Introduction
Summary
 General context of IFRS deployment in Europe
 The IFRS valuation model
 IFRS will be mandatory for Valeo Group
 Applicable standards for 2005
 Valeo IFRS conversion project

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Introduction
General context of IFRS deployment in Europe
 17 existing different primary bases of

accounting (25 in the future)
Lack of transparency and comparability
 International markets
Europe represents 25% of the
worldwide market capitalization
 A need for homogeneous accounting rules

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Introduction
IFRS will be mandatory for Valeo Group
 IAS 2005 : European Commission Project

 IFRS mandatory from 2005 in the consolidated accounts of European groups with
listed securities;
 IFRS will be mandatory from 2005 for Valeo consolidated accounts;
 IFRS does not apply to divisions’ statutory accounts: IFRS adjustments will be
recorded entries under Hyperion for management reporting and consolidation
purposes.

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Introduction
IFRS will be mandatory for Valeo Group
 Required information to be published under IFRS:
First published set of IFRS accounts : 31 March 2005

A P/L also to be restated for 2004 as comparative year
To obtain the 2004 P/L need for an opening balance sheet
 The starting point for the IFRS restatement exercise is the 31 December
2003 exercise.

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Introduction
Valeo IFRS conversion project
 IFRS Conversion Project Organization and Timetable
 General approach: 3 phases:
 Phase 1: Diagnosis and first estimate of potential impacts (Feb  May
2004);
 Phase 2: Rewriting Valeo MAF (June  August 2004) and training of finance
staff (August  September 2004);
 Phase 3: Restatement of 2004 financial data :
– IFRS opening balance sheet at January 1st, 2004 (early October 2004) ;
– 2004 Half yearly IFRS financial statements (end of October 2004);
– Audit of 2004 Opening balance sheet and limited review of S1 IFRS
figures (end November 2004);
– 2004 year end IFRS financial statements (early February 2005);
– Q1 2004 IFRS Financial Statements (mid March 2005);
– Q3 2004 IFRS Financial Statements (mid April 2005).
 Budget B1 2005 data: Will be prepared both under current MAF rules and future
IFRS rules.
 2005 IFRS reporting: “Go live” for January 2005 closing.

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Introduction
 Assistance provided to the finance staff of the divisions for IFRS

implementation:
 Local training sessions;
 IFRS Kynesis site:
 Training manual,
 Draft of new MAF Standards (early September),
 Answers to frequently asked questions (IFRS forum),
 Alert about updates,
 …
 IFRS Hyperion releases (September 2004 / October 2004/2005).

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Introduction
 Branch IFRS leaders :
 VWS : Ariane COMBLIN

 VEC : Sylvaine CORVEST
 VCC : Cong Thuong TRAN
 VECS : Khang PHAM NGOC
 VSDS : Didier CHASSONNERIE
 VMA : Fabrice MANCA
 VSS : Jean-Marc HERTSBERG
 VLS : Stéphane VERY
 VES : Ghislain BRETON
 VT : Françoise CURTILLET
 VS : Moncef ZADEM

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Introduction
 IT systems impacts:
 Compass system:
 Compass core team (leader: Rafael Labrador) has started analyzing
IFRS impacts in order to develop appropriate solutions to be
operational in January 2005;
 Solutions will be tested in some pilot sites in Q4 2004;
 In addition, the development of the PS module of Compass is in
progress (leader: S. Meridjen) and will incorporate IFRS requirements.
 Other accounting systems: Jean Roy (VES IT Director) coordinates the

analysis of the IFRS impacts on IT systems other than Compass.
Development of dedicated solutions will depend on:
 System specifications,
 Timing of conversion to Compass system.
Due to the variety of other accounting systems, the fit-gap analysis at
division level should be carried out by finance team, along with division IT
manager / branch IT Director. Then conclusions should be directed to Jean
Roy for group coordination purpose.

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Introduction
 Objectives of this training session:
 Scope:
 This is not a comprehensive IFRS training;
 This is a training about the main expected IFRS impacts on Valeo
divisions MAF accounts;
 Objective:
 At the end of the session, you should have gained:
– from an accounting and reporting point of view, a good
understanding of the IFRS impacts on division financial data (first
time application as at January 1st, 2004 and subsequent
accounting periods).
– from an organisational point of view: a clear view of the changes
linked to IFRS implementation at division’s level.
 Remark:
 Some amendments to this presentation may occur in the coming
weeks in order to:
– precise some points in the course of IFRS implementation by
divisions (specific cases not addressed during the general
approach,…);
– bring some evolutions in the set of IFRS standards (in particular:
financial instruments).
 IFRS updates will be issued in such situations.

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- Introduction p.
1. Intangibles (Development costs) p.
2. Tangible assets and Specialized Tooling p.
3. Leases p.
4. Impairment p.
5. Revenue p.
6. Inventories p.

1. Intangibles (development costs)
Summary
1.1. Preliminary remarks

1.2. IAS 38 main principles
• Internally generated assets
1.3. IAS 38 main principles applied to Valeo
• Development phase vs research phase
• Conditions to capitalize costs
1.4. Implementation guidance
• General case
• Related topics
• Multi division projects

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1. Intangibles (development costs)
Summary
1.5. Depreciation and amortization
1.6. Customer financing
1.7. Responsibilities
1.8. Specific First Time Application (FTA) Steps
1.9. Release Hyperion

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1. Intangible (development costs)
 Purpose
 To determine the development costs eligible for the compulsory
capitalization at each closing date. This represents a main change
compared to MAF procedure.
 This procedure is based on IAS 38 (intangible assets) standard.
 Scope of application
 This procedure is applicable for all reporting periods: year, half year, quarter
and month.
 It applies to all group companies and divisions.
 Warning:
 This procedure applies only to MAF accounts.
 The decision to capitalize development costs in statutory accounts will be
made by each division depending on local statutory and tax regulations.
Advice should be obtained from branch financial control before any decision
in this area.
 In the Hyperion statutory/MAF Equity reconciliation, an item named
“Capitalized development costs” has been inserted.

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 Definition of an intangible asset:

 An asset is a resource:
(a) controlled by an entity as a result of past events; and
(b) from which future economic benefits are expected to flow to the entity.
 An intangible asset is an identifiable non-monetary asset without physical
substance.
 An intangible asset should be recognised :
 It is probable that the future economic benefits that are attributable to the
asset will flow to the enterprise and
 The cost of the asset can be measured reliably
– If not, the cost will be accounted as an expense.
 An intangible asset is measured initially at cost.

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 Amortization and impairment of an intangible asset
Amortisation:
 Should reflect the pattern in which the benefits of the asset are consumed
(but straight line basis accepted);
 Under certain conditions intangibles might have an indefinite useful life and
therefore should not be amortised;
 Residual value is assumed to be zero.
Impairment test:
 An asset is impaired when its recoverable amount (value in use or fair value
less costs to sell) is less than its net carrying amount (additional guidance is
provided in the training support dedicated to impairment : section 4);
 Intangible assets with an indefinite useful life (e.g. goodwill, brand) or under
development have to be tested for impairment annually. Other intangible
assets have to be tested only if there is an indication that the asset could be
impaired since they are amortized;
 Reversal of impairment loss is allowed (except for goodwill).

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1.2. IAS 38 main principles – Internally generated assets
 Key concept 1: Research phase vs development phase.
 R&D expenses for an entity have to be split between a Research Phase and
a Development Phase.
 The research phase:
 Corresponds to original and planned investigations undertaken with the

prospect of gaining new scientific or technical knowledge and
understanding.
 No intangible asset arising from research (or from the research phase of
an internal project) should be recognized.
 Expenditure on research phase are systematically expensed

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 The Development phase is the application of research findings or other

knowledge to a plan or design:
 For the production of materials, devices, products, processes, systems or

services;
 New or substantially improved;
 Prior to the commencement of commercial production or use.
 Costs incurred under the development phase of a project have to be

capitalized if specific criteria are met.

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 Key concept 2: conditions to capitalize development costs
 Development costs must be considered as an asset, if and only if specific
criteria are met simultaneously.
 6 criteria are defined by IAS 38 Standard:
1) The technical feasibility of completing the intangible asset so that it will
be available for use or sale;
2) The intention to complete the intangible asset and use or sell it;
3) The ability to use or sell the intangible asset;
4) How the intangible asset will generate probable future economic
benefits. Among other things, the enterprise should demonstrate the
existence of a market for the output of the intangible asset or for the
intangible asset itself or, if it is to be used internally, the usefulness of the
intangible asset;
5) The availability of adequate technical, financial and other resources to
complete the development and to use or sell the intangible asset; and
6) The ability to measure the expenditure attributable to the intangible
asset during its development reliably.
 If these 6 criteria are not simultaneously met, developments costs
can not be capitalized.
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1.3. IAS 38 main principles applied to Valeo – Concept 1
Key concept 1: Development phase vs research phase
 According to Valeo Constant Innovation Policy (CIP), R&D costs are classified
among the following categories:
 P3 projects: ‘Investigation of the viability of new ideas for technology,

systems, functions, modules, components or software; serves to get initial
market feedback. So as to foster creativity, P3 projects have no
predetermined structure and have no pre-determined phases’.
 P3 projects can clearly be assimilated to Research costs as their objective
is to identify potential technological progress without any direct link to a
marketable product.

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 P2 projects: ‘Creation of new validated generic standards to be used later in

P1 projects. Such standard cover systems, modules, components and software.
P2 project are structured into 5 phases’.
 The P2 projects relate to research costs as the corresponding final product
and industrial application are not yet identified.
 P1 projects: ‘Development of specific customer application. Must be based on

validated generic standards (P2) or technologies already applied in volume
production.’
 P1 projects can clearly be assimilated to development costs as they are
dedicated to supply car makers with a specific system/component relying on
technologies already available or validated.
 P0 projects: ‘Major modifications on an existing product already in production

for the same customer application(s). P0 projects are essentially focused on
improvement of serial products (cost reduction, quality improvement).
 PO projects mainly include costs of manufacturing and industrial nature.

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Key concept 2: Conditions to capitalize costs
 P0 & P2 projects cannot be capitalized:

 The development phase of P2 projects does not comply with some of the 6
conditions required to capitalize costs and especially with the fourth one, the
ability to demonstrate the profitability of the corresponding projects.
 Their capitalization is thus forbidden.
 P0 projects do not meet the profitability criterion as they generally relates to

products with a low or negative margin and the incremental profitability can
not be measured reliably.
 Their capitalization is thus forbidden.

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 Focus on P1 projects:
 For P1 projects a case by case analysis is necessary to check whether
capitalization is required or not. A specific attention must be paid to criteria n°
4 (and also n°1 & 5 in some particular cases).
N° IFRS Criteria Applied to Valeo P1 project

(1) Technical Always fulfilled for P1 projects except if they rely on
feasibility non validated P2 technology.
(2) Intention to Always fulfilled once Valeo gets a nomination letter (or
complete equivalent)
(3) Ability to use / Always fulfilled once Valeo gets a nomination letter (or
sell equivalent)
(4) Probable A case by case analysis is required on that point.
future Specific guidelines are provided below.
economic
benefits
(5) Availability of Always fulfilled for P1 projects except if a specific and
adequate material risk is documented on a given project.
resources
(6) Measure the Always fulfilled for division applying the C.I.P.: P1
expenditures projects are structured into 6 phases allowing a detailed
reliably cost allocation (see following slide).
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 P1 project summarized organization :
Start
Phase 0 Phase 1 Phase 2 Phase 3 Phase 4A Phase 4B
Competition Product/process Designation Product/process Launch & process Volume
phase design validation validation stabilization production
C.A.A. I.A.R. Tooling S.O.P.

Launch

27
 P1 project summarized organization :

Component P1 Phase 0 Phase 1 Phase 2 Phase 3 Phase 4A Phase 4B
Objectives Understand Finalize Develop Prepare the Stabilize

customer product detailed product production production
requirements requirements and process launch; source, process Capitalize on
Design build, install, experience
Develop Develop adapt and qualify Achieve volume
proposal for general product Validate the production build of Measure
customer and process detailed design equipment production customer
design to customer's satisfaction
Gain new and Valeo's Internal validation Achieve
profitable Check if the requirements of readiness for
business concept meets product/process customer SOP
the customer's
and Valeo's Customer
requirements validation of
product/process
Key achievements Mock-ups/ Mock-ups/ Prototypes Production line Pre-series Serial delivery
Simulation Simulation ready
(Optional) Design Reduced Project closure.
Design freeze/tooling Initial Samples variations
Offer to compliant with launch (IS)
customer specifications QCD target
Serial product IS acceptation reached
Requirements definition file
freeze from (drawings, SOP readiness
customer specifications)

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1.4. Implementation guidance – General case
 Issue 1 - Scope of the contracts to analyze

 A P1 project is defined by a CAA and its corresponding IAR  each
CAA/IAR corresponds to one P1 project at division level;
 P1 projects should be consistent with the one reported in the Project

Management Committee (as defined in Valeo C.I.P.) document.
 Total cumulated P1 costs of P1 projects under review have to match with the
P1 costs reported under Hyperion (DEP) and accounting system.

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 Issue 2 - Dates to start capitalizing costs
 Capitalization of development costs has to be considered successively and

only at each of the following critical dates:
 Upon receipt of the nomination letter (or equivalent) which supports
the agreement from the customer on Valeo P1 project (usually
beginning of phase 1).
 At the date of the launch of the tooling which triggers design freeze
and the specific industrial investments related to the project (usually end
of phase 2).

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 Retrospective capitalization of development costs is not authorized: the cost

to capitalize should only be the costs incurred from the date when the
intangible asset first meets the 6 recognition criteria previously stated
(prospective capitalization mandatory). i.e. either at the date of receipt of the
nomination letter or at the tooling launch date.
Practically, capitalization could start on the first day of the month in which
one of those two events occurs.
 If a project fails to pass the capitalization test at the nomination letter date or at
the launch of the tooling date, there will never be any development costs
capitalized for this project.

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 Illustrative example 1 - capitalization criteria met from the nomination letter.
Year N Year N+1
PROJECT "ALPHA"
Expenditure incurred on the P1 projec t Alpha
Expenses Capitalized costs on Capitalized costs on project Alpha

of year N project Alpha year N year N+1
year N
Receipt of the nomination

letter. The 6 recognition
criteria are met from that
date.

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 Illustrative example 2 - capitalization criteria met from the tooling launch date.
Year N Year N+1
PROJECT "BETA"
Expenditure incurred on the P1 project BETA
Expenses of financial Capitalized costs on

Expenses of
year N project BETA
year N+1
Receipt of the nomination Date of the launch of tooling.

letter. The 6 recognition The 6 recognition criteria are
criteria are not met at tha t met a t tha t da te.
date.

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 Issue 3 - Date to stop capitalizing costs

 Development costs should not be capitalized after SOP date, i.e. end of
phase 4 A of P1 projects (refer to C.I.P.).
 Phase 4 B costs are assimilated to start up costs and must be expensed
accordingly.
 Only P1 development costs incurred between beginning of

phase 1 and end of phase 4A are capitalizable.

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 Issue 4 - P1 projects are considered to generate future economic benefits if:
either  The potential gross margin of the project at the date of the Nomination
letter (based on CAA figures, updated for any potential amendments to
the initial CAA) is above 15 %.
If these conditions are met, development costs have to be capitalized as
soon as the confirmation from the client (nomination letter or equivalent
even by email) is received.
or  The potential gross margin of the project at the date of the launch of
the tooling (based on the IAR figures updated if necessary to take into
account all significant events occurring before the launch of the tooling
date) is above 15 %.
If these conditions are met, development costs on the project have to be
capitalized from the launch of the tooling onwards.
However, if the P1 project has a negative profitability (example :

negative operating income), capitalization would not be authorized.

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 Development costs for projects that do not respect these criteria (gross
margin > 15% and profitability) should be expensed.
 Even if these profitability criteria are met, divisions must expense

development costs if they consider that one of the other IFRS criteria is not
met (for instance P1 projects relying on non validated P2 technology).
However for such cases, the approval of the Branch is required.
 The 15% gross margin criterion has been defined by taking into account two
approaches :
 full cost approach  no capitalization of projects that do not generate net
profitability.
 Impairment approach  no capitalization of projects that could fail the
impairment test after capitalization.

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 Issue 5 – Nature of costs to capitalize
 Only gross costs attributable to the project should be capitalized: customer
financing should not be considered.
 The nature of P1 costs to capitalize is detailed in the table below:
Capitalizable P1 costs are including
1- Labor costs of :
Project team members (including

Methods, Purchase, Quality,
dedicated to R&D activities)
Directly charged to project through
PSN7 hours follow-up
R&D contribution
Laboratory contribution
Allocated to projects through hourly rate

R&D and Project directors
used for PSN7 hours valuation
Directly allocated to project through

PSN7 hours follow up. Hourly rate of the
2- Capacity subcontracting
section must include subcontracting
costs.

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3- Skills Subcontracting
Prototypes Costs less any Directly charged to project through analytic

4-
corresponding sales allocation
5- External studies
Directly allocated to project through

6- Travel expenses analytic allocation of travel costs or
integrated in section hourly rate
Depreciation (building, IT,

7-
laboratory)
IT costs (purchased licences and Allocated to projects through hourly rate

8-
maintenance) used for PSN7 hours valuation
General Overhead (electricity,

9-
maintenance, consumables,…)

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 The following costs must be excluded from capitalization:
All Project cost spent before
10
nomination letter reception and
-
post SOP.
Labor costs of Methods,

11 Purchase, Quality (MPQ) and all

- others not fully dedicated to
R&D activities
12
Training and seminars
-
13
Recruitment expenses
-
14 Patent expenses not related to

- P1 projects
 Sum of 1 to 10 natures of costs should be consistent with P1 D EP Hyperion

Reporting.
 Nature of cost 11 is included in gross margin.
 Sum of 12 to 14 natures is reported in DEP Hyperion in the category « other
costs ».

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 Standard allocation rate updating process:

 As stated above, P1 costs are, depending on their nature, charged to projects
either through an analytical allocation.
 Hours allocated to a project are valued using a standard rate that must take
into account all the cost natures listed above. These standard hourly rates
will have to be reviewed at least once a year in the course of the budget
process. If significant variances are identified between standard and actual
valuation, capitalized costs will have to be adjusted accordingly.
 ‘Other costs’ nature treatment:

 Some R&D expenses are recorded under Hyperion (DEP) in the ‘other costs’
category. This category should only be used to record costs that cannot be
allocated to other R&D categories (P3, P2, P1 and P0). Accordingly, the ‘other
costs’ category should mainly include the following nature of expenses:
– Staff training costs;
– Patent expenses related to P2 projects,
– Branch specific coordination costs,
– Non significant variance between standard vs. actual valuation of P1
projects : (as stated above, if significant, this amount will have to be
analyzed and reallocated to P1 projects). This analysis must be carried
out by analytical center.
 No expense recorded under this ‘Other costs’ category is to be
capitalized.

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 Issue 6 – Specific focus on prototypes
Costs should be included in R&D;

Sales have to be recognized in ‘Other revenues’;
Any margin should remain in R&D and hence will decrease the total project
capitalizable costs.

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1.4. Implementation guidance – Related topics
 Development cost capitalization process is very linked to the following
topics:
Tooling capitalization (see section 8)
Loss making provisions (see section X)
Impairment testing (see section 4)
 This interaction can be summarized through the following table:
Loss making
Gross margin P1 development costs Specific toolings provisions
x > 15 % Capitalized * Capitalized if financing below 50 % No provision
15 % > x > 8 % Not capitalized Capitalized if financing below 50 % No provision
8%>x>5% Not capitalized Capitalized if financing below 50 % Provision may

=> compulsory impairment test be needed
5 %> x Not capitalized Capitalized if financing below 50 % Provision may

=> compulsory impairment test be needed
* If all the other required criteria are also met;

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1.4. Implementation guidance – Related topics
 Specific areas of attention should be:

For each project where the initial profitability is not sufficient to allow
capitalization of development costs, divisions will have to pay a specific
attention to the following related topics:
 Capitalization of tooling (where customer financing is below 50 %)
will have to be closely reviewed : risk of impairment (see section 4)
 A review to determine if a loss making provision is necessary will
also have to be made (see section X).
For each project where a subsequent profitability decline is an
indicator that the related assets could be impaired, the division will have
to:
 Realize an impairment test encompassing both capitalized
development costs and specialized tooling;
 Check if an additional loss making provision would be necessary.

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1.4. Implementation guidance – Multi divisions projects
 Additional guidelines have to be set to manage multi sites, multi

divisions or even multi branches R&D projects.
 Description
 In these situations, up to the SOP date, the overall vision of the project
is in general only available in the entity in charge of leading the project.
 As per Valeo Constant Innovation Policy, the “leading branch / division /
site” is designated based on the following criteria :
 Customer interface
 Product responsibility
 System management capability
 Positioning within the value chain.
 The expected profitability of the project is assessed by the project
manager of this leading entity.
 These leading entities will re-invoice to the other divisions (the
associated / customer divisions) that are also part of the overall project,
the development costs they have incurred on their behalf at least on a
quarterly basis (monthly basis is recommended).

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 In which division should development costs be capitalized?

 Development costs have to be capitalized and amortized in each
division that will at the end record the development costs of the overall
project (the associated / customer divisions);
 Development costs incurred by the leading entity that will be re-invoiced
to the associated / customer divisions do not have to be capitalized in
the leading entity;
 Intra group P1 invoices received have to be included in the development
costs capitalized by each associated / customer division (based on the
same criteria as discussed above).

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 Decision to capitalize
 Up to the SOP date, the decision to capitalize or not a multi site / multi
division / multi branches P1 project should be made by the leading entity
which is the only one to have the global vision on the project profitability
and features.
 This decision has to be documented by the project leader of the leading
entity.
 This decision has to be communicated to the associated / customer
divisions (which will at the end record the development costs in their
financial statements). An adequate documentation has to be
communicated to the associated/customer divisions with the
corresponding development invoices (the capitalization decision must
however not be indicated directly in the invoice to avoid any confusion
between local GAAP and MAF GAAP).
 Associated / Customer divisions should follow the decision set by the
leading entity.

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 A specific follow-up is required for those projects in two situations:
Situation 1 - If a P1 project, below the required thresholds when analyzed on

an individual basis, has been capitalized in a given division because it is part
of a more global project that is above these thresholds when considered as a
whole, the division will have to document that this situation is still supported
at each quarterly closing.
Refer to the following page for an illustrative example

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 Illustrative example (situation 1)
 Division A operates a project with a negative gross margin of -1 %. This
project is however part of a more global nomination letter at the Branch
level which corresponding business is profitable (gross margin on the
whole business is above 15 %).
 The initial capitalization decision on this multi-division project is initially

made by the leading division for the whole project. Division A had
applied the corresponding capitalization decision and capitalized
development costs in its balance sheet.
 For each subsequent quarterly closing, division A will have to check with
the appropriate authority (leading division and/or Branch in this
example), that the corresponding whole business is still profitable to
avoid booking any impairment loss.
 Note : In case one of the divisions associated to the overall project is a

joint-venture, only Valeo’s share of interest will be considered for the
assessment of the overall profitability of the project.

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Situation 2: if a P1 project is impaired at a given closing date by a division, a

specific approval (“alert procedure”) from the branch will be required
whenever this project is identified as a multi division/multi site/multi branches
project, in order to assess the potential impact on other related divisions.
Refer to the following page for an illustrative example

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 Illustrative example (situation 2)
 Division A operates a project n°1 with a positive gross margin of 15 %

during year N. This project is part of a more global nomination letter
including also a project n°2 manufactured by division B. Project n°2
gross margin is also at 15% during year N. Development costs of
both projects n°1 and 2 are capitalized.
 On year N+1, division B grants to its final customer a quick saving of

10 % with respect to its project n°2. Accordingly, its gross margin on
this project falls to 5 % and an impairment loss is required. Following
this quick saving, the whole business gross margin (project n°1 +
project n°2) also falls significantly below 15%.
 The need of a formal approval from the Branch to book the

impairment on project n°2 will allow the Branch to trigger also an
impairment test on project n° 1 at Division A level.

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 Amortization
 All capitalized costs have to be amortized on :
 48 months (most cases),
 Or th expected duration of the OEM market (as defined in the CAA) if
shorter.
 Amortization of capitalized development costs must start from the SOP date.
 Amortization charge must be calculated on a straight line base.
 Amortization charge should be recorded in the R&D line of the P/L.
 R&D line of the IFRS P/L will be made of two sub-items :

 Non capitalized R&D expenses;
 Development costs amortization.

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 Impairment:
 According to IFRS, an impairment test is mandatory:
 For all intangible assets in progress at least once per year.
 For development projects currently under production (post SOP) if
there is any indicator (commercial failure of the relating vehicle, loss
making product…) that a project should be impaired.
 Impairment tests on capitalized costs can be subsequently reversed if

appropriately supported and documented.
 Impairment tests for each project should be made based on the dedicated
Excel sheet form (refer to the following slide). Additional guidance is
available on this issue in the MAF standard ‘Impairment of assets’ (see
section X).

52
1.6. Customer financing
 P1 contributions are considered as advances received from customers:

As such, they must be spread on a straight-line basis over the
amortization period defined for the corresponding project. These
contributions have to be recorded as revenues.
The lump-sum contributions have to be deferred whatever the decision
taken regarding the capitalization of related development costs: as a
consequence financial contributions attached to non profitable P1
projects also have to be deferred. This accounting treatment on lump-
sum contributions aims at being consistent with the situation where
customer contributions are included in the piece price.
All development lump-sum contributions have to be deferred whenever
they are received by Valeo (at the signing of the nomination letter / at
SOP date…). For prototypes and tooling sales, see section X and X
respectively.
 P2 contributions have to be spread in revenues over the related P2
project lifetime (P2 projects do not lead to sales to the final customer).

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1.7. Accounting procedure
 Development cost follow up:
 Each division will have to follow each of its P1 projects on a dedicated
Excel sheet form (currently in preparation at Group level).
 Please be aware that this file will need to be:
 Set up for each new P1 project from the start of phase 1;
 Updated at least on a quarterly basis;
 Filled in with forecasted figures up to the expected end of the OEM
market (source: order book). These figures will be replaced by actual
figures as soon as they are available (at least on a quarterly basis).
 These Excel sheet forms should be made available to the Division
accounting managers in order for them to document their intangible asset
accounts.
 Hyperion reporting:
 Capitalized development costs have to be reported in the intangible assets
schedule of Hyperion.
 Costs have to be capitalized as ‘Capitalized development costs in
progress’ up to the SOP date. From the SOP date, these costs have to be
reclassified as ‘Capitalized development costs’.

54
 The P1 development costs follow-up form must be filled by each

division: R&D controller. Under the supervision of project manager.
 Project capitalization and impairment should be approved by Branch /
Group :
 Capitalization decision for a project should be shown on the CAA / IAR
to be approved by the Branch/Group.
 Impairment should be based on forecasted impairment loss using the
dedicated impairment autorization form (refer to section Impairment for
approval levels).
 As stated above, Branches will also have to give specific approvals in
relation with multi sites / multi divisions / multi branches projects and
especially if these projects have to be impaired.

55
 For Valeo 2004 opening balance sheet, development costs have
exceptionally (FTA specific requirement) to be capitalized on a
retroactive basis:
 Valeo 01/01/04 balance sheet should present a situation as if
development costs had always been capitalized.
 However, no capitalization is possible and thus required, if the
information necessary to assess the compliance of a specific P1 project
with the 6 criteria set by IAS 38 was not available at that date.
 The retrospective application of development cost capitalization will be
closely reviewed by external auditors  Each step must be clearly
documented.
 Each division will have to retrieve historical data as far as
possible in the past (potentially up to 1999).
 The restatement will have to be documented on a specific Excel sheet

form to be provided by the group.
 The restatement impact will be booked against equity as at January 1,
2004.

56
 Illustrative Examples
 Project n° 1: SOP before January 1, 2004

 Started on October 15, 2001 (date of nomination letter receipt);
 From that date, the available data show that capitalization criteria
were met.
 SOP date for this project was on July, 1st 2003;
 Total costs incurred from nomination letter to the SOP date amount
to K€ 2,000 ;
 OEM market duration for this project is expected to be 4 years;
 As of January 1, 2004, this project must be capitalized for a gross
value of 2,000 K€ and a cumulated amortization of 250 K€ (6 month
amortization from July 1st, 2003 to December 31, 2003:
0,5 * [2000 K€ / 4 years]).

57
 Illustrative Examples (continuing)
 Project n° 2: SOP after January 1, 2004

 Started on July 1, 2002 (date of nomination letter receipt);
 Available data shows that capitalization criteria were met from
tooling launch date;
 SOP date for this project was on January 31, 2004;
 Total costs incurred from nomination letter to launch of the tooling
amount to 700 K€. Total costs incurred from Launch of the tooling
to SOP date amounts to 550 K€ (of which 480 K€ prior to
December 31, 2003);
 OEM market duration for this project is expected to be 4 years.
 As of January 1, 2004, this project must be capitalized for a gross
value of 480 K€. No amortization has to be recorded as at January
1, 2004.

58
 Set up of additional items in the Hyperion reporting

 Examples of changes in the Hyperion report :
 Capitalised development cost for projects in production : in the intangible
assets table;
 Development costs capitalized : new nature in the local/MAF
reconciliation tables;
 Reversal of discounting of other provisions : new financial result line
item.

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Training Session – DAY
DAY 11
-- Introduction
Introduction p.
- Intangibles (Development costs)
- Tangible assets and Specialised Tooling
- Impairment
3. Leases p.
- Revenue
4. Impairment p.
-5.Inventories
Revenue p.
6. Inventories p.

2. Tangible assets & Specialized tooling
Summary
2.1. Preliminary comments
2.2. IAS 16 main features
2.3. Determination of gross value
2.4. Component approach
2.5. Spare parts
2.6. Major repairs
2.7. Identification and treatment of investment property
2.8. Depreciation and impairment loss

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2. Tangible assets & Specialized tooling
Summary
2.9. Specialized tooling

 Inventory vs fixed asset initial recognition;
 Specific recognition requirement;
 Customer financing.
2.11. First Time Application (FTA)

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2. Tangible assets & Specialized Tooling
 IAS 16 and IAS 40 prescribe the accounting and disclosures for property,
plant and equipment
 Based on the diagnosis phase, 6 main issues were identified for Valeo with
respect to tangible assets:
 Determination of gross value;
 Component approach;
 Spare parts;
 Major repairs;
 Identification and treatment of investment property;
 Depreciation (residual value) and impairment loss.
 Considering specialised tooling, 3 main issues were identified
 Inventory vs fixed asset recognition rule;
 Specific recognition requirements;
 Customer financing.

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2.2. IAS 16 Main Features
 Definitions:
 Tangible assets are property, plant and equipment that:

 Are held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes, and
 Are expected to be used during more than one year.
 Depreciable amount is the cost of an asset less its residual value.
 Useful life is the period over which an asset is expected to be available for
use by an entity.

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 Recognition criteria:
 The cost of an item of property, plant and equipment shall be recognized as
an asset if, and only if:
 it is probable that future economic benefits associated with the item will
flow to the entity; and
 the cost of the item can be measured reliably.
 Measurement subsequent to initial recognition:

 Cost less accumulated depreciation and impairment losses;
 Depreciable assets : Depreciation method selected reflects the consumption
of benefits:
 The depreciation is the systematic allocation of the cost of an asset less
its residual value over its useful life;
 The residual value is the net amount which the enterprise expects to
obtain for an asset at the end of its useful life after deducting the
expected costs of disposal.

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 Subsequent expenditure
 When should subsequent expenditures be capitalised?
 Future economic benefits are probable;
 They will be in excess of the originally assessed standard of performance
of the existing asset.
 Component approach
 Some items of property plant & equipment, have useful lives different from
those of the items of PP&E to which they relate. They are considered as
components:
 Each component is accounted for separately; and
 Is depreciated according to its own useful life.
 This approach is relevant to reflect the pattern in which the component’s
economic benefits are consumed.

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2.3. Determination of gross value
 Safety and environmental assets
 Certain items of property, plant and equipment may be purchased in order to

enhance the safety or environmental friendliness of an asset already held by
an enterprise.
 When considered on its own, such an item may not appear to encompass
future economic benefits which will flow to the enterprise.
 If however, the item enables the enterprise to derive greater future economic
benefits related to the original asset than would have been the case if the
new asset had not been acquired, it is appropriate to capitalize the item.

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 A new concept compared to current MAF principles
 Initial recognition
 Based on Valeo new IFRS MAF, a component is accounted for as a separate

asset if and only if :
 It can be measured reliably,
 Its gross value is above 300K€.
 The initial recognition of a component should not affect the total gross value
of the asset it relates to. If the purchase invoice does not mention the value of
the components, an estimated amount should be considered based on
market prices if available.
 Example for production equipment : a furnace may require relining after a
specified number of hours of usage
 Example of component for buildings : roof, air conditioning /heating system,
…

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 Derecognition of a component
 When a component is physically replaced, its relating carrying amount is

derecognised from the balance sheet;
 If the component had not been previously recognized in the assets ledger, a
partial write down on the main asset will be performed in order to take into
account the fact that the component had not been depreciated over its useful
life;
 If it is not practicable for an entity to determine the carrying amount of the
replaced part, it may use the cost of the replacement as an indication of what
the cost of the replaced part was at the time it was acquired or constructed.
 Division with heavy equipments should be more impacted.

69
 Example 1
 Facts :
 A company installs a specific machine of a total cost of 1,8 M€
 The estimated useful life of the machine is 10 years (straight-line
depreciation)
 The company knows by experience that every 5 years, a specific motor
of the machine needs to be changed. The cost of this specific motor can
be estimated at 500 K€
 Question :
 How to account for the acquisition of the machine?
 Answer :
 Account for the machine for 1,300K€, with a straight line depreciation
over 10 years;
 Account separately for the motor for 500K€ with a straight line
depreciation over 5 years.

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 Example 2
 Facts :
 A company installed a specific machine of a total cost of 1,8 M€
 The estimated useful life of the machine is 10 years (straight-line depreciation)
 No specific components were initially recognised as it was assumed that they
all had an estimated useful life of 10 years
 After 5 years, a specific motor of the machine is replaced. Cost of the new
part amounted to 500 K€
 Question :
 How to account for the replacement of the motor ?
 Answer :
 The new motor shall be accounted for as a specific line item, with a straight
line depreciation over 5 years
 The previous motor shall be derecognised. As its amount has not been
previously identified, its carrying amount can be estimated by its replacement
cost: 500K€. Hence there is a derecognition on the machine line item of
500K€ in gross value, and 500K€*5/10=250K€ in accumulated depreciation
(P&L impact).

71
2.5. Spare parts
 According to IFRS major spare parts meet the definition of a tangible asset if:
 They are held for use in the production or supply of goods or services, for
rental to others, or for administrative purposes; and
 They are expected to be used during more than one year.
 As a consequence, it has been decided that spare parts over 3 K€ have to be

accounted for as tangible assets.
 Other spare parts remain in inventories unless not significant (in that case
they can be expensed directly)
 Depreciation for spare parts classified as tangible assets will be computed:

 Over the useful life of the fixed assets they relate to, or;
 Over a shorter period in case of a risk of obsolescence.
 A specific attention is required on that topic due to the heterogeneity

noticed between divisions in this area during the diagnosis phase.

72
2.6. Major repairs
 Major inspections and overhaul costs are recorded as expenses under IFRS
except when they are identified as a separate component in the carrying
amount of the asset regardless of whether parts of the item are replaced;
 Any remaining carrying amount of the cost of the previous inspection is
derecognized at that time;
 If necessary, the estimated cost of a future similar inspection may be used as
an indication of what the cost of the existing inspection component was when
the item was acquired or constructed.
 No provision can be booked for major inspection and overhaul costs under
new IFRS GAAP.
 See next slide for an illustrative example.

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2.6. Major repairs
 Illustrative example:
 An asset acquired on 1.1.2004 for 1000, has an useful estimated to 50 years
and will need major overhaul in 10 years (estimated cost is 150 in 2004,
effective cost of 160 in 2013 *)
* The impact of discounting will not be taken into account in this example
Current MAF treatment IFRS
PPE Provision P&L PPE P&L
12.31.04 1000 (20) 20 Comp.1 850 (17) 17

(15) 15 Comp.2 150 (15) 15
980 (15) 35 968 32
PPE Provision P&L PPE P&L

1000 (200) 20 Comp.1 850 (170) 17
12.31.13 150 (150) 15 150 Comp.2 150 (150) 15
160 Comp.3 160 - -
800 - 45 840 32
 Impact on equity = 360 (200+160)  Impact on equity = 320 (170+150)

74
2.6. Major repairs
 Illustrative example (continuing):
 The 40 K€ difference derives from:
 A 30 K€ excessive amortization in current MAF treatment. Major overhaul
costs are indeed:
– fully provided for (150 K€), and in addition
– depreciated over 50 years within the global value of the asset (30 K€
= 150 K€ / 50 years * 10 years).

 A 10 K€ difference between the expected cost of the major overhaul at
January 1, 2004 and the real cost incurred in 2013.

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 Investment property
 Investment property is property (land and / or building or part of a building)
held (by the owner or by the lessee under a finance lease) to earn rentals or
for capital appreciation or both, rather than for:
 use in the production or supply of goods or services or for administrative
purposes; or
 sale in the ordinary course of business.
 Measurement
 IFRS allows an enterprise to choose either;
 fair value model, or
 historical cost model (option chosen by Valeo)
 Application of the cost model to all of the enterprise's investment property;
 Change from one model to the other model allowed if it results in a more
appropriate presentation (highly unlikely for change from fair value to cost
model);

76
 Examples:
 Land or building held for a currently undetermined future use;
 A building leased out under an operating lease;
 A building that is vacant but is held to be leased out under an operating
lease.

77
2.8. Depreciation and impairment loss
 Depreciation
 Residual value
 Definition: the residual value of an asset is the estimated amount that an
entity would currently obtain from disposal of the asset, after deducting
the estimated costs of disposal, if the asset were already of the age and in
the condition expected at the end of its useful life.
 According to the new IFRS MAF, the residual value should be deducted
from the depreciation amount if and only if:
– It can be measured reliably (for example: external assessment);
– It is above €1 million;
– There has been a Group Financial Control approval for deducting it
from the depreciable amount.

 Residual value deducted from the depreciable amount shall be reviewed
on a yearly basis;
 Depreciation plan
 A depreciation plan is defined by the division when the asset is put into
service. The plan defines the estimated useful lifetime and depreciation
method.
 No change from previous MAF depreciation rates is required by the group
for IFRS purposes (except if specific sub components are identified, see
above section 2.4.).
78
2.8. Depreciation and Impairment loss
 The useful life of an item of property plan and equipment should be reviewed
periodically and, if expectations are significantly different from previous
estimates, the depreciation charge for the current and future periods should
be adjusted after Group Financial Control approval.
 No major change expected as compared to MAF 31/12/2003 accounts.
 Impairment loss:
 IFRS are more explicit than current MAF with respect to impairment testing;
 An impairment loss is the amount by which the carrying amount of an asset
exceeds its recoverable amount;
 To determine whether an item of property, plant and equipment is impaired
refer to the section 4;
 Divisions operating with significant operating losses should be more

impacted.

79
2.9. Specialized tooling - Inventory vs Fixed asset initial
recognition
 Main references to IFRS standards:

 An asset is a resource :
 Controlled by a company as a result of past events; and
 From which future economic benefits are expected to flow to the company.
 Tangible assets are property, plant and equipment that:

 Are held by a division for use in the production or supply of goods or
services, for rental to others, or for administrative purposes, and
 Are expected to be used during more than one year.
 Inventories are assets:

 held for sale in the ordinary course of business;
 in the process of production for such sale; or
 in the form of materials or supplies to be consumed in the production
process or in the rendering of services.

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2.9 Specialized tooling - Inventory vs Fixed asset initial
recognition
 Inventory vs fixed assets rule:
 To determine whether tools should be recorded as fixed assets or

inventories, Valeo applies the following criteria:
 Control of the tools over the entire OEM period;

 Bearing of the risks and rewards related to ownership during the OEM
period.
 Based on previous principles, Valeo has decided to rely on a simplified

criteria based on the level of financing (current MAF criteria).

81
recognition
 Indeed, in general, there is a good correlation between the level of financing

of a customer and its requirement regarding the ownership of tooling:
 Tooling will be recorded as fixed assets when customer financing are
below 50 % of the total costs of the tools (as specified in the CAA);
 Tooling will be recorded as inventories when customer financing are
above 50 % of the total costs of the tools (as specified in the CAA).
 In case a division considers that this simplified rule does not reflect at all the
underlying control and risk & reward attached to a specific tooling, a specific
agreement will be required from the Branch to depart from MAF accounting
rule.

82
recognition
 Accounting treatment
 Tools recorded within fixed assets have to comply with the corresponding
MAF procedure. Among others, they have:
 To be amortized on a straight line basis over the OEM market duration
(no longer than 4 years);
 Amortization starts at SOP date.
 Tools recorded as inventories are derecognized and expensed in accordance

with general Valeo revenue recognition principles (in general at the date of
acceptance of tools by the car manufacturer).

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2.9. Specialized tooling - Specific recognition requirements
 Fixed assets tools

 A specialized tooling is part of the assets dedicated to a customer contract.
Consequently as it is the case for all assets dedicated to a contract, an impairment
test is required when there is an indication that the customer-contract dedicated
assets have been impaired (desourcing, early re-styling, sales by far lower than
forecasted, major quality issue...).
 Valeo guidelines are summarized in the following table:
* If all the other required criteria are also met;

** Except in specific derogating cases as mentioned in previous slide
Within the context of Valeo’s opening balance sheet, divisions will have to check
that no impairment is needed for all tools relating on low margin contracts.
84
2.9. Specialized tooling - Specific recognition requirements
 Inventory tools
Costs are recorded within inventories when incurred;
As it is part of inventory a test is required at each closing date in order to
check that inventory carrying value is not above its net realizable value. If
needed, a provision will be booked based on the proportion of costs
incurred at year end.
When tools are sold to car manufacturers at a price lower than incurred
costs, the difference is :
 Immediately recognized in profit and loss under IFRS 
corresponding costs are no more deferred, any prior provision is
reversed;
 Except if additional financing for tooling is formally guaranteed
through subsequent piece price by the car manufacturer.
 Within the context of Valeo opening balance sheet, divisions will have to
derecognize deferred costs recorded as of December 31, 2003.

85
2.10. Specialized tooling - Customer financing
Customer financing are analyzed under IFRS as a method of funding 

They are part of the global revenues attached to a specific contract.
Accordingly, customer contributions for tooling are included in revenues

 Either in the sales figures in case of a price per piece agreement;
 In income from tooling in case of lump-sums (whatever the financing
level).
For capitalized toolings, lump sum financing have to be deferred up to

SOP date. They have then to be reversed on a straight line basis over the
OEM market duration (same as depreciation period).
For inventory tools, immediate recognition of the lump sum financing after
acceptance of tools by the car manufacturer

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 Tangible assets:
 Division financial controller should obtain authorization from Group Financial
Control for:
 The amount of the residual value deducted from the depreciable amount,
 Any amendment to depreciation plan of fixed assets,
 Classification of a land or building in the investment property category.
 Specialised tooling
 Division management controller :
– provides to the Division chief accountant all necessary information to
apply the appropriate accounting treatment for tooling manufacturing

costs,
– performs the impairment test in case of indication that some assets
have been impaired.

 Division financial controller
– reviews the computation and the results of the impairment test.
– obtain authorisation from Group Financial Control if the 50 % tooling
financing rule can not be applied in some very specific cases.

87
 As a consequence, all above mentioned principles have to be applied on a

retrospective basis;
 Valeo divisions should therefore focus on the main issues detailed:

 Determination of gross value:
 Costs to include on a prospective view;
 Component approach (additional depreciation)
 spare parts classification (fixed asset vs inventory and related
depreciation / allowance adjustment)
 identification of major repairs to be recognized as component
 Identification of investment property;
 Depreciation (residual value) and impairment loss.

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 Specialised tooling:
 Recognition (fixed asset vs inventory);
 Impairment (low margin contracts);
 Revenue recognition for inventory tools (no more deferred expenses on
tooling and potential allowance if cost is above NRV);
 Customer financing for capitalized tooling (for all projects which OEM
market goes beyond January 1, 2004, divisions will have to reverse part -
or all if SOP date is beyond January 1, 2004 - of past financing recorded
in previous years revenues to spread them over the remaining OEM
market period).

89
Training Session – DAYDAY 11
-- Introduction
Introduction p.
1. Intangibles(Development
- Intangibles (Developmentcosts)
costs) p.
2. Tangibleassets
- Tangible assets and
and Specialized
SpecialisedTooling
Tooling p.
3. Leases
- Impairment p.
4. Impairment
- Revenue p.
5. Revenue p.
- Inventories
6. Inventories p.

3. Leases
Summary
3.3. Broader definition of a finance lease contract
3.4. More extensive criteria to capitalize lease
3.5. Lower materiality to capitalize lease
3.6. Specific cases
3.8. Hyperion Release

91
3. Leases
 IAS 17 prescribe for lessees and lessors, the appropriate accounting policies
and disclosures to apply in relation to leases.
 Scope of the corresponding MAF procedure

 This procedure does not apply to intra-group leasing contracts;
 Based on the diagnostic phase, 4 main issues were identified for Valeo with
respect of IAS 17:
 Broader definition of a lease contract;
 More extensive criteria to capitalize lease;
 Lower materiality required to capitalize lease;
 Specific cases:
 Land;
 Sale and lease back agreements;
 IAS 16 requirements for capitalized leased.

92
3. Leases
 Definitions:
 A lease is an agreement whereby the lessor conveys to the lessee in return

for a payment or series of payments the right to use an asset for an agreed
period of time.
 A finance lease is a lease that transfers substantially all the risks and
rewards incidental to ownership of an asset. Title may or may not
eventually be transferred.
 Must be restated.
 An operating lease is a lease other than a finance lease.

 No specific restatement.
 Lease classification is made at the inception of the lease.

93
3. Leases
3.3. Broader definition of a finance lease contract
 Reference to IAS 17:

 As stated above IFRS definition of a finance lease is very large and can
encompass many contracts that are not directly identified as finance lease
contracts.
 Consequences for Valeo:

 New contracts may have to be restated under IFRS while they were out of
the scope of current MAF finance leases procedure;
 For example during the diagnostic phase, some IT contracts have been
identified as being potentially impacted with respect to finance lease
restatement
 Divisions are asked to check if additional contracts (compared to the one

already restated as financial lease in MAF accounts) involving the use of an
asset by Valeo, could be within the scope of this new MAF IFRS finance
lease procedure.

94
3. Leases
 IFRS criteria are more extensive:
 Under IFRS, whether a lease is a finance lease or an operating lease

depends on the substance of the transaction rather than the form of the
contract.
 IFRS do not give any minimum figures to restate lease (difference with US
GAAP). Instead, IFRS give examples and indicators of situation that
individually or in combination would normally lead to a lease being classified
as a finance lease (see following slides).

95
3. Leases
 Examples of situations that individually or in combination would normally

lead to a lease being classified as a finance lease are:
 The lease transfers ownership of the asset to the lessee by the end of the
lease term;
 the lessee has the option to purchase the asset at a price that is expected
to be sufficiently lower than the fair value at the date the option becomes
exercisable for it to be reasonably certain, at the inception of the lease, that
the option will be exercised (bargain price);
 the lease term is for the major part of the useful life of the asset even if title
is not transferred (guideline : over 75 % of the useful life);
 at the inception of the lease the present value of the minimum lease
payments amounts to at least substantially all of the fair value of the
leased asset (guideline : over 90 % of the fair value of the asset); and
 the leased assets are of such a specialised nature that only the lessee can
use them without major modifications.

96
3. Leases
 In addition, IFRS give indicators of situations that individually or in

combination could also lead to a lease being classified as a finance lease are:
 if the lessee can cancel the lease, the lessor’s losses associated with the
cancellation are borne by the lessee;
 gains or losses from the fluctuation in the fair value of the residual accrue to
the lessee (for example, in the form of a rent rebate equalling most of the
sales proceeds at the end of the lease); and
 the lessee has the ability to continue the lease for a secondary period at a
rent that is substantially lower than market rent.
 These examples and indicators are not exhaustive
 These examples and indicators are not always conclusive.

 If it is clear from other features that the lease does not transfer substantially
all risks and rewards incidental to ownership, the lease is classified as an
operating lease.

97
3. Leases
 Illustrative example - Signature of a leasing agreement for a factory
 Data at the inception of the lease

 A division signs a leasing agreement for a factory
 Estimation of land : 1 M€
 Estimation of building : 4 M€
 Initial costs (service fee to the leasing company) : 0.1 M€*
 Estimated economic life of the building : 20 years
 Length of the leasing contract : 15 years
 Yearly lease payment : 0.42 M€
 Buying option at the end of the contract (15 years) : 0.775 M€
 The fair value of the land and the building in 15 years is estimated at
2M€.
* Any initial direct costs of the lessee are added to the amount of the
finance lease to be capitalized.

98
3. Leases
 Analysis of the contract features
 The ownership of the land + building is not transferred automatically at

the end of the lease contract => does not give rise to capitalisation
 Buying option of 0.775 M€ in year 15, this option is sufficiently lower than
fair value at that date to be reasonably certain, at the inception of the
lease, that the option will be exercised => gives rise to capitalisation
 Leasing term/economic life is 15/20= 75 %, the lease term is for major

part of the economic life => gives rise to capitalisation
 The assets are not of a specialised nature => does not give rise to
capitalisation

99
3. Leases
 Discounted value of the minimum payments :

– The implicit interest rate* of the contract is 4,3 % per year
15
0,42
5,0 =  + 0,775
(1+r) i (1+r) 15
i=1
– The discounted value of 15 minimum payments is 4,59 M€ plus the discounted
value of the buying option 0,41 M€ that gives 5,0 M€.
0,42 + 0,42 + …. + (0,775 + 0,42) = 5,0 M€

(1 + 4%) (1 + 4%) 2 (1 + 4%)15
– The discounted value of the minimum lease payment is equal to the fair value
of the lease => gives rise to capitalisation
 Overall conclusion: the asset has to be capitalized for 5,1 M€.
* : Implicit interest rate is the discounting rate calculated at lease inception for which :
Present value of (min.lease payments + residual value) = Fair value of leased asset.

100
3. Leases
 Accounting entries
 At the inception date of the finance lease contract
(Debit) (Credit)
Land 1,0 M€
Building 4,1 M€
Initial costs capitalization 0,1 M€
Loan over 1 year 4.8 M€
Loan below 1 year 0.2 M€

101
3. Leases
 First yearly lease payment
– Cancellation of lease payment

(Debit) (Credit)
Loan below 1 year 0.2 M€
Interest expense 0.2 M€
Lease expense 0.4
M€
– Building yearly depreciation

(Debit) (Credit)
Building depreciation charge 0.2 M€
Building accumulated depreciation 0.2 M€

102
3. Leases
3.5. Lower materiality required to capitalize lease
 Previous MAF lease procedure required capitalization of lease for contracts

which individual asset fair value was above 750 K€;
 New IFRS MAF principle:

 Financial lease restatement need not be applied when the aggregated
market/fair value of the leased tangible assets is below an amount defined
per category of tangible assets (please refer to following page) at site
level.
 Each contract must be aggregated with all the contracts within the same
category to assess if a restatement is needed;
 During the diagnostic phase, the following natures of assets had been
identified as potentially sensitive:
 EDP hardware contracts (laptops…);
 Car fleet rental contracts;
 Industrial equipments which asset fair value is below 750 K€ on a stand
alone basis (but above this level on an aggregated basis).

103
3. Leases
3.5. Lower materiality required to capitalize lease
 New financial lease restatement scopes
Materiality scope by category of tangible assets

- Land improvements and fixtures 500 K€
- Buildings 500 K€
- Fixtures and improvements 500 K€
- General installations, fixtures, miscellaneous improvements 500 K€
- Infrastructure items 500 K€
- Technical installations, production equipment and tooling :
* Production equipment 500 K€
* Machine tools and other production plant 500 K€
* Packing and storage equipment 500 K€
* Electronic hardware 500 K€
* Specialized tooling 500 K€
* Production tooling 500 K€
* Production plant and tooling fixtures and improvements 500 K€
- Vehicles :
* Light and heavy road vehicles 500 K€
* Internal handling vehicles 500 K€
- Office equipment (copiers, fax, scanners…) 500 K€
- EDP hardware 500 K€

104
3. Leases
3.6. Specific cases
 The land and building element of a lease agreement are considered separately
for the purpose of lease classification.
 A land has normally an indefinite economic life.

 If title is not clearly transferred to the lessee by the end of the lease term
(either directly or through a significantly below market price option), the
lessee does not receive substantially all the risks and rewards linked to
ownership. In this case, the lease of the land will be an operating lease.
 In this case, whenever necessary in order to classify and account for a lease
of land and buildings, the minimum lease payments (including any lump-sum
upfront payments) are allocated between the land and the buildings
elements in proportion to the relative fair values of the leasehold interests
in the land element and buildings element of the lease at the inception of the
lease.

105
3. Leases
3.6. Specific cases
 Sale & leaseback transaction:
 A sale and leaseback transaction involves the sale of an asset and the
leasing back of the same asset.
 Issues to consider:
 Step 1 - Check that the sale comply with IAS 18 recognition criteria
(Please refer to revenue part). If criteria for derecognising the asset are
not met, the sale is cancelled  the asset remains in the balance sheet.
 Step 2 - Qualify the leasing contract : Finance or operating lease. In case
of a Finance lease, a financial debt is recorded and the potential capital
gain is cancelled (the fixed asset is recorded for its initial value).
 Step 3 – In case of an operating lease, consider if the selling price is
equivalent to the fair market price in order to decide if the capital gain
can be maintained.
 A sale and leaseback transaction usually gives rise to a restatement as a

finance lease.

106
3. Leases
3.6. Specific cases
 Once capitalized a finance lease has to comply with accounting rules set for
fixed assets:
 A division needs to consider at each balance sheet date whether there is an
indication that a leased asset may be impaired. If such indication exists, an
impairment test will have to be performed according to the corresponding
MAF standard.
 If required, a division will have to identify the main components within a
leased fixed asset.
 Depreciation rules have to be consistent with the one set for wholly owned
fixed assets of the same nature.

107
3. Leases
3.7. First time application
 No specific exceptions allowed with respect to leases in FTA

 All above mentioned principles have to be applied on a retrospective basis
 Valeo divisions should therefore:
 Scan all active leasing contracts;
 Aggregate by category of tangible assets;
 Calculate retrospectively the impact of any change in classification, based on
the information available at the inception of the lease.
 Any restatement impact will be booked in equity as at January 1, 2004.

108
3. Leases
3.8. Hyperion Release
 Set up of a additional schedules analysing the fluctuations in leased asset

gross value, depreciation and provision
Rajouter matrice hyperion

109
- Introduction p.
3. Leases p.
4. Impairment p.
5. Revenue p.
6. Inventories p.

4. Impairment of assets
Summary
4.1. Scope
4.3. Categories of assets to be tested at Valeo
4.4. Performing an impairment test
4.5. Recognizing an impairment loss
4.6. Reversing an impairment loss
4.8. IAS 36 simplified flow-chart

111
Summary
4.9. Simplified example
4.10. First Time Application

112
4.1. Scope
 IAS 36 prescribes the accounting and disclosures for:

 This procedure applies to the following assets:
 Goodwill (to be addressed at Group level only),
 Intangible assets with indefinite life duration (examples: brands),
 Intangible assets with finite life duration (in progress or not; capitalized
development costs, patents…),
 Tangible assets: lands, buildings, machinery and equipment (including
specific toolings), investment property carried at cost.
 Exclusions:
 Inventories,
 Assets arising from construction contracts,
 Deferred tax assets,
 Assets arising from employee benefits,
 Financial assets,
 Investment property that is measured at fair value (assets revalued at
their market value),
 Assets classified as held for sale.
113
 Objective of an impairment test:
The objective of an impairment test of assets is to ensure that assets are

carried at no more than their recoverable amount.
An asset or a group of assets are carried at more than their recoverable
amount if their carrying amount (in the books) exceeds the benefits to be
recovered through use (value in use) or sale of the asset (fair value less
costs to sell). If this is the case, the asset is described as impaired and this
procedure requires the entity to recognize an impairment loss.
Recoverable amount = max (fair value less costs to sell; value in use)
Recoverable amount > = carrying value : No impairment
Recoverable amount = < carrying value : Impairment loss

114
 Definitions:
Value in use: the present value of future cash-flows expected to be derived

from an asset or a cash-generating unit.
Cash-generating unit (CGU) : the smallest identifiable group of assets that

generates cash inflows from continuing use that are largely independent of the
cash inflows from other assets or groups of assets. The definition of a CGU
should be consistent from one period to another.
Fair value less costs to sell: the amount obtainable from the sale of an asset
or cash-generating unit (in an arm’s length transaction between
knowledgeable, willing parties) less costs to sell.
Costs to sell: incremental costs directly related to the disposal of an asset or a

cash-generating unit, excluding finance costs and income tax expenses.

115
 Frequency of impairment test
 Regular basis and at least annually
 Goodwill
 Intangible assets in progress
 Intangible assets with indefinite life duration
 When there is an indication that an asset may be impaired
 All other assets not listed above

 These indications derive either from external or from internal sources
(“trigger event”).

116
 Four categories have been identified
 Goodwill
 Group of tangible assets (except tooling)

 A division should define the CGU associated to those assets. It could be
the plant, one or several Autonomous Production Units (APU), one or
several production lines…
 Assets dedicated to a contract

 Capitalized development costs and capitalized specific toolings
 A contract (originated by a nomination letter from a customer) usually
generates cash inflows on a stand alone basis. As a consequence the
CGU would be the dedicated assets related to this contract.
 Individual assets
 They generate cash flows on an independent basis.

117
 Impairment test process for each category
 Goodwill
 When ? : Annually.
 Who ? : Group.
 What is the scope of the CGU ? : Aggregation of one or several reporting
divisions to which goodwill has been allocated.
 Group of tangible assets (except specific toolings)

 When ? : As soon as there is an indication that the group of assets may
be impaired.
 Who ? : Division.
 What is the scope of the CGU ? : Group of assets generating cash flows
independently from other tangible assets.

118
 Impairment test process for each category (continuing)

 When ? : As soon as there is an indication that the assets may be
impaired, but annually if there is any capitalized development costs in
progress.
 What is the scope of the CGU ? : All existing assets dedicated to a
contract (nomination letter) plus any tangible assets used to generate the
cash flows.
 When ? : As soon as there is an indication that the asset may be
impaired.
 What is the scope of the CGU ? : The individual asset.

119
 Examples of indication of impairment
 External sources:
 Information from the client affecting the economical conditions of the

assets under review,
 accelerated clients’ vehicles end of life (earlier than forecasted),
 client’s vehicle commercial performance worse than expected,
 significant price decreases granted to the customer (example : quick
savings),
 technological changes or changes in legislation with adverse effect on
the entity,
 …

120
 Examples of indication of impairment (continuing)
 Internal sources:
 Obsolescence or physical damage of an asset which lowers its carrying

value,
 Significant management decisions having adverse effect on the
Division’s assets, mainly production transfers or relocations, restructuring
plans, operations discontinuation or closure,
 Loss making contracts attached to specific assets,
 Plant operating at loss,
 …

121
As a guideline, the gross margin levels mentioned below define the risk areas for
assets dedicated to a contract.
Insérer nouveau tableau des niveaux de marge

122
 Carrying amount computation
 The carrying amount of a CGU includes:

 The net book value of the assets directly attributable to the CGU,
 Any related liabilities,
 Any related working capital (inventories, customer receivables, accounts
payable…) excluding deferred taxes assets
 Any related operating provisions (retirement provisions, CATS/CASA,
pensions…, provision for litigations…)
 For individual assets, the carrying amount is the net book value recorded in
the balance sheet.

123
 Value in use computation
 The Division will estimate future cash inflows and outflows relating to
continuing use of the assets under test and the net proceeds from its ultimate
disposal (if any), and discount those cash flows using an appropriate discount
rate to be validated with the Group.
 Cash-flow projections should be based on:
 reasonable and documented assumptions,

 the most recent budgets and medium term plans (MTP) figures;
 projections based on these budget / MTP should cover a maximum period
of 5 years unless a longer period can be justified (however limited to the
useful life of the assets to be tested),
– First 3 years derive from budget and MTP;
– Next two years are extrapolated using a steady or declining growth
rate (unless an increasing rate can be justified).

124
 Value in use computation (continuing)
 The MTP should include a P&L projection for the period under review
from revenue to Gross Margin and Operating Income. This projection
comprises :
 Revenues: all revenues deriving from the Division orderbook.

Revenues from existing productions as well as revenues from P1
projects will be considered as they are binding agreements with the
clients (any target considered will have to be documented).
 Savings and related expenses on restructuring plans committed
and not yet recorded (booked in the accounts) but approved by the
Branch and the Group (IAR, budget…) will be included.
 Gains and related expenses from investment approved by the
Branch and the Group (CAA, IAR, budget…) to improve or enhance
the asset in excess of its standard performance.
 Management fees are representative of the corporate assets that are
to be supported by the CGU under review.

125
 Value in use computation (continuing)
 The MTP should include an operating cash flow estimate for the period
under review. This projection comprises:
 Projections of cash inflows and outflows deriving from the

continuing use of the assets based on revenue assumptions
estimated in the currency in which they will be generated,
 Working capital variation,
 Net cash flows, if any, to be received (or paid) for the disposal of
the asset at the end of its useful life,
 Investment flows relating to approved investments,
 Restructuring flows relating to approved restructuring plans.
 The operating cash flow estimate should exclude:

 cash inflows or outflows from financing activities,
 inflows generated by other assets, if those inflows are largely
independent from those generated assets.

126
 Fair Value less costs to sell
 Is the amount obtainable from the sale of an asset or cash generating unit
in an arm’s length transaction between knowledgeable, willing parties, less
the costs of disposal. If there is a binding sale agreement, the fair value
less costs to sell is the price under that agreement less costs of disposal.
 If there is an active market for that type of asset, the fair value less costs
to sell is the market price (less the costs of disposal).
 If there is no binding sale agreement or active market fair value less costs
to sell is based on the best information available on the amount that an
entity could obtain for the disposal of the asset in an arm’s length
transaction. In determining this amount, an enterprise considers the
outcome of recent transactions for similar assets within the same industry.
 Costs of disposal are the added costs directly attributable to the disposal
of an asset.
Example of disposal costs: legal costs, stamp duty, costs of removing the
asset and direct incremental costs to bring an asset into condition for its
sale.

127
 Principles
 Depending on the nature of the assets impaired, the impairment loss is

recognized as a provision for depreciation charge of tangible or intangible
assets in the income statement.
 The impairment loss is allocated to reduce the carrying amount of the

assets as described in the following slides.
 After the recognition of an impairment loss, the depreciation charge for

the asset should be adjusted in future periods to allocate the asset’s
revised carrying amount, less its residual value - if any, on a systematic
basis over its remaining useful life.

128
 Allocation method
 Cash generating unit with goodwill
 The impairment loss is allocated to reduce the carrying amount of the

assets of the unit;
 first to goodwill allocated to the cash generated unit (if any);
 then to the other assets of the unit on a pro-rata basis based on the
carrying amount of each asset in the unit. The carrying amount of an
asset should not be reduced below the higher of its fair value less
costs to sell, its value in use and zero.

129
 Allocation method (continuing)
 Group of tangible assets

assets of the unit on a pro-rata basis based on the carrying amount of each
asset in the unit. The carrying amount of an asset should not be reduced
below the higher of its fair value less costs to sell, its value in use and zero.

 In the case of Valeo, the allocation of the impairment loss will be done in the
following order :
– Intangible assets (capitalised development costs, patents…),
– Specific toolings,
– Other tangible assets.
individual asset.

130
 Principles
 An entity shall assess at each balance sheet date whether there is any
indication that an impairment loss recognized in prior periods for an asset
other than goodwill may no longer exist or may have decreased. If any such
indication exists, the entity shall estimate the recoverable amount of that
asset or asset’s cash – generating unit.
 An impairment loss recognized in prior periods for an asset other than

goodwill shall be reversed if, and only if, there has been a change in the
estimates used to determine the asset’s recoverable amount since the last
impairment loss was recognized. If this is the case, the carrying amount of
the asset shall be increased to its recoverable amount.
 After a reversal of an impairment loss is recognized, the depreciation

(amortization) charge for the asset shall be adjusted in future periods to
allocate the asset’s revised carrying amount, less its residual value (if any),
on a systematic basis over its remaining useful life.

131
 Allocation method
 A reversal of an impairment loss for a cash-generating unit shall be

allocated to the assets of the unit, except for goodwill, pro-rata with the
carrying amount of those assets.
 These increases in carrying amounts shall be treated as reversals of

impairment losses for individual assets. In allocating a reversal of an
impairment loss for a cash-generating unit, the carrying amount of an
asset shall not be increased above the lower of :
 its recoverable amount (if determinable) and
 the carrying amount that would have been determined (net of
amortization and depreciation) had no impairment loss been
recognized for the asset in prior periods.
 The amount of the reversal of the impairment loss that would otherwise
have been allocated to the asset shall be allocated on a pro-rata basis to
the other assets of the unit, except for goodwill.

132
 Allocation method (continuing)

 At Valeo, the reversal will be made in the opposite order of the
impairment loss allocation, i.e. in the following order :
– Other tangible assets
– Specific toolings
– Intangible assets (capitalised development costs, patents…)
 Individual asset
 The increased carrying amount of an asset due to a reversal of an
impairment loss shall not exceed the carrying amount that would have
been determined (net of amortization or depreciation) had no
impairment loss been recognized for the asset in prior years.
 A reversal of an impairment loss for an asset shall be recognized

immediately in profit and loss.

133
Warning : Those limits may be amended as the Group has not yet defined its final
position on this subject.
Cash generating unit Responsibility Authorisation level

definition
Individual asset / CGU Group Controlling >€5 000k
Branch Controlling >€300k and <€5 000k
Division controlling < €300k
Impairment test
Discount rate Group controlling
Cash flows projections Division controlling

134
Cash generating unit Responsibility Authorisation level

definition
Fair value / Value in use

computation
Individual asset / CGU Value in use: Branch /

Division
Fair value: Branch / Division
Impairment loss /
impairment reversal
Individual asset / CGU Group Controlling >€1 000k

Branch Controlling <€200k and <€1 000k
Division controlling < €200k

135
 Indication of loss of value and impairment testing (1/2)
Individual Asset CGU with definite Goodwill / indefinite

(1) useful life assets useful life
(2) intangible CGU (3)
N Indication of Test required

Impairment annually
(trigger event)
No test
Impairment test
on CGU / asset
Fair value available ? See next page

 Indication of loss of value and impairment testing (2/2)
Recoverable
amount = fair value Y Fair value
less costs to sell available ? Division :
 P&L
N computation
Cash flows
Value in use projections
computation
 Carrying amount
Group :
Recoverable
amount = max  Discount rate
(value in use, fair Other fair value
No value)
impairment measurement
Y
Recoverable N
amount > carrying Impairment See next
amount ? loss page

 Recognising an impairment loss
Impairment loss
Allocation of impairment loss

and reduction in carrying
values
Computation of
depreciation over the
net residual life using
restated gross value

 Division Alpha
Balance Sheet 31/12/2004  Division Alpha
Intangible assets 800 Equity 6800

Tangible assets 7000 Provisions 1000  Same product family.
 Definite useful life intangible.
Receivables 3000 Payables 4000
Stocks 4000  Two production sites, with one separate
Cash 1000 Financial debt 4000 major customer for each production plant.
A trigger event has occurred for the
Total 15800 Total 15800 overall Division (technological
obsolescence of the products within 4
years).
 It concerns both the tangible and the
related intangible assets.

139
 Impairment exercise: 5 steps to perform
 Phase 0 : Determine whether to test as a separate asset or a CGU

 Phase 1 : Identification of CGUs
 Phase 2 : Determining the carrying amount
 Phase 3 : Computing the recoverable amount
 Phase 4 : Affecting impairment loss

140
 Identifications of the level of the impairment test
Intangible assets
 Can be separated between the two
production sites and the specific clients.
 Intangibles cannot be tested on a stand-alone Test as a CGU
basis as they do not produce cash-inflows
independently from the other assets.
 Definite useful life: 4 years remaining.
Tangible assets
 Can be separated between the two
production sites and the specific clients.
 Fair value available (machinery & equipment Test as individual assets
expert report) available for assets in Plant 1. or in a CGU
 Definite useful life, 4 years remaining.

141
 2 CGUs considered for the testing of intangible assets
CGU 1 CGU 2
Customer / Plant 1 Customer / Plant 2
Tangible assets Tangible assets

Intangible assets Intangible assets

142
 Carrying value
 Allocation of the respective assets and liabilities to the
respective CGUs,
Balance Sheet CGU 1 31/12/2004
 Financial assets are excluded from the scope of the test,
 Allocation of corporate assets. Intangible assets 300
Tangible assets 2000
Receivables 2000
Stocks 3000
Provisions (200)
Payables (2 000)
Corporate assets (100)
Total 5000
Intangible assets 500

Receivables 1000
Stocks 1000
Provisions (800)
Payables (2 000)
Total 4600

143
 Value in Use computation : CGU 1

 Based upon the approved 3 year MTP, 2005 2006 2007 2008
 2008 extrapolated,
Sales 7000,0 5000,0 4000,0 3500,0
 4 year remaining useful life,
 Disposal value of the assets estimated net of Gross margin 3500,0 2250,0 1800,0 1400,0
% of sales 50,0% 45,0% 45,0% 40,0%
costs.
Operating Income 1050,0 600,0 480,0 350,0
% of sales 15,0% 12,0% 12,0% 10,0%
- Tax rate (30%) (315) (180) (144) (105)

- Change in working capital (10) 10 10 10
- Maintenance capital expenditures (100) (100) (100) (100)
+ Depreciation 400,0 400,0 400,0 400,0
+ Amortization of R&D 50,0 50,0 50,0 50,0
Operating cash-flow 1075,0 780,0 696,0 605,0
Discount rate 5,0%
Discounted cash-flow 1023,8 707,5 601,2 497,7
Estimated income from disposal 2400,0

Estimated income from disposal (discounted) 1974,5
Value in use 4804,7

144
 Value in Use computation: CGU 1

 The carrying amount exceeds the recoverable amount, CGU 1
 Impairment of 195,
Carrying amount 5000
 Allocation of impairment loss
 Working capital excluded from the scope of IAS 36 (and already at fair value),
Value in use 4805
 Tangible assets cannot be impaired as the expertise confirms the book value,
 Allocation to the intangible assets.
Fair value n/a
Recoverable amount 4805
Impairment loss 195
CGU 1
Receivables 2000
Stocks 3000
Provisions (200)
Payables (2 000)
Total 4805

145
 Value in use computation: CGU 2

 Based upon the approved 3 year MTP, 2005 2006 2007 2008
 2008 extrapolated, Sales 4000,0 3500,0 3500,0 2000,0
 4 year remaining useful life,
Gross margin 1200,0 840,0 770,0 400,0
 Disposal value of the assets estimated net of
% of sales 30,0% 24,0% 22,0% 20,0%
costs.
Operating Income 240,0 175,0 70,0 40,0
% of sales 6,0% 5,0% 2,0% 2,0%
- Tax rate (40%) (96) (70) (28) (16)

- Change in working capital (5) 5 5 10
- Maintenance capital expenditures (500) (500) (500) (100)
+ Depreciation 1000,0 1000,0 1000,0 1000,0
+ Amortization of R&D 100,0 100,0 100,0 100,0
Operating cash-flow 739,0 710,0 647,0 1034,0
Discount rate 6,5%
Discounted cash-flow 693,9 626,0 535,6 803,8
Estimated income from disposal 2200,0

Estimated income from disposal (discounted) 1710,1
Value in use 4369

146
 Fair value computation: CGU 2

 The carrying amount exceeds the recoverable amount, CGU 2
 Impairment of 231.
Carrying amount 4600
 Allocation of impairment loss
 Working capital excluded from the scope of IAS 36 (and already at fair value).
 No fair value less costs to sell available for the tangible assets as individual assets.
Value in use 4369
 Pro-rata allocation between tangible and intangible assets. Fair value n/a
Recoverable amount 4369
Impairment loss 231
CGU 2
Receivables 1000
Stocks 1000
Provisions (800)
Payables (2 000)
Total 4369
NB. In the case of Valeo Divisions, the allocation of impairment loss will be made
according to the rules described in the section « Recognizing an impairment loss » of
this presentation.
147
4.10. First time application issues
 Based on the guidelines provided by this presentation, impairment test will have to
be performed on balance sheet items (except for goodwills which are managed at
group level) as at January 1, 2004 when there is an indication that an asset or a
group of assets might be impaired.
 Group of tangible assets

 Test to be performed if there is an indication of impairment loss.
 Assets dedicated to a contract

 Test to be performed if there is an indication of impairment loss,
 Test compulsory if there is capitalized development costs in progress,
 As a guideline, gross margin below 8 % is an indication of impairment
loss for specific toolings.
 Individual assets
 Test to be performed if there is an indication of impairment loss.

148
- Introduction p.
3. Leases p.
4. Impairment p.
5. Revenue p.
6. Inventories p.

5. Revenues
Summary
5.2. Recognition
5.3. Measurement
5.4. Cut Off
5.5. Depreciation of receivables
5.6. P&L presentation

150
5. Revenues
 IAS 18 prescribes the accounting and disclosures for revenue arising from
certain types of transactions and events:
 The rendering of services;
 The sales of goods;
 The use by others of enterprise assets yielding royalties, fees,….
 Based on the diagnostic phase four main issues were identified for Valeo with
respect of IAS 18:
 Measurement;
 Cut Off (Incoterm);
 Depreciation of receivables;
 P&L presentation.

151
5. Revenues
5.2. Recognition
 The key criterion for the recognition of the sale of goods is the following:
 Transfer to the buyer of the significant risks and rewards of ownership of the
goods;
 The assessment of when a division has transferred the significant risks and
rewards of ownership to the buyer requires an examination of the
circumstances of the transaction and the contractual sales conditions.

152
5. Revenues
5.3. Measurement
 Measurement of the amount received or receivable implies:

 Sales are posted after deduction of rebates and allowances;
 All cash discounts are deducted from the sales;
 When the inflow of cash or cash equivalents is deferred, discounting may be
necessary;
 Use of best estimates for provision for the return of defective/unused
products. These provisions have to be recorded as a reduction of turnover.
 Sales invoiced in foreign currencies:

 Must be converted into the local currency at the exchange rate on the date of
the transaction;
 Specific treatment related to hedge accounting is described in section 7
relating to financial instrument.
 Divisions with significant cash discounts could be more impacted.

153
5. Revenues
5.4. Cut Off
 Cut off procedures are more restrictive under IFRS than under previous MAF:
 The substance of the transaction is predominant over its legal form;
 According to new IFRS MAF revenue recognition principle:

 Goods must remain within Valeo inventories until the date of the transfer to
the buyer of the significant risks and rewards related to ownership;
 Depending on the destination and the contract conditions of sale, the posting
principles may vary (refer to the following page detailing the main incoterms
in use within the group).

154
5. Revenues
5.4. Cut Off
 Date of transfer of risk & reward (main incoterms):
Delivery to
Factory Loading Unloading customer
Local International Local

Incoterms used Valeo Factory Customer
transportation transportation transportation
EXW:
Transfer at Valeo factory's gate
FOB:
Transfer whan goods are loaded on
ship
CIF:
Transfer when goods are
loaded/unloaded from ship
DDP:
Transfer when goods are delivered at
customer's premises
Risks and rewards borne by Valeo division
Risks and rewards borne by customer

155
5. Revenues
5.4. Cut Off
 Date of transfer of risk & reward (main incoterms) continuing:
 Ex-works sale: the transfer of risks and rewards takes place when the goods
leave the plant or the platform, with the costs and risk coverage of the
transportation borne by the buyer.
 FOB sale (Free On Board): the transfer of risks and rewards takes place after
the loading on ship.
 CIF (Cost, Insurance, Freight): the transfer of risk and rewards usually takes
place after the loading, but in some cases after unloading depending on the
nature of the insurance coverage.
 DDP (Delivered Duty Paid): the transfer of the risks and rewards takes place
at the named place of destination.

156
5. Revenues
5.5. Depreciation of receivables
 According to IFRS, receivables shall be measured at the lower of their

carrying amount and their Fair Value
 Following the diagnostics phase, it appears that the MAF depreciation
procedure allow to reflect the fair Value of customer receivables accounts and
is thus compliant with IFRS:
 A provision for depreciation must be made for all receivables unpaid at the
end of a period of 6 months after due date (provision of 25%). A progressive
depreciation is required for unpaid receivables which become fully
depreciated when overdue for more than 2 years.
 A specific provision must be made whenever an event occurs, on the basis of
which, an allowance on a receivable before the end of the 6-month period is
considered certain.
 No change expected in the IFRS opening balance sheet.

157
5. Revenues
5.6. P&L presentation
 Valeo will split its revenues in three main categories:
 Sales:
 Sales and billings;
 Sales returns;
 Cash discounts.
 Income from Tooling:

 This category includes the lumpsum financial contributions from the
customers (Please refer to section 2 relating to Tangible assets).
 Other revenue:
 Financial contribution of the customers to research (P2/P3) and
development projects (P1);
 Sale of prototypes;
 Operating lease income from external parties;
 Royalties, patent fees and similar contractual revenues from external
parties.

158
5. Revenues
 Specific attention to sales cut off (incoterms);
 New recognition rules for customer financial contributions for :
 Development costs (refer to section 1 Intangible)

 Specialized toolings (refer to section 4 Tangible assets and specialized toolings)

159
5. Revenue
 Creation of additional line items in the Hyperion report

 Examples of changes in the Hyperion report, new line items (draft version):
Rajouter matrice hyperion

160
- Introduction p.
3. Leases p.
4. Impairment p.
5. Revenue p.
6. Inventories p.

6. Inventories
Summary
6.3. Nature of costs to include in the inventory valuation
6.4. Cost formula
6.5. Cut off procedures
6.6. Allowance
6.7. First Time Adoption (FTA)

162
6. Inventories
 IAS 2 prescribes the accounting and disclosures for inventories
 Scope of the “Inventory and work in progress” MAF standard: It is not

applicable for spare parts dedicated to a fixed asset as they are treated in the fixed
asset MAF standard.
 Based on the diagnostic phase four main issues were identified for Valeo with
respect of IAS 2:
 Nature of costs to include in the inventories valuation;
 Cut off procedure;
 Depreciation method;
 Reclassification of major spare parts within fixed assets (please refer to
section 2 Tangible assets).

163
6. Inventories
 Measurement of inventories:
 Nature of costs to include in the inventory valuation
 The cost of inventories shall comprise all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to their
present location and condition.
 Cost formula
 The cost of inventories shall be assigned by using the first-in, first-out
(FIFO) or weighted average cost formula. An entity shall use the same
cost formula for all inventories having a similar nature and use to the
entity. For inventories with a different nature or use, different cost
formulas may be justified.
 Net realisable value:

 Inventories shall be measured at the lower of cost and net realisable
value.

164
6. Inventories
 Raw materials, supplies and purchased goods:
 No significant difference with previous MAF principles:
 Valued at purchase price delivered to the plant or to the warehouse The

purchase price includes :
 Purchase price billed by the supplier less any rebate or trade discount
and other similar items (except financial expenses).
Under IFRS cash discount must also be deducted from inventory value;
 Related purchase expenses : import duties and other taxes, transport
and insurance, handling and other costs directly attributable to the
acquisition of goods, materials or other supplies.
 Divisions with strong cash discounts could be more impacted

165
6. Inventories
 Work in process, semi-finished and finished goods

 Remain valued as per MAF at standard cost price (SCP) on the basis of
normal production costs;
 However, for finished goods, IFRS valuation must also take into account the
costs of transportation, and handling* to customer platforms if the transfer of
the risks and rewards related to ownership occurs at this location (ex:
picking)
 Division working with consignment inventories located in customer platforms

are more directly impacted.
* Handling costs up to the unloading of the product at the customer platform

166
6. Inventories
6.4. Cost formula
 Cost formula
 The method adopted by the group for reporting purposes is the FIFO method.
This method is compliant with IFRS.
 For raw materials, component stocks and merchandises, in the case of:
 Rapid stock turnover and,
 Insignificant price variances,
divisions may approximate the FIFO method by using a different valuation
technique (last purchase price).

167
6. Inventories
6.5. Cut off procedures
 IFRS cut-off procedure are more explicit.

 Under IFRS an inventory can be recorded in Valeo books from the date the
following criteria are met:
 Transfer of the significant risks and rewards of ownership to Valeo division;
 Neither continuing managerial involvement nor effective control from the
supplier over the inventory;
 Costs incurred or to be incurred can be measured reliably .
 Divisions and companies must take adequate steps to ensure that
their cut-off procedures comply with the following procedures:
 Incoming stock:
 When inventories are purchased, they are recognised in inventories
account at the time risks and rewards related to ownership is transferred to
the division.
 Outcoming stock:
 When inventories are sold, the carrying amount of those inventories should
be recognised as an expense in the period in which the related revenue is
recognised.
 Divisions that are not buying on DDP terms (transfer of ownership at the
division plant/warehouse) could be impacted.
168
6. Inventories
6.6. Allowance
 Allowance procedure for Valeo*

 Group methodology is deemed to be compatible with IFRS;
 Calculation of an allowance according to average stock turnover which in
fact relates mainly to old inventories;
 An additional allowance is made where necessary to adjust to NRV
(buffer rule).
 Specific calculation of the NRV

 Beware that materials and other supplies shall not be written down below
cost if the corresponding finished products are expected to be sold at or
above cost.
 Work in process and semi-finished goods : the division must compare NRV of
the finished product to be obtained with the cost price of the work in process
plus estimated completion costs. A depreciation shall be accounted for when
applicable.
* Except for spare parts recorded within inventories for which depreciation remain based on case by case analysis.

169
6. Inventories
 FTA does not allow any exception to the retrospective restatement with
respect to IAS 2.
 With respect to IFRS, Valeo divisions should therefore focus on the four main
issues detailed:
 The costs to include in the cost of inventories;
 The cut off procedure;
 The allowance computation (divisions should inform the group if the current
method does not enable to cover older inventories);
 The reclassification of main spare parts on fixed assets (please refer to
section 2 Tangible Asset).

170
7. Financial instruments
8. Current and Deferred taxes
9. Provisions
10. Employee benefits
11. Appendix

Summary
7.1. Introduction
7.2. Commodity hedges
7.3. Foreign exchange hedges
7.4. Embedded derivatives

172
7.1. Introduction
 2 standards about Financial Instruments
 IAS 32 : Disclosure and presentation, distinction between debt and

equity
 IAS 39 : Recognition and measurement
 For this training, operational divisions oriented, only IAS 39 will be

evoked

173
7.1. Introduction
 The impacts of IAS 39 on Valeo operational divisions will be:

 Commodity hedges
 Foreign exchange hedges
 Embedded derivatives in contracts
 The IFRS main changes comparing with MAF rules are:

 A balance sheet approach:
– All financial derivative instruments booked at fair value in the
balance sheet.
– Variations of fair value booked in P&L or in equity.

174
7.1. Introduction
 Two options:
– - Trading and a stronger volatility of result.
- Hedging relationship and lower volatility but significant

difficulties to justify a hedging relationship:
» Qualification of hedging instruments and hedged items.
» Documentation of hedging relationships.
» Effectiveness measurement.
 New MAF procedures will be issued to address these topics.
 Definition of fair value and Derivative Instrument

Fair value is the amount for which an asset could be exchanged or a liability
settled, between knowledgeable, willing parties in an arm’s length
transaction.

175
7.1. Introduction
 Derivative instrument has 3 characteristics:
 value changes in response to the change in a specified variable or index

(underlying variable)
 no initial net investment or initial net investment smaller than would be
required for other contracts which have a similar response to market
factors
 settlement at a future date

176
 Introduction
 The Group has decided that all Valeo divisions would have to account for
hedging relationship on the commodity hedges in compliance with IAS 39.
 That means strict follow up and significant work of documentation for

divisions.
 The commodities hedged are: Aluminum, Aluminum alloy, Copper, Zinc and
Tin.

177
 IAS types of hedging relationship

Two types of hedging relationship are possible for commodity hedges:
 Cash flow hedge: if the future transaction related to the commodity risk is
forecasted, only the cash flow hedge is eligible. The future transaction must
be highly probable.
 Fair value hedge: if the future transaction related to commodity risk is

considered as a firm commitment when the hedging instrument is entered to,
only the fair value hedge is eligible.
IAS 39 defines a firm commitment as a binding agreement for the exchange
of a specified quantity of resources at a specified price on a specified future
date or dates.
The fair value hedge should be exceptional and must be presented
previously to the BIV in order to negotiate an adapted hedge.
Only cash flow hedge for commodity will be described in this training.

178
 Commodity hedge process

 For cash flow hedges, IFRS require identifying separately budget process
from exposure to be hedged.
To comply with that requirement, the following process is required:

 Each division elaborates commodity consumption budget. Divisions
using different currencies to purchase commodities must split the
budget by currency.
 The risk exposures are determined gross from the budget by
currency according to the purchase price characteristics.
 From these risk exposures, each division determines the quantity to
be hedged month by month according (1) to the selling prices
characteristics (2) to the part of risk exposures considered as non
highly probable (if any).

179
Chart summarizing the process:
Budget of commodity purchase

Forecast
Commodity risk exposure
Request for hedge

Forecast

180
These information (budget, exposure and request), must be communicated to

the BIV through ekit at the end of each quarter:
N+1 N+2
T1 T2 T3 T4 T1 T2
December N
March N+1
June N+1
September N+1
Update
New

181
 Documentation of hedging relationship

A hedging relationship qualifies for hedge accounting only if all of the
following conditions are met at the inception and throughout the life of the
hedge until its maturity:
 At the inception of the hedge, there is formal designation and

documentation of the hedging relationship. That documentation will
include identification of hedging instrument, hedged item or transaction,
the nature of risk being hedged and how division will assess the hedge
effectiveness.
The hedge is expected to be highly effective. For cash flows hedges, a
forecast transaction that is the subject of the hedge must be highly
probable. To assess it, there are two main considerations: (1) Division
experience with this type of hedging relation (2) percentage hedged
compared with historical figures (realized versus budget).
 At each quarter, the hedge effectiveness must be assessed

“retrospectively”. The “retrospectively” test consists to calculate the
efficiency of the hedge over the past.

182
Cash flow hedge: calculation of hedge effectiveness

The hedge effectiveness must be assessed at the end of each quarter for
all outstanding positions. The following calculation must be applied:
Nominal of hedge contracts related to the month (1)

Updated exposure related to the month (2)
(1) Nominal of hedge contracts related to the month = hedged tons
(2) Updated exposure related to the month = quantity equivalent to the risk
exposure
 Result ≤ 100%  no ineffectiveness.

 100% < Result < 125%  over hedge situation. The over derivative
contracts must be recorded like trading or sold.
 Result >125%  too much over hedge situation. All derivative contracts
must be recorded as trading or sold.

183
Example: calculation of hedge effectiveness (retrospective test)
Outstanding position as at 30/06/N:
Maturity Hedged tons Exposure Effectiveness Comment % of nominal of swap to be

updated recorded like trading or sold
31/07/N 100 91 110% over hedge 9%
31/08/N 128 100 128% too much over hedge 100%
30/09/N 95 100 95% no ineffectiveness 0%
The division has to prepare one documentation per month, per commodity,
and per currency. In fact, documentation exists for each contract with the
BIV.

184
Example: Hedging relationship documentation (for each contract)

Division xxx
Functional currency EUR
Risk management Commodity risk reduction

Hedged risk Aluminium risk
IAS hedging relationship Cash flow hedge
HEDGED ITEM
Type 01/N+1 exposure in AL/EUR
Index Average (LME AL 01/N+1 / ECB EUR/USD 01/N+1)
Last forecast June N : 112 t
Previous forecast No
Payment date 20/02/N+1
Updated forecast September N: December N:
HEDGING INSTRUMENT
Type Commodity swap Start date 15/08/N
N° xxx Maturity 31/01/N+1
Notional 100t External trade N° xxx
Fixed price 1 600 EUR
Market price Average (LME AL 01/N+1 / ECB EUR/USD 01/N+1)
EFFECTIVENESS TEST
Prospective effectiveness Comment the division experience with this type hedging relation
Comment the % hedged (100/112) with historical figures (realized/forecasted)
Retrospective method Nominal of hedge contracts related to the month
Updated exposure related to the month
Periodicity September & December

185
 Accounting process related to hedging relationship

 Cash flow hedge
If the future transaction related to commodity risk is considered as a
forecasted transaction, the cash flow hedge must be applied. It should be
recorded as follows:
 The effective part of gain or loss on the derivative should be accounted in
equity.
 The ineffective part of gain or loss on the derivative should be accounted
in the income statement (financial income).
 The amount accumulated in equity will be reclassified in the income
statement (raw material consumption) when the products using these
commodities are sold.
According to Group’s target for throughput time (7 days), the
reclassification of equity should always occur in the same month as
commodity delivery.

186
 Accounting treatment for cash flow hedge

Case 100% effective
Example: Hedge for commodity risk related to a forecasted commodity
consumption.
Hedged item Forecasted commodity consumption

Commodity Aluninum
Forecasted quantity 100 tons
Currency EUR
Price Average (LME AL/USD 01/N+1 / ECB EUR/USD 01/N+1)
Hedging month 31/01/N+1
Invoice date 02/02/N+1
Hedging instrument Buy swap commodity AL/EUR

Quantity 100 tons
Fixed price 1 600 EUR
Market price Average (LME AL/USD 01/N+1 / ECB EUR/USD 01/N+1)
Start date of hedge 15/08/N

Maturity date of hedge 31/01/N+1
Swap payment 20/02/N+1

187
15/08/N Initiation of external contract

- No recording
31/08/N Closing
- Recording the fair value of hedge in equity.
This information will be communicated by BIV to each division:
Valuated date Metal Hedged Fixed price Ccy Market price MtM swap (1) Var MtM
quantity
31/08/N AL 100 1 600 EUR 1 630 3 000 3 000
(1) Mark to market swap = (1 630 - 1 600) x 100 = 3 000
Balance sheet
Fair value of Reserve for commodity
# account # account
MtM Swap (effective part) 3 000 3 000
31/08/N 3 000 0 0 3 000

188
30/09/N Quarterly closing

- Assessing of hedge effectiveness by BIV
- Reversal MtM 31/08/N.
- Recording the change in fair value of hedge (effective part) in equity
and ineffectiveness in profit or loss.
Valuated Metal Hedged Fixed Ccy Market MtM Var Exposure Effectiveness Comment % of swap to be
date quantity price price swap MtM updated rec. like trading
30/09/N AL 100 1 600 EUR 1 645 4 500 1 500 100 100% No 0%
ineffectiveness
Balance sheet
Fair value of derivatives Reserve for commodity
# account # account
Initial balance 3 000 0 0 3 000
Reversal MtM 3000 3000
30/09/N 4 500 0 0 4 500
31/10/N Same accounting as at 31/08/N (no test but new valuation of the swap).
30/11/N Same accounting as at 31/08/N (no test but new valuation of the swap).
31/12/N Same accounting as at 30/09/N (test of effectiveness and new valuation of
swap).

189
31/01/N+1 Maturity of hedge

- Reversal MtM
- Recording the change in fair value of hedge (effective part) in equity
and ineffectiveness in profit or loss.
Valuated date Metal Hedged Fixed Ccy Market MtM Var MtM Exposure Effectiveness Comment % of swap to
be rec. like
quantity price price swap updated trading
31/01/N+1 AL 100 1 600 EUR 1 660 6 000 1 500 100 100% No ineffectiveness 0%
Balance sheet
Fair value of Reserve for
# account # account
4 500 4 500
Reversal MtM
31/01/N+1 6 000 0 0 6 000

190
02/02/N+1 Invoice
- Recording invoice at spot price (100 x 1660 = 166 000 EUR)
- Automatic recording of inventory
Balance sheet Operating income
Payables Inventories Raw material Var inventories P&L Effectiveness
# account # account # account # account # account
Invoice (spot price) 166 000 166 000

Stock (spot price) 166 000 166 000
02/02/N+1 0 166 000 166 000 0 166 000 0 0 166 000 0 0
20/02/N+1 Swap payment and sale of goods

- Recording the payment of swap
- Reclassification in Balance
operating
sheet income the amount accumulated in equity.
Operating income
Fair value of Reserve for Raw material P&L
Payables Inventories Cash Var inventories
derivatives commodity CFH consumption Effectiveness
# account # account # account # account # account # account # account # account
Initial balance 6 000 0 0 6 000 0 166 000 166 000 0 00 166 000 0 0 166 000 00
Swap payment 6 000 6 000

Var stock 166 000 166 000
Hedging instrument effect 6 000 6 000
28/02/N+1 00 00 0 166 000 00 6 000 0 166 000 0 00 0 6 000
Expense in Operating Income is 160 Keur

eg commodity at hedging price.
191
Case over hedge (>100% and <125%)

15/12/N Update exposure: 90 tons
31/12/N Closing
- Recording the changes in fair value of hedge (effective part) in equity and
ineffectiveness in profit or loss.
Hedging part Trading part

Valuated Metal Hedged Fixed Ccy Market MtM Var MtM Var Exposure Effectiveness Comment % of swap to
be rec. like
date quantity price price swap MtM swap MtM updated trading
31/12/N AL 100 1 600 EUR 1 650 4 500 0 500 500 90 111% Over hedge 10%
Balance sheet Financial income

Fair value of Reserve for commodity P&L Ineffectiveness
# account # account # account
Initial balance 4 500 0 0 4 500 00
Reversal MtM 4 500 4 500

MtM Swap (trading part) 500 500
31/12/N 5 000 0 0 4 500 0 500

192

Hedging part Trading part
Valuated Metal Hedged Fixed Ccy Market MtM Var MtM Var Exposure Effectiveness Comment % of swap to
quantit be recorded
date y price price swap MtM swap MtM updated like trading
31/12/N AL 100 1 600 EUR 1 660 5 400 900 600 100 90 111% Over hedge 10%

Fair value of Reserve for commodity P&L Ineffectiveness
# account # account 0
Initial balance 5 000 0 0 4 500 0 500
Reversal MtM 5 000 4 500 500

MtM Swap (trading part) 600 600
31/01/N+1 6 000 0 0 5 400 0 100

193
02/02/N+1 Invoice at spot rate (90 x 1660 = 149 400 EUR)
Balance sheet
Payables Inventories Raw material Var inventories
# account # account # account # account
Invoice (spot price) 149 400 149 400

Stock (spot price) 149 400 149 400
02/02/N+1 0 149 400 149 400 0 149 400 0 0 149 400
20/02/N+1 Swap paymentBalance

and sheet sale of goods Operating income Financial income
Fair value of Reserve for commodity Raw material

Payables Inventories Cash Var inventories P&L Effectiveness P&L Ineffectiveness
derivatives CFH consumption
# account # account # account # account # account # account # account # account # account
Initial balance 6 000 0 0 5 400 0 149 400 149 400 0 00 149 400 0 0 149 400 00 0 100

Var stock 149 400 149 400
Hedging instrument effect 5 400 5 400
28/02/N+1 00 00 0 149 400 00 6 000 0 149 400 0 00 0 5 400 0 100 (1)
(1) Result on N : +500 and result on N+1 : +100 Expense in Operating Income is 144 Keur; eg commodity at hedging price.

194
Case discontinuation of hedge accounting (cancellation of

forecasted transaction)
If the hedge accounting ceases for a cash flow hedge relationship because
the forecasted transaction is no longer expected to occur, gains
and loss deferred in equity must be taken to the income
statement immediately.
Example: 15/12/N disqualification of hedge
31/12/N Closing
Fair value of Reserve fo P&L
Cash
derivatives commodity CFH Trading results
reversal MtM 4 500 4 500
MtM swap
5 000 5 000
(disqualification)
31/12/N 5 000 0 0 0 0 0 0 5 000

195

Fair value of Reserve fo Cash P&L
Initial balance 5 000 0 0 0 0 0
MtM swap 6 000 6 000
31/01/N+1 6 000 0 0 0 0 0 0 1 000
20/02/N+1 Swap payment
Balance sheet
Fair value of Reserve fo Cash
28/02/N+1 00 0 0 6 000 0

196
 Introduction
 According to IAS 21” A foreign currency transaction shall be recorded, on initial

recognition in the functional currency, by applying to the foreign currency amount
the spot exchange rate between the functional currency and the foreign currency at
the date of the transaction” (or an approximate exchange rate). No accounting at
hedging exchange rate.
 This training will deal only with currency commercial transactions.
 The Group’s policy related to foreign exchange hedges is as follows:

 In most cases, the hedging relationship is not documented. The derivatives are
recorded at fair value with changes in fair value in foreign exchange profit or
loss (trading category)
 In some particular cases, the hedging relationship will be documented for some
external forecasted transactions that may have significant impact on result.

197
 Foreign exchange hedge process for all commercial transactions

 Term
The divisions must hedge their currency transactions in balance sheet and
their three months forecast of sale or buy.
The maturity of hedge related to currency transactions depends on trade
payment term:
Currency 1 Currency 2 Currency
3
Payment term 30 days 60 days 90 days
Hedge:
Balance sheet position 1 month 2 months 3 months
Sale/buy forecast 3 months 3 months 3 months
________ ________ ________
Hedge period 4 months 5 months 6 months

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 Counterparty
 The BIV is the only counterparty of the divisions to hedge their foreign
exchange risks.
 When legal and tax regulations prevent from hedging at the BIV, hedges with
banks will require BIV’s agreement. The IAS treatment will be defined with
BIV too.

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Hedge request
The following information is required:
The hedge request must be done separately for the receipts and disbursements
(without netting).
Hedge request
Import Export
Balance sheet (1) Forecast Balance sheet (1) Forecast

Instrument Instrument Instrument Instrument
Amount Amount Amount Amount
Currency Currency Currency Currency
Maturity date Maturity date Maturity date Maturity date
Type ►Intercompany Type ►Intercompany
►External ►External

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 Accounting process (Trading-non documented hedges)

 Payables and receivables
 The payables and receivables are valuated at each monthly reporting.
The changes in fair value of these transactions will be accounted in
foreign exchange profit or loss.
 The changes in fair value of derivatives will also be accounted in foreign
exchange profit or loss.
 The net impact should be the interest effect (report/déport)
 Forecasted transactions
 The changes in fair value of derivatives will impact foreign exchange
profit or loss.
 When the underlying affects profit or loss, e.g. sale or buy, the
accounting process will be the same as indicated above for payables and
receivables.

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 Accounting treatment for trading category

Commercial transactions (payables and receivables)
Example 1: Hedge for a receivable in USD
Hedged item
Sales 1 000 000 USD
Invoice date 15/10/N
Hedging instrument
Forward sale USD/EUR -1 000 000 USD
Amount in EUR 959 141 EUR
Spot rate (EUR/USD) 1,0526
Forward rate (EUR/USD) 1,0426
Swap points -0,01

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Valuation of derivative at each month end:
Changes in
Event Date Spot rate Forward rate Mtm Changes in FV Spot effect Interest effect
interest effect
Invoice 15/10/N 1,0526 1,0426 0 na 0 0 na
Closing 31/10/N 1,0304 1,0357 -6 390 (1) -6 390 -20 468 (2) 14 078 (3) 14 078
Closing 31/12/N 1,0400 1,0450 2 203 8 593 -11 510 13 713 -366
Payment 31/01/N+1 1,0500 na 6 760 4 557 -2 352 9 112 -4 601
(1) Mark to market = (1 000 000 / 1.0426) – (1 000 000 / 1.0357) = -6 390 EUR
(2) Spot effect = (1 000 000 / 1.0526) – (1 000 000 / 1.0304) = -20 468 EUR
(3) Interest effect = MtM – Spot effect = -6 390 -(-20 468) = +14 078 EUR

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15/10/N Invoice
(1) Recording invoice at spot rate (1 000 000 / 1.0526 = 950 029 EUR)
31/10/N (2) Recording the changes in fair value of hedge in financial income
(3) Recording the changes in fair value of underlying in financial income
Balance sheet Operating income Financial income
Fair value of derivatives Receivables Sales of goods FX P&L
15/10/N
Invoice (spot rate) 950 029 950 029
MtM FX Forward 6 390 6 390

Translation (closing rate) 20 468 20 468 Interest effect
31/10/N 0 6 390 970 497 0 0 950 029 14 078

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31/12/N (1) Reversal MtM and translation

(2) Recording the changes in fair value of hedge in financial income
Fair value of derivatives Receivables Sales of goods FX P&L
Initial balance 0 6 390 970 497 0 0 950 029 14 078

reserval translation 20 468 20 468

Translation (closing rate) 11 510 11 510 Interest effect
31/12/N 2 203 0 961 539 0 0 950 029 0 13 713

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31/01/N+1 Payment date

(1) Reversal MtM of hedge and translation
(2) Recording payment of receivable at hedging rate
(1000 000 / 1.0426= 959 141 EUR)
Fair value of derivatives Receivables Cash EUR Sales of goods FX P&L
Initial balance 2 203 0 961 538 0 00 00 00

reserval translation 11 510 11 510
Payment of receivable (hedging rate)

950 029 959 141 9 112
31/01/N+1 00 00 959 141 0 00 4 601 0

Interest effect
for january N+1

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Accounting treatment for forecasted transactions

Example: Hedge for a forecasted sale in USD
Hedged item
Forecasted sale 1 000 000 USD
Forecasted date 15/07/N
Hedging instrument
Swap points -0,01

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Event Date Spot rate Forward rate Mtm Changes in FV Spot effect
Future forecast 15/07/N 1,0700 1,0600 0

Closing 31/07/N 1,0675 1,0590 -891 -891
Closing 31/08/N 1,0640 1,0580 -1 783 -893
Invoice 15/10/N 1,0550 1,0626 2 308 4 092
Closing 31/10/N 1,0304 1,0357 -22 134 -24 443 -22 630
… …
Payment 31/01/N+1

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15/07/N Start date of FX forward

(1) No recording
31/07/N (1) Recording the changes in fait value of derivative in financial income
FX derivatives FX P&L
# account # account
15/07/N
Start date of FX forward (no entry)
MtM FX Forward 891 891
31/07/N 0 891 891 0

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15/10/N Invoice
(1) Recording the invoice at spot rate (1 000 000 / 1,055 = 947 867 EUR)
31/10/N (2) Recording the changes in fair value of derivative in financial income
FX derivatives Receivables Sales of goods FX P&L

Reversal MtM 891 891
15/10/N

Translation (closing rate) 22 630 22 630
31/10/N 0 22 134 970 497 0 0 947 867 496
From the invoice date, the accounting process will be the same as indicated in the previous example
for payables/receivables.

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 Documented hedges
If the hedge request related to an external forecasted transaction is selected by the BIV
to be documented, the following process must be implemented by BIV and division
concerned:
 BIV
 The external contract must be allocated at inception by the BIV, as soon as
it is negotiated, to selected division.
 That allocation is permanent.
 Division
 For cash flow hedges, IFRS require to demonstrate that the forecasted
transaction is external and highly probable.
To comply with that requirement, additional information is required:
- Monthly buy or sale budget in that currency specifying the external
forecasted transaction in that budget.
- This information must be updated monthly until invoice stage.

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 Documentation of hedging relationship

The documentation shall include:
 identification of the hedging instrument
 the hedged item or transaction
 the method of measurement of effectiveness
 Effectiveness of hedging relationship

Cash flow hedge: retrospective effectiveness:
Nominal of hedging instrument

Updated external monthly budget
 Result ≤ 100%  no ineffectiveness
 100% < Result < 125%  over hedge situation. The over derivative contracts must be
recorded like trading or sold.
 Result > 125%  too much over hedge situation. All derivative contracts must be
recorded like trading or sold.

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 Accounting process for cash flow hedge (documented hedges)
 When the hedges of the external forecasted transactions are documented,

the gain or loss on the derivative that is determined to be an effective hedge
should be recorded directly in equity and ineffectiveness in profit or loss.
 The interest element (report/déport) of a forward contract is considered like

an ineffectiveness component, so that this component is always recorded in
financial result (whatever the hedge effectiveness is).
 The amounts accumulated in equity will be reclassified in operating income

when the underlying affects profit or loss, e.g. the sale or buy. Then the
accounting process will be the same as described above for payables and
receivables.
The amount to be reclassified in operating income is equal to the spot effect
between the start date and invoice date.

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 Accounting treatment for cash flow hedge (100% effective)
Example: Documented hedge for a external forecasted sale in USD
Hedged item
Exernal forecasted sale 1 000 000 USD
Forecasted date 15/07/N
Hedging instrument
Swap points -0,01

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Forward Changes in Interest Changes in

Event Date Spot rate Mtm Spot effect
rate FV effect interest effect
Budget 15/07/N 1,0700 1,0600 0 na 0 0 na
Closing 31/07/N 1,0675 1,0590 -891 -891 -2 189 1 298 1 298
Closing 31/08/N 1,0640 1,0580 -1 783 -893 -5 270 3 487 2 189
Invoice 15/10/N 1,0550 1,0626 2 308 4 092 -13 288 15 596 12 109
Closing 31/10/N 1,0304 1,0357 -22 134 -24 443 -35 917 13 783 -1 813
Closing 31/12/N 1,0400 1,0450 -13 542 8 593 -26 959 13 417 -366
Payment 31/01/N+1 1,0500 na -8 985 4 557 -17 802 8 817 -4 601

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15/07/N Start date of FX forward

(1) No recording
31/07/N (2) Recording the changes in fair value of derivative (spot effect) in equity
(3) Recording the changes in fair value of derivative (interest effect) in financial
income

Reserves for exchange
FX derivatives FX P&L
CFH
15/07/N
Start date of FX forward (no entry)
MtM FX Forward (spot effect) 2 189 2 189

MtM FX Forward (interest effect) 1 298 1 298
Interest effect
31/07/N 0 891 2 189 0 0 1 298

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15/10/N (1) Recording invoice at spot rate (1 000 000 / 1,055 = 947 867 EUR)
(2) Classification in operating income the amount accumulated in equity (it is
equal to the spot effect between the start date and invoice date)
31/10/N (3) Recording the changes in fair value of derivative in financial income
FX derivatives Reserves for exchange CFH Receivables Sales of goods FX P&L

Initial balance 0 891 2 189 0 0 0 00 0 1 298
reversal MtM 891 2 189 1 298
15/10/N
MtM FX Forward (spot effect) 13 288 13 288
Reclassification of equity 13 288 13 288
MtM FX Forward 8 846 The hedged item 8 846

1 MUSD / 1,07
Translation (closing rate) affects P/L 22 630 22 630
(budget spot rate)
31/10/N 0 22 134 0 0 970 497 0 0 934 579 0 13 784 Interest effect

From the invoice date, the accounting process will be the same as indicated in the previous example
for payables/receivables.

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7.4. Embedded Derivatives
Introduction
Some contracts can include index or clause (which make cash flows evolve
according to economic variables) which could be recognized as embedded
derivatives.
The purpose of this part of the training on financial instruments is to make you
sensitive to this subject.
Taking into account its complexity, you can ask help to BIV, or Group Accounting
Department, when you detect in a contract a component which in your opinion
could be comparable to an embedded derivative.

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An embedded derivative :
An embedded derivative is a component of a contract (financial or not) that meets
the definition of a derivative and whose economic characteristics are not closely
related to these of the « host contract »
Host contract Embedded derivative

 Financial A/L  Interest rate
 Equity  Foreign exchange rate
 Lease contract  Commodity price/index
 Insurance contract  Security price
 Normal purchase/sale contract  Index rate

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 Embedded derivatives within a contract can only be recognized if the contract

constitutes a firm commitment :
 A firm commitment is a binding agreement for the exchange of a specified

quantity of resources at a specified price on a specified future date or dates.
 Determining if a contract is a firm commitment or not may be the first

complexity to deal with.
 In case of “open” contracts where it is not sure if the quantity indicated in
the contract is firm, the existence (or not) of penalties towards the party
of the contract that could not comply with the quantity indicated is a good
indicator to assess if this contract is a firm commitment.

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 The embedded derivative is required to be separated and recorded at fair

value with gains and losses taken to profit or loss if:
 If the host contract is not already recorded at fair value with gains and losses
taken to profit and loss
 If the separate instrument would meet the definition of a derivative
 The economic characteristics and risks of the embedded derivative are not
closely related to those of the host contract .

221
Is the host contract

Would it be Is it closely
carried No Yes
Separate accounting
a derivative related No
at fair value
if it was to the host
through profit
free-standing? contract?
and loss ?
Yes No Yes
No separate accounting under IAS 39

222
 Examples of contracts for which the « closely related » criteria is difficult to

meet
 Equity-indexed debt instrument or buy or sell contracts
 Buy contracts of material in yen between two European entities
 Buy contracts of copper indexed to aluminum market price
 Examples of contracts for which the « closely related » criteria is easier to
assess
 CPI-indexed lease contracts
 Buy contracts of material in yen to a Japan entity
 Buy contracts of aluminum indexed to aluminum market price
 Examples of contracts for which the « closely related » criteria need to be
analyzed
 Buy contracts of material in usd between two European entities
 Buy contracts in yen to a Japan entity where yen is capped at a certain price
versus euro
 Buy contracts of product indexed to a commodity market price
 Sell contracts indexed to a commodity market price

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 Currency embedded derivative
 Purchase contract of commodities denominated in a currency which is nor

the functional currency of one of the parties, nor the currency in which the
price is routinely denominated around the world for this commodity (e.g. the $
for crude oil transactions), nor a currency that is commonly used in economic
environments where the local currency is unstable or illiquid.
 A forward commodity purchase denominated in yens between a German

and a French company, would be considered as integrating an
embedded derivative, because that commodity is not routinely
traded/quoted in yen.

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 The embedded derivatives requirements of IAS 39 will cause problems of

identification. So, it is necessary to examine carefully all material contracts to
ensure that there are no embedded derivatives that need to be accounted for
particularly foreign currency and/or commodity derivatives.
 The recording and valuation of these embedded is also complex, and will be
analyzed case by case whenever it is necessary.
 The embedded derivative’s fair value at the time the contract is entered to is
zero in most cases. It help’s to determine its characteristics. For example, a
yen forward is considered to be a forward at the rate equal to the forward rate
when the contract was committed.
 That derivative (yen forward) is booked at fair value in the balance sheet with
variations of fair value booked in P&L (or in equity if a cash flow hedge is
possible with that derivative).

225

9. Provisions
11. Appendix

8. Current and deferred tax
Summary
8.3. Recognition of additional sources of temporary differences
8.4. Deferred tax limitation
8.5. Accounting for deferred tax in some specific situations
8.6. Presentation

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8. Current and deferred taxes
 IAS 12 prescribes the accounting and disclosures for income taxes.
 Based on the diagnostic phase, 4 main issues were identified for Valeo with
respect of IAS 12:
 Recognition of additional sources of temporary differences;
 Accounting for deferred tax in some specific situations;
 Disclosures;
 First Time Application (FTA).

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 Definitions
 Current tax
 Amount of income taxes payable (recoverable) in respect of the taxable
profit (loss) for a period
 Deferred tax
 The purpose of deferred tax is to recognise immediately the future tax
consequences of current transactions.
 Deferred tax assets = amounts of income taxes recoverable in future
periods in respect of
– Deductible temporary differences
– Carry forward of unused tax losses
 Deferred tax liabilities = amounts of income taxes payable in future

periods in respect of taxable temporary differences
 IAS 12 does not deal with taxes not based on taxable profit, government
grants and investment tax credits.

229
 Temporary differences definition is very extensive under IFRS:

 The only exceptions to the recognition of a temporary difference, when the
tax base of an asset/liability is different from its carrying amount, are:
 Non deductible goodwill arising on acquisition;
 Differences between tax result and MAF result that will never reverse.
Example: a car bought for 60 K€ whose tax deductible value is limited to
20 K€ does not give rise to a temporary difference for 40 K€.
 Very few exceptions to the recognition of temporary differences under

IFRS.

230
 Main potential sources of additional deferred tax positions identified:
 Non amortizable intangible assets

 Assets acquired in a business combination revalued at fair value at the
date of acquisition have to give rise to deferred tax even if they are non
amortizable intangible assets;
 Example: brands and logos.
 Pensions
 The non deductible IAS 19 provision for pensions always gives rise to a
deferred tax amount even if the reversal is expected in the very long
term.
 Land
 Each time the MAF value of a land is different from its tax value, a
deferred tax amount must be recorded even if the reversal will only occur
when the land will be sold or impaired.
 Adjustment for hyperinflation or functional currency

231
 Divisions have at least to check their sensitivity to those areas and to review
the exhaustiveness of their timing differences.
 No discounting is allowed for deferred tax position even if the reversal will
occur in the long term.
 The limitation methodology for deferred tax asset is unchanged from MAF’s:
 Assessed to be compliant with IFRS by the Group.
 Divisions will however have to check the consistency between the economic
assumptions used for their tax planning and the one used for potential
impairment testing.

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8.4. Deferred tax limitation
 The limitation methodology for deferred tax asset is unchanged from MAF’s:
 Deferred tax liabilities are always recognised whereas deferred tax assets
are recognised only if :
 Their reversal is independent from next years tax result;
 The taxable incomes of the following years enable to ensure that the
deferred tax assets will be utilized.
 Even if deferred tax assets are limited, the amount of unrecognised deferred
tax assets is disclosed in Valeo annual report
 Divisions have to ensure that the gross amount of deferred tax assets
(before allowance) is correctly filled in in Hyperion tax package;
 Divisions will have also to check the consistency between the economic
assumptions used for their tax planning and the one used for potential
impairment testings.

233
8.5. Accounting for deferred tax in some specific
situations
 Unrecognized deferred tax asset at the date of a business combination:
 Main principles:
 If deferred tax is recognized on a later date, the division will have to
adjust its goodwill accordingly (no impact on the income statement);
 Even if the deferred tax is recognized after the window period;
 A specific follow up will have to be implemented;
 The IAS Board could change its position on this subject.

234
8.5. Accounting for deferred tax in some specific
situations
Deferred and current tax recorded directly in equity:
 Deferred and current tax impact is recorded in P&L except if the tax arises from:
 A transaction or event which is recognized directly in equity:

– Change in the carrying amount of financial instruments (cash flow
hedge),
– Change in accounting policy,
– IFRS first time application (FTA),
– Costs related to a capital increase…
 A business combination that is an acquisition (deferred tax, when recognized
within acquiree’s opening balance sheet, is included in the goodwill
calculation).
 Consequently, the reversal of the deferred tax position occurs also against equity
except for change in accounting policy, IFRS FTA and business combination.
 A specific follow up will be required at division level by nature.
235
8.6. Presentation
 Main points of attention:

 Separate presentation on the face of the balance sheet of:
 Current tax assets and tax liabilities;
 Deferred tax assets and tax liabilities.
 Presentation of deferred taxes as non current assets / liabilities (the IAS Board
should however converge with the current/non current US GAAP presentation
on that topic in the future).
 The major components of tax expense (income) should be disclosed separately.
For example, any adjustments recognized in the period for current tax of prior
periods should be separately identified.
 Disclose Deferred tax position by nature :
 Intangible assets;
 Tangible assets and leasing;
 Financial assets;
 Current assets;
 Current liabilities;
 Non current liabilities;
 Provisions;
 Tax losses carried forward.

236
8.6. Presentation
 Main points of attention (continuing):

 Offset of tax assets and tax liabilities if
 Legally enforceable right to offset current tax assets/liabilities
 Intention to settle on a net basis or recover tax assets and settle tax
liabilities simultaneously
 Applicable to each separate taxable entity within the Group

237
 Deferred tax impacts shall be calculated (in compliance with above mentioned
principles) on all IFRS opening balance sheet adjustments:
 Significant DTL on capitalized development costs;

 Potential DTA on loss making provisions…
 this could change significantly the net DTL/DTA position of some
divisions.

238
 Set up of a dedicated tax package for IFRS adjustments

 Examples of other changes in the Hyperion report:
 Creation of a Short Term Deferred tax liability account;
 Creation of a “capitalised development cost” temporary difference line
item;
 Set up of a schedule to allocate deferred tax position by nature.

239
9. Provisions
11. Appendix

9. Provisions
Summary
9.3. Restructuring provisions
9.4. Discounting of provisions
9.5. Loss making contracts
9.6. Loss making contracts – Specific focus on customer contract

241
9. Provisions
 IAS 37 prescribes the accounting and disclosures for:

 All operational provisions (except those relating to employee benefits or
some other specific cases),
 Contingent liabilities and,
 Contingent assets.
 Based on the diagnostic phase three main issues were identified for Valeo
with respect of IAS 37:
 The need to make provisions to cover loss making contracts;
 The need to define an appropriate methodology to discount long term
provisions.
 The necessity to clarify the criteria to book a restructuring provision.

242
9. Provisions
 Definitions:
According to the standard, provisions are liabilities of uncertain timing or
amount.
 Conditions to book a provision:
A provision should be recognised when, and only when:
 An enterprise has a present obligation (legal or constructive) as a result of a
past event;
 It is probable (i.e. more likely than not) that an outflow of resources
embodying economic benefits will be required to settle the obligation; and
 A reliable estimate can be made of the amount of the obligation. The
Standard notes that it is only in extremely rare cases that a reliable
estimate will not be possible.
 Provisions for general non specifically identified risks are not allowed.
 Provisions should not be recognised for future operating losses.

243
9. Provisions
 General guidelines to measure a provision.
 The standard require that a company while assessing a provision, take risks
and uncertainties into account. However, uncertainty does not justify the set
up of excessive provisions.
Example:
 An employee sue Valeo for 100 K€;
 According to the lawyer, for corresponding case, courts are granting
between 40 to 60 K€;
The provision should not be above 60 K€.
 Discount the provisions, where the effect of the time value of money is
material. We will further develop this topic in the following slides.

244
9. Provisions
 The expected disposal of assets should not be taken into account, even if the
expected disposal is closely linked to the event giving rise to the provision.
Example:
 As of December 31, N a division is committed to a restructuring plan and
will have accordingly to expense 1,000 K€ on N+1 to close down its
operation;
 The industrial equipment of the plant was already fully depreciated;
 Part of the industrial equipment of the production plant could be sold to
an external third party in order to reduce the cost of the restructuring.
 The division has various firm proposals valuing the corresponding
industrial equipment at 250 K€.
The provision has to be booked for 1,000 K€ as of December 31, N. The
division will record separately a gain of 250 K€ when it will effectively sell
the asset.

245
9. Provisions
 The same logic has to be applied to provisions partially or totally covered by

an insurance reimbursement:
 The disbursement to be supported by Valeo has to be recorded as a
separate liability and assessed in compliance with IAS 37 requirements;
 The insurance reimbursement must be recorded as a separate asset
when virtually certain.

246
9. Provisions
 Where there are a number of similar obligations (e.g. product warranties or

similar contracts) the probability that an outflow will be required in settlement is
determined by considering the class of obligations as a whole.
Example (extract from IAS 37):
 An enterprise sells goods with a warranty under which customers are
covered for the costs of repairs of any manufacturing defects that become
apparent within the first six months after purchase.
 If minor defects were detected in all products sold, repair costs of 1 M€
would result.
 If major defects were detected in all products sold, repair costs of 4 M€
would result.
 The enterprise’s past experience and future expectations indicate that, for
the coming year, 75 % of the goods sold will have no defects, 20 % of the
goods sold will have minor defects and 5 % of the goods sold will have major
defects.
 The provision, corresponding to the expected value of the cost of repairs is:
(75 % of nil) + (20 % of 1 M€) + (5 % of 4 M€) = 0,4 M€

247
9. Provisions
 The amount recognised as a provision should be the best estimate of the

expenditure required to settle the present obligation at the balance sheet
date. The evidence considered includes any additional evidence provided by
events after the balance sheet date.
Example:
 A 1,500 K€ provision is recorded as of December 31, N to cover a
probable cash outflow related to a litigation with a customer.
 As of February 25, N+1, the litigation is settled and Valeo will only have
to pay 1,000 K€. Valeo consolidated accounts are approved by the board
of Directors on February 28 N+1.
 The provision should be adjusted to 1,000 K€ as of December 31, N
(except if the impact is deemed as not significant).

248
9. Provisions
 Definition of a contingent Liability / Asset

 The Standard defines a contingent liability as:
 A possible obligation that arises from past events and whose existence
will be confirmed only by the occurrence or non-occurrence of one or
more uncertain future events not wholly within the control of the
enterprise; or
 A present obligation that arises from past events but is not recognised
because:
– it is not probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; or

– the amount of the obligation cannot be measured with sufficient
reliability
 An enterprise should not recognise a contingent liability. An enterprise
should disclose a contingent liability, unless the possibility of an outflow
of resources embodying economic benefits is remote (i.e. there is very
low probability that this outflow of resources will occur).

249
9. Provisions
 The standard defines a contingent asset as:

 A possible asset that arises from past events and whose existence will
be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the enterprise.
 An enterprise should not recognise a contingent asset. A disclosure is
required if the contingent asset is significant and probable.
 For instance, a contingent asset should be disclosed if as of December
31, 2003:
– A division had a significant (at Group level) potential gain related to a
tax litigation; this potential gain is not recorded (revenues can only be
recorded when they are virtually certain);
– As of December 31, 2003 the division has a very strong likelihood to
receive a significant amount of cash from the tax administration in Q1

2004.

250
9. Provisions
 Scope
 Definition: a restructuring plan is defined as a program that is planned and

controlled by management, and materially changes either:
 The scope of a business undertaken by an enterprise; or
 The manner in which that business is conducted.
 This procedure does not concern:
 Normal reorganization (workshop transfers, movement of departments,

etc.). Those costs are recognized in the usual lines of the profit and loss
statement.
 Goodwill provisions posted during the balance sheet at the date of
acquisition (refer to MAF standard Goodwill provisions).
 Provisions for the decommissioning costs of fixed assets that are dealt
with under MAF standard Tangible Assets.

251
9. Provisions
 Basis for recognition

 A provision for reorganization or social costs is recognized only when the
general recognition criteria for provisions are met. In this context, a
constructive obligation to restructure arises only when a division :
 (a) Has a detailed formal plan for the restructuring identifying at least:
– The business or part of a business concerned;
– The principal locations affected;
– The location, function, and approximate number of employees who
will be compensated for terminating their services;

– The termination benefits for each job classification or function;
– The expenditures that will be undertaken; and when the plan will be
implemented
 (b) Has raised a valid expectation in those affected that it will carry out
the restructuring by starting to implement that plan or announcing its
main features to those affected by it.
 Implementation of the plan should begin as soon as possible and the period
of time to complete implementation should be such, that material changes to
the plan are unlikely.
252
9. Provisions
 Costs to be considered
 A restructuring provision should include only the direct expenditures arising
from the restructuring, which are those that are both :
 Necessary entailed by the restructuring, and
 Not associated with the ongoing activities of the division.
 The expenses that may be included in ‘reorganization and social costs

provisions’, associated with the discontinuation of an activity, a site closure or
a transfer of activity, are listed in the two following slides.
 Where “No” is mentioned, this means that the costs can be considered as
Restructuring and social costs but can not be provided for i.e. recognized in
P&L when incurred.

253
9. Provisions
Costs to be considered (continuing)
Nature of cost Discountinuation Site closure Transfer of

of activity activity
Termination costs Yes Yes Yes
Incentives for voluntary Yes Yes Yes
termination
Termination period paid but not Yes Yes Yes
worked
Training or outplacement expenses Yes Yes Yes
for terminated employees
Assets write offs Yes Yes Yes
Building or fixtures demolition Yes Yes Yes
costs
Dismantling costs of equipment Yes Yes Yes
without future use (destruction or
sale)
Facilities restoration (if not Yes Yes Yes
capitalizable)
Project team : additional Yes Yes No
supervision
Project team : outplacement Yes Yes Yes
Project team : monitoring of site / No Yes No
plant closing

254
9. Provisions
 Costs to be considered (continuing)

Nature of cost Discountinuation Site closure Transfer of
of activity activity
Dismantling costs of equipment Yes Yes No
with future use
Equipment installation costs N/A N/A No
Equipment transfer costs N/A N/A No
Equipment re-start costs N/A N/A No
Expenses to modify tools and N/A N/A No
moulds
Site restoration costs (if not No Yes if compulsory No
capitalizable)
Feasibility studies No No No
Technical assistance for equipment N/A No No
re-start
Technical assistance for closing or Yes Yes No
discontinuation of activity
Start up costs : N/A N/A No
 scrap
 under activity
 safety inventory
 …
Equipment set up costs N/A N/A No
Project team : transfer supervision N/A N/A No
Incentives for non terminated No No No
employees
Recruitment expenses No No No
Training expenses for non No No No
terminated employees
255
9. Provisions
 Procedure / responsibilities
 Any restructuring decision has to give rise to an IAR.
 The accounting consequences of a decision to discontinue, to transfer or to

reorganize an activity must be taken into account when writing the IAR
analyzed.
 This restructuring IAR will distinguish:

 The expenses with investment nature;
 The expenses which can be provided for.
 The provisions must be documented. The supporting documents will

evidence the obligation and the computation of the provision.
 The review of the nature of expenses included in restructuring or social costs

IAR is under the responsibility of the division financial controller.

256
9. Provisions
 Reporting
 Within the framework of the monthly reporting system, each division must
present a statement monitoring restructuring costs. This statement, must
provide the following information:
 The carrying amount at the beginning and end of the period;
 Additional provisions made in the period, including increases to existing
provisions;
 Amounts used (i.e. incurred and charged against the provision) during
the period;
 Unused amounts reversed during the period;
 The increase during the period in the discounted amount arising from the
passage of time and the effect of any change in the discount rate.
 Each division must split the provision according to maturity of associated
cash outflows (long term/short term).
 Where the effect of the time value of money is material, the amount of a
provision should be the present value of the expenditure expected to be
required to settle the obligation (discounting).
 The provision is measured before tax. It may generate deferred tax position
(refer to MAF standard current and deferred taxation).

257
9. Provisions
 Financial statements
 Costs committed in connection with reorganization and social costs must be
presented under a separate heading designated "reorganization and social
costs” in the P&L.

258
9. Provisions
 Objective
 As stated above, IAS 37 require that provisions be discounted whenever the
effect of time is significant.
 Scope
 The discounting procedure will have to apply to the following provisions:
 Warranty (if there is an effective cash outflow);
 Quality risk
 Loss making contracts
 Other operating contingencies (tax, environmental risk,…)
 Social costs
 Reorganization costs
 Lawsuits, contingencies and others
 Provisions for depreciation and write offs will not be discounted because
there is no cash outflow associated to those provisions.
 Employee benefit provisions are discounted but they are subject to a specific
procedure (refer to MAF Employee Benefits standard).

259
9. Provisions
 Principles:
 After discounting, the provisions equal the present value of future flows
necessary to extinguish the obligation towards a third party.
 Materiality level:
 Discount effect will be computed only for provisions above 3,0 M€ and for
which cash outflow will take place more than 24 months after initial
recognition in the balance sheet.

260
9. Provisions
Calculation method:
Formula :
n
Gi
P= ∑ (1+r)i
i=1
With :
 Cash outflow in connection to the provision in year ‘i’: Gi
 Discounted LT provision: P
 Nb years to extinguish the obligation: n
 Discounting rate: r

261
9. Provisions
 Reporting Package:
 The discounting rate is communicated by the group consolidation

department, by country.
 At each closing date, the provisions shall be reported after discounting in
the MAF balance sheet.
 The discounting effect on P&L shall be recorded at each closing on a
specific line within Other financial income and expenses.
 Responsibilities :
 Computation of discount rate : Group consolidation department
 Calculation of discount effect : Division chief accountant

262
9. Provisions
 General example:
 Provision for restructuring: 1000 K€

 Appropriate discounting rate: 4%
 The cash outflow for the whole part of the LT provision is to take place in 3 years
from initial recognition in the balance sheet.
Discountin Discounted
Gross Short term Long term
g period long term
value < 1 year > 1 year
(years) provision
31/12/N 31/12/N
1 000 200 800 3 711
711 = 800/(1+4%)^3
 Provision to be reported in 31/12/N balance sheet : 911 K€ = 200 K€ (short term)

+ 711 K€ (discounted long term).

263
9. Provisions
Discount effect to be reported in the income statement :
Year 1 : 711 * 4 % = 28
Year 2 : (711+28) * 4 % = 30
Year 3 : (711 + 28 + 30) * 4 % = 31
____
Total discount effect : 89
Discounted provision : 711

___
Undiscounted provision : 800

264
9. Provisions
9.5. Loss Making Contracts
 Objective
 IAS 37 require to book a provision to cover unavoidable losses expected on a

contract:
Extract from IAS 37 § 66:
‘If an enterprise has a contract that is onerous, the present obligation
under the contract should be recognised and measured as a provision.’

265
9. Provisions
 Definition
 Under IAS, an onerous contract is a contract in which the unavoidable costs

of meeting the obligations under the contract exceed the economic benefits
expected to be received under it. Unavoidable costs under a contract reflect
the lower of:
 Net costs for exiting from the contract (contract termination penalty for
instance);
 Net costs for fulfilling the contract: customer contract with a negative
gross margin, non cancelable lease agreements for idle buildings…
 A specific focus will me made on Customer loss making contracts that

appear to be particularly sensitive at Valeo level.

266
9. Provisions
 General principles of a loss making provision (1/2)

 For each loss making contract, a provision must be booked to cover, the
expected future cumulated losses to be incurred by a division on the
remaining contract duration (from the reporting date to the end of the
contract).
 This provision must be booked from the date a division is committed with
a third party (including intra-company contracts) through a loss making
contract, even if no cost or sale have yet been incurred on the contract.
 This provision has to be calculated based on the non cancelable costs of
the corresponding contracts. All costs not directly related to the contract must
be excluded from this calculation to avoid including future losses in the
provision.

267
9. Provisions
 General principles of a loss making provision (2/2)

 The provision has to be calculated based on the best estimate of the loss.
The use of estimates is an essential part of the preparation of financial
statements and does not undermine their reliability. Except in extremely rare
cases, a division will be able to determine a range of possible outcomes and
can therefore make an estimate of the obligation that is sufficiently reliable to
be used in recognizing a provision.
 This provision will have to be discounted if the effect of time is significant.
Appropriate discount rates will be provided by Group accounting department.
 A provision will have to be recorded only if losses are still expected on the
contract after all its dedicated assets (specific tooling, capitalized
development costs…) have been impaired.

268
9. Provisions
9.6. Loss Making Contracts – Specific focus on customer
contract
 Preliminary comment
 All customer contracts for which an unavoidable loss is expected have to give
rise to a loss making provision.
 Due to the competitive environment of the Automotive parts business, this
issue is sensitive.
 Scope of the contracts to analyze

 Contracts fall within the scope of this procedure as soon as a division is
committed towards a customer through a nomination letter (or an equivalent
document). A provision must be booked on a loss making contract even if the
project is still in its early P1 development stage, without any sale recorded at
date  all projects for which a nomination letter (or equivalent) has been
signed are potentially within the scope of this procedure.
 The approach should be global i.e. both development and production phases
have to be considered.
 Intra-group contracts have to be analyzed as well.

269
9. Provisions
contracts
 Scope of the contracts to analyze (continuing):
 A contract can include one or several product references. At division level, all
references relating to a same contract have to be analyzed globally. An offset
is mandatory between a profit making reference and a loss making one within
the same contract held by the same division.
 Identification of a loss making contract

 A loss making provision will have to be recognized as soon as it is known
that economic conditions have deteriorated since the contract award:
 For products in the production stage, a customer loss making contract
is a contract which expected average potential gross margin rate over
the remaining contract duration is below 5 %: contracts with a rate
below 5 % are generating losses because they are not in a position to
cover their direct below gross margin costs (administrative, marketing,
restructuring and P0).

270
9. Provisions
contracts
 Identification of a loss making contract (continuing):
 For products in the P1 development stage (excluding phase 0) for

which no development costs have been capitalized (gross margin below
15 %), a further analysis is required to determine if a loss making
provision is necessary. Indeed for these contracts, the gross margin will
also have to absorb the remaining P1 development costs to incur.
 Contracts related to the OEM business have to be analyzed on a systematic
basis.
 Loss making provision for the IAM / OES businesses should be less frequent.

271
9. Provisions
contracts
 Calculation of a loss making provision for products in the production stage:
 The loss making provision must be equivalent to:

 The expected gross margin over the remaining contract duration
 Less 5% of the expected sales over the remaining contract duration.
 This provision must be recorded in the reporting package on a discounted

basis (if needed).

272
9. Provisions
contracts
Illustrative example (Product in the production stage):
 Expected sales over the remaining contract duration: 10,000 K€

 Expected gross margin over the remaining contract duration: 100 K€ (+1%)
 Below gross margin costs directly attributable to the contract: - 500 K€ (-5%)
 Expected loss on the contract: - 400 K€ (-4%)
 A provision of 400 K€ has to be recorded (to be discounted if needed)
 The provision will be released on a monthly basis to offset the below gross
margin costs incurred during the month and not absorbed by the gross
margin.

273
9. Provisions
contracts
 Calculation of a loss making provision for products in the P1 development

stage:
 A specific attention has to be paid to projects currently under P1 development

phase for which no development costs have been capitalized due to an
insufficient gross margin (refer to section 1). Indeed, for these projects, a
loss making provision could be necessary even if the project gross
margin is above 5 % in order to cover the remaining P1 costs to incur.
 For a products in the P1 development stage, the loss making provision

amounts to:
 The expected gross margin over the remaining contract duration
 Less 5% of the expected sales over the remaining contract duration.
 Less the remaining P1 costs to be incurred on the project (but
taking into account customer financial contribution not yet
recognized in the P&L).

274
9. Provisions
contracts
 Calculation of a loss making provision for products in the P1 development

stage (continuing):
 This provision must be recorded in the reporting package on a discounted

basis (if needed).
 This provision will have to be updated at least on a quarterly basis or as soon

as a significant event occurs. During the remaining P1 project development
stage, this provision will have to be released to the income statement on a
monthly basis for an amount equivalent to the development costs incurred
during the month by the division on the project;
 A review of the remaining provision will have to be done at SOP date and
then at least each quarter during the production phase where the share of the
provision corresponding to below gross margin costs will be released.

275
9. Provisions
contracts
Illustrative example n°1 – Gross margin < 5 %
 Below gross margin costs directly attributable to the contract: - 500 K€ (-5%)
 P1 remaining development costs to incur: - 600 K€ (-6%)
 Expected loss on the contract: - 1 000 K€ (-10%)
 A provision of 1 000 K€ has to be recorded (to be discounted if needed)
Illustrative example n°2 – Gross margin > 5 % with a loss making provision
 Below gross margin costs directly attributable to the contract: - 500 K€ (- 5%)
 P1 remaining development costs to incur: - 400 K€ (-4%)
 Expected loss on the contract: - 300 K€ (-3%)
 A provision of 300 K€ has to be recorded (to be discounted if needed)
because P1 remaining development costs can not be fully covered by
future gross margin.

276
9. Provisions
contracts
Illustrative example n°3 – Gross margin > 5 % without loss making provision
 Expected gross margin over the remaining contract duration:700 K€ (+7%)
 Below gross margin costs directly attributable to the contract:- 500 K€ (- 5%)
 P1 remaining development costs to incur: - 100 K€(-1%)
 Expected gain on the contract: +100 K€ (+1%)
 No provision needed

277
9. Provisions
contracts
 Accounting treatment
 Example (the discounting effect is not taken into account):
 Loss making provision set up during P1 development stage split as
follows:
– Remaining P1 development costs: 40 K€  Remaining development
stage = 10 months;
– Below Gross Margin costs: 120 K€  OEM business period = 40
months.
 Total loss making provision recorded : 160 K€
 Example of an accounting entry during the remaining development

stage:
– Dt Loss making provision (B/S) 3 K€
– Ct Release of loss making provision (P&L) 3 K€
– Dt R&D (P&L) 3 K€
– Ct Cash or suppliers (B/S) 3 K€
Assumption : 3 KE of P1 development costs incurred during the month.

278
9. Provisions
contracts
 Example (continuing):
 Example of an accounting entry during the production stage:

– Dt Loss making provision (B/S) 7 K€
– Ct Release of Loss making provision (P&L) 7 K€
– Dt Administrative & Selling* (P&L) 7 K€

– Ct Cash or suppliers (B/S)
7 K€
Assumption : 7 KE of below gross margin not covered by the gross

margin of the month.
* In case the project would have a negative gross margin, Cost of sales
could also be impacted.

279
9. Provisions
contracts
Connection with capitalized development costs
For each project under review, a control will have to be performed with respect
to the corresponding development costs. In particular, no development costs
have to be capitalized on contracts with a loss making provision.

280
9. Provisions
contracts
 Connection with impairment losses:
 IAS 37 requires that provision for loss making contracts have only to be
booked after the corresponding specific assets used to serve the contract
have been impaired.
 As a consequence, if a customer contract is identified as generating losses,

the relating dedicated assets (specialized tooling, development costs…) have
to be impaired first.
 Once these dedicated assets have been impaired, a new assessment of the
expected losses is to be made taking into account the reduced level of
dedicated fixed asset depreciation.

281
9. Provisions
contracts
Illustrative example
 A post SOP contract presents a gross margin over the remaining contract duration
of 1 %:
Expected sales over the remaining contract duration: 10,000 K€
Expected gross margin over the remaining contract duration: 100 K€ (1%)
Below gross margin costs directly attributable to the contract: - 500 K€ (-5%)
Expected loss on the contract: - 400 K€ (-4%)
 Assumption: according to MAF standard, an impairment of 200 K€ has to be
recorded on specialized tools related to this project. Following this impairment,
the project recalculated expected margin is as follows:
Expected sales over the remaining contract duration: 10,000 K€

Expected gross margin over the remaining contract duration: 300 K€ (+3%)
Below gross margin costs directly attributable to the contract: - 500 K€ (- 5%)
Recalculated expected loss on the contract: - 200 K€ (-2%)
 Conclusion: a loss making contract provision of 200 K€ will be recorded (to
be discounted if needed).

282
9. Provisions
contracts
 Loss making products authorization form (to be filled by each division):
Project Project Contract Customer Expected Expected gross Remaining P1 Theoretical Impairment Can the loss be Discounted LMP
Number name Number (Division n° turnover over margin over the costs to incur LMP ** test already offset at to be recorded in
*** / External the RCD* (K€) RCD* (K€) performed division level Hyperion
client name)    - (YES/NO) (YES/NO)
(*5%+)
Project
xxxx1
Project
xxxx2
Total
* Remaining Contract Duration

** Loss Making Provision
*** Post SOP projects with a gross margin below 5 % or Pre SOP projects for which no development costs have been capitalized.
Signatures
Division Financial controller Date Branch Financial controller Date Activity General manager Date
Division General manager Date Branch General manager Date Group Financial controller Date
Activity Financial controller Date Chairman Date

283
9. Provisions
contracts
 Compensation principles
Compensation is compulsory in the following cases:

 references of two (or more) separate divisions that relate to the same
contract (nomination letter);
 two (or more) contracts (nomination letters) that relate to the same
business with the same customer.
The appropriate level of analysis can be described as follows:

 Aggregation between two divisions of the same branch  Branch level;
 Aggregation between two divisions of different branches within the
same activity  Activity level;
 Aggregation between two divisions of different activities  Group level
Only the net compensated amount will have to be reported in Hyperion loss
making provisions schedule after approval by the appropriate level (Branch,
Activity or Group).

284
9. Provisions
contracts
Illustrative example 1: divisions selling directly to the same final customer
 A- Main assumptions:
 Division A is selling product 1 with a gross margin of 2 % and an expected
turnover over the remaining contract duration of 10 M€.
 Division B is selling product 2 with a gross margin of 15 % and an expected
 Divisions A & B are part of the same Branch.
 Product 1 & Product 2 businesses are closely related as they are technically
inter-dependent (systems): each sale of product 1 generates a sale of product 2.
Final customer
(Outside Valeo Group)
Product 1 Product 2
Valeo Valeo
(Division n° A) (Division n° B)

285
9. Provisions
contracts
Illustrative example 1: (continuing)
 B- Loss making provision calculation at division level:

 Division A will have to report to its branch that it will require to recognize
a loss making provision amounting to 300 K€ (in this example the
discounting impact is ignored);
 Division B does not report any loss making provision to its branch.
 C- Offsetting process at the Branch level:

 Because the branch can clearly document that product 1 & product 2
businesses are closely related, it can assess the profitability of both
products globally and as a consequence the branch instructs Division A
before the month-end closing not to recognize the 300 K€ loss making
provision.
 In case divisions A and B are not part of the same branch, this decision
would have been made at activity or group level based on figures
provided by divisions A & B.

286
9. Provisions
contracts
Illustrative example 2: intra division sales
 A- Main assumptions:
 Product 2 (Valeo system sold to the final customer), is made of product 1
supplied from division A, and additional manufacturing steps within division
B ==> product 1 & product 2 sales are directly related.
 Division A is selling product 1 with a Gross margin of 2 % and an expected
 Division B is selling product 2 with a Gross margin of 15 % and an
expected turnover over the remaining contract duration of 20 M€.
 Divisions A & B are part of the same Branch.
Final customer
(Outside Valeo Group)
Product 2
Product 1
Valeo Valeo
(Division n° A) (Division n° B)
Product 2

287
9. Provisions
contracts
Illustrative example 2: (continuing)
 B- Loss making provision calculation at division level:

 Division A will have to report to its branch that it will require to recognize
a loss making provision amounting to 300 K€ (in this example the
discounting impact is ignored);
 Division B does not report any loss making provision (its calculation is
based on the cost invoiced by division A for product 1).
 C- Offsetting process at the Branch level:

 Because the branch can clearly document that product 1 & product 2
businesses are closely related, it can assess the profitability of both
products globally and as a consequence the branch instructs Division A
before the month-end closing not to recognize the 300 K€ loss making
provision.
 In case divisions A and B are not part of the same branch, this decision
would have been made at activity or group level based on figures
provided by divisions A & B.

288
9. Provisions
contracts
 Reporting package
 Provision for loss making contracts must be disclosed by contracts in the

dedicated Hyperion provisions schedule.
 These provisions have to be booked:

 On a discounted basis (if needed);
 Before tax. Where appropriate, deferred tax will have to be computed
separately.
 In the line ‘Impairment loss and loss on contracts’ of the income
statement.

289
9. Provisions
contracts
 Responsibilities
 Each division financial controller is responsible for:

 Computing the loss making contract provision;
 Filling in the authorization form before recording any provision in order to
inform its branch;
 Providing necessary information to the appropriate level in case of
compensation.
 Approval of the corresponding loss making provision will be done according to

the limits defined below:
 All amounts  Branch approval
 Provision > 750 K€  Branch, Activity and Group approvals.

290
9. Provisions
 No specific exemption from retroactivity is included within FTA;
 All above mentioned principles have to be applied on a retrospective basis.
 Valeo divisions should therefore focus on the main issues detailed:

 Existence of loss making contracts (reminder : loss making provisions will
be recorded only after all contract-dedicated assets have been fully
impaired);
 The need for discounting long term provisions;
 The compliance of costs recorded within restructuring provisions.

291
9. Provisions
 Creation of complementary line items in the Hyperion report

 Examples of changes in the Hyperion report, new line items:
 Loss making contract : balance sheet line item,
 Reversal of discounting : new flow available,
 Reversal of discounting of other provisions : new financial result line
item.

292
9. Provisions
11. Appendix

10. Employee Benefits
Summary
10.1. Introduction
10.2. Classification of Employee Benefits
10.3. Recognition principles
10.4. Post Employment benefits
10.5. Accounting for post-employment benefits
10.6. Defined benefits plans: Actuarial gains and losses
10.7. Defined benefits plans: Past service cost

294
Summary
10.8. Defined benefit plans: Settlement and curtailment
10.9. Defined benefit plans: “Asset ceiling”
10.10. Measurement of post-employment defined benefit plans’

obligation
10.11. Organization of the measurement process at VALEO
10.12. First time adoption of IAS 19:
10.13. Example

295
10.1. Introduction
 Definition of “Employee Benefits”

IAS 19 defines employee benefits as all forms of consideration given by an entity
in exchange for service rendered by employees.
 Scope of “Employee Benefits”

All types of employee benefits are concerned, including those provided:
 Under formal agreements between an enterprise and individual employees,
group of employees or their representatives;
 Under legislative requirements, or through industry arrangements, whereby
enterprises are required to contribute to national, state, industry or other
multi-employer plans;
 By those informal practices that gives rise to a constructive obligation.

296
10.2. Classification of employee benefits
 IAS 19 requires:
a thorough identification of the employee benefit obligations existing

throughout the group
the classification of each employee benefit obligation in the appropriate

category of employee benefits:
 Short term employee benefits;

 Post employment benefits;
 Other long term employee benefit;
 Termination benefits.

297
 Short-term employee benefits:
 They fall due wholly within 12 months
 Examples:
 Wages, salaries and social contributions
 Paid annual leave and paid sick leave
 Profit sharing and bonuses (if payable within 12 months of the end of the period)
 Non monetary benefits for current employees: medical care, housing, cars and
free or subsidized goods or services
 Post-employment benefits:
 They are payable after the completion of employment
 Example:
 Pensions
 Early retirement benefits, supplementary pension plans and other retirement
benefits
 Post-employment life insurance and post-employment medical care

298
 Other long-term employee benefits:

 They do not fall due wholly within 12 months after the end of the period in which the
employees render the related service.
 Examples:
 Long service leave or sabbatical leave
 Jubilee or other long-service benefits
 Long-term disability benefits
 Profit sharing, bonuses and deferred compensation (if not payable wholly within
12 months after the end of the period)
 Termination benefits:
 They are payable as result of either:
 an entity’s decision to terminate an employee’s employment before the normal
retirement date;
 an employee’s decision to accept voluntary redundancy in exchange for those
benefits

299
10.3. Recognition principles
A specific accounting treatment is attached to each of 4 categories of employee
benefits.
Categories of employee benefits Recognition rules Examples Hyp. B/S

Employee
Wages, social security
SHORT-TERM EMPLOYEE Recognized as an expense (and a liability) when the payable /
contributions, annual leave,
BENEFITS service has been rendered Social
Measurement on an undiscounted basis profit-sharing and bonuses,
(fall due within 12 months) security
etc.
authority
Defined Supplementary pension
The contribution payable is recognized as an expense Same as
contribution (and a liability) when the service has been rendered. plans (ARRCO / AGIRC,
above
plans 401(k), …)
Calculated expense is recognized when the service has
POST- been rendered.
EMPLOYMENT
BENEFITS Defined A liability is accrued: Pension plans, post
Retirement
benefit Balance sheet presentation employment medical care
Provision
plans Present value of the obligation benefits, …
- Fair value of plan assets
+/- Other elements not recognized
= Liabilities
OTHER LONG-TERM Jubilee
Same rules as for post-employment benefits classified
EMPLOYEE BENEFITS as defined benefit plan, except that all elements are
Jubilee, long term disability provision /
always immediately recognized benefits, etc. Other operat.
Defined benefit plans prov.
Recognition of an expense (and a liability) when the Early retirement (French

TERMINATION BENEFITS
entity is committed to provide termination benefits. “CATS” 1, “CASA” 2 , Social cost
(formal plan to which the Measurement based on the estimation of probable German ATZ 3, US RAP 4, provision
employer is committed) termination costs, discounted if time value is material etc.), restructuring
1 CATS: “Cessation Anticipée d’activité de certains Travailleurs Salariés” ; 2 CASA: “Cessation Anticipée d’activité de Salariés Agés”
3 Altersteilzeit ; 4 Retirement Accelerated Program
300
10.4. Post employment benefits
 Distinction between defined contribution and defined benefit plans
Defined contribution plans:

 are post-employment benefit plans under which an entity pays fixed
contributions into a separate fund and will have no legal or constructive
obligation to pay further contribution if the fund does not hold sufficient
assets to pay all employee benefits relating to employee service in the
current and prior periods.
 The amount of the post-employment benefit received by the employee is
determined by the amounts of the contributions made together with
investment return arising from the contributions.
Risk under defined contribution plans:

 The entity’s obligation is limited to the amount that it agrees to contribute to
the fund.
 The risks, that the benefit received by the employee will be less than
expected and that the assets invested will not be sufficient to meet expected
benefits, fall on the employee.
Examples:
 Social Security schemes
 Supplementary schemes (Arrco/Agirc in France, 401(k) in USA,…)
The total amount of defined contribution recognized as an expense by the

division should be disclosed in the schedule SRS0R600 of RS.
301
Defined benefit plans:

 are all post-employment benefit plans other than defined contribution plans.
Risk under defined benefit plans:

 The entity’s obligation is to provide the agreed benefits to current and
former employees.
 The risks (or some of the risks), that the benefit received by the employee
will be less than expected and that the assets invested will not be sufficient
to meet the agreed benefits, fall on the entity.
Examples:
 Retirement Indemnities;
 Post employment Medical care benefits.
REMINDER:
In case that a division can not easily establish whether a plan is to be classified under
defined contribution or defined benefit category, Group consolidation department
should be informed
302
Defined benefit plans can be either funded or unfunded

In case of a funded defined benefit plan, the entity has issued some financial
assets held by a fund that is legally separate from the reporting entity and exists
solely to pay or fund the employee benefits.
These financial assets:

 can be financial instruments issued by the reporting entity provided they
are transferable (can be sold without restrictions).
 are available to be used only to pay or fund the employee benefits.
 are not available to the reporting entity’s own creditors (even in bankruptcy)
and can not be returned to the reporting entity, unless either:
– the remaining assets of the fund are sufficient to meet all the related
employee benefit obligations of the plan or reporting entity; or
– the assets are returned to the reporting entity to reimburse it if for
employee benefits already paid.

303
10.5. Accounting for post employment benefits
 Accounting for defined contribution plans:
Contributions to a defined contribution plan shall be recognized when the

employees have rendered the services in exchange for those contributions.
A liability is accrued.

304
 Definitions:
All the following term are used for actuarial valuation and accounting.
 The present value of a defined benefit obligation:

 Corresponds to the present value, without deducting any plan assets, of expected
future payments required to settle the obligation resulting from employee service in
the current and prior period.
 Fair Value:
 Is provided by the fund and usually corresponds to the market value of the financial
assets.
 Plan assets:
 Comprise assets held by a long-term employee benefit fund and qualifying insurance
policies.

305
 Current service cost:

 Equals the increase in the present value of the defined benefit obligation
resulting from employee service in the current period.
 Interest cost:
 Equals the increase during a period in the present value of a defined
benefit obligation which arises because the benefits are one period
closer to settlement.
 Expected return
 Is based on market expectations, at the beginning of the period, for
returns on the plan assets over the entire life (long term) of the related
obligation.

306
 Accounting for defined benefit plans
 Each post-employment defined benefit plan or other long term defined benefit
plan is recognized according to the following rules:
 Balance-sheet:
The amount recognized as a defined benefit liability in the balance sheet
is the net total of the following amounts:
– the present value of the defined benefit obligation at the balance
sheet date;
– minus the fair value of plan asset at the balance sheet date;
– plus any actuarial gains (less any actuarial losses) not recognized (*)
– minus any past service cost not yet recognized (*)
– plus / minus the effect of Asset Ceiling
 (*) Warning: for other long term benefit plans, actuarial gains and
losses and past service cost are recognized immediately whereas
they can be deferred for post-employment defined benefit plans.

307
 Income statement:
The amount recognized as expense or income (the “net periodic pension cost“) is
the net total of the following amounts:
– Current service cost;

– Interest cost (or discounting cost);
– Expected return on plan assets;
– Actuarial gains and losses: for the portion recognized during the reporting
period;
– Past service cost : for the portion recognized during the reporting period;
– Losses (gains) on curtailments and settlements;
– Effect of asset ceiling.
 Warning: The cash paid (contributions to the fund, payments of benefits …)

is not recognized in the income statement but is considered as an
utilisation of pension provision.

308
 Actuarial gains and losses arise when there are:
 Changes in actuarial assumption (discount rate, salary increase, turn-over,

mortality rates...);
 Discrepancies between expected and actual behaviour (return on asset...).

 Valeo has elected to apply the “corridor method” for the recognition of actuarial
gains and losses.
 Under this method:
 If total unrecognized actuarial gains and losses exceed the corridor, of plus or
minus 10% of whichever is higher of the plan assets or the obligation, the excess
is recognized over the average expected remaining working life of the employees
of the plan.
 Gains and losses falling within the 10% corridor remain unrecognized in the
income statement.
 Reminder:
 Immediate recognition for actuarial gains and losses related to other long term
benefits plans.

309
 The successive steps of the Corridor Method:
 1st step: Consider each defined benefit plan separately
 2nd step: Calculate the excess amount falling outside the “corridor” as the net
cumulative unrecognized actuarial gain or loss at the end of the N-1 accounting
period less 10 per cent of the greater of:
– The present value of the defined benefit obligation at 31/12/N-1 (before

deducting plan assets); and
– Fair value of the plan assets at 31/12/N-1.
 3 rd step: Recognize in the income statement of year N an amount equal to the

excess (as in 2nd step above) divided by the expected average remaining working
life of the employees participating in the scheme.

310
 Illustration case:
 At 31/12/2010, a plan of a division had a net cumulative actuarial loss

of 1,200.
 At the same date, the present value of the defined benefit obligation
was 10,200 and the fair value of the related plan assets was 9,500.
The expected average remaining working life of the employees
participating in the scheme was 9 years.
 Net actuarial gains of 150 have arisen during year 2011.

311
The
Corridor
Fair Value of
the related 10%*MAX ( A ; O )=
plan assets
9,500
Defined benefit CORRIDOR

obligation 1,020
10,200
A: Asset
O:Obligation
Actuarial loss to be recognized in the income

statement in 2011
Net cumulative 180 are in excess of the

corridor.
unrecognized actuarial CORRIDOR
loss > 1,020
Actuarial loss to be
recognized in the
1,200 incom e statem ent in
2011 equal to:
20 (=180/9)

312
Determination of the net cumulative unrecognized gain or loss

existing as of 31/12/2011
Actuarial Amortization of
Stock Stock
gains arisen actuarial losses in
31/12/2011 = 01/01/2011 + during 2011 - 2011
1,030 1,200
(150) 20

313
 Past service cost:
 arises when a defined benefit or other long term plan is amended or set up in
a retrospective manner.
 equals the change in the defined benefit obligation and may be either an
increase (where benefits are introduced or improved) or a decrease (where
existing benefits are reduced).
 Accounting principles:
 To the extent that the benefits are already vested (*) immediately following
the introduction of, or changes to, a defined benefit plan, an enterprise shall
recognize past service cost immediately.
 If the benefits of the plan have not become vested yet, the past service cost
(increase/decrease) shall be recognized as an expense/income on a straight
line basis over the average period until the benefits become vested.
 Reminder: immediate recognition for non vested past service cost related to
other long term benefit plans.
(*)The vested employee benefits are employee benefits that are not conditional on future employment and are
not forfeited if the employee leaves.
314
 Illustration case
 A division operates since 2006 a pension plan that provides a pension of

2% of final salary for each year of service.
 The benefits become vested after five years of service
 On 1st January 2015, the enterprise improves the pension to 2,5% of final
salary for each year of service starting from 1 st January 2011.
 A the date of the improvement, the present value of the additional
benefits amounts to 220. This additional benefits for service from 1st
January 2011 to 1st January 2015 is as follows:
– For employees with more than five years of service at 1/1/2015 : 80

– For employees with less than five years of service ay 1/1/2015 (and for
which the benefits are not yet vested) : 140 (average period until
vesting date : 2 years)

315
Determination of the past service costs to be recognized in 2015:
 The division recognizes 80 immediately because those benefits

are already vested.
 The division recognizes140 on a straight-line basis over two years
from 1st January 2015 to 1st January 2017. As a result, the
amount recognized in 2015 is 140/2=70.
 The division records in 2015 a total expense of 80+70=150 arising
from “past service cost”.

316
10.8. Defined benefits plans: Settlement and curtailment
 Settlement:
 Occurs when an enterprise eliminates all of its legal or constructive
obligations for part or all of the defined benefits. For example, by making a
lump sum payment to plan participants, in exchange for their rights to receive
specified post-employment benefits.
 Curtailment:
 Arises when there is a significant reduction in head count (plan closure,
discontinuation, restructuring)

317
10.8. Defined benefits plans: Settlement and curtailment
 Accounting principles:
 A gain or loss arising on the settlement or curtailment of a defined benefit
plan shall be recognized immediately, when the curtailment or settlement
occurs. Such a gain or loss will comprise the aggregate of:
 The changes in the present value of the obligation;

 Any resulting change in the fair value of the plan assets;
 Any related actuarial gains and losses and past service cost that had
not previously been recognized (prorata basis).

318
10.9. Defined benefits plans: “Asset ceiling”
 Rule:
 In some circumstances, the amount determined in the balance sheet
can be negative which generates a Net Prepaid Pension Cost
(instead of a Net Accrued Pension Cost).
 Example: such a Prepaid Pension Cost appears when a defined

benefit plan is over-funded or when significant actuarial losses or past
service cost are not yet recognized in the balance sheet.
 When the total of the elements presented above generates a Prepaid

Pension Cost, the entity must apply the “ Asset Ceiling” rules to
determinate the amount to recognize in the balance sheet.
 In such case, the Division Financial Controller has to contact Group

Consolidation Department for further guidance.

319
10.10. Measurement of post-employment DB plans’
 oblig.
General principles:
 The measurement rules of the defined obligations and of the related plan
assets are strictly defined under IAS 19.
 The main features to be applied:

 Obligation to use the Projected Credit Unit Method to measure the
obligations and the related profit and loss (this method sees each period
of service as giving rise to an additional unit of benefit entitlement and
measures each unit separately to build up the final obligation);
 Use of unbiased and mutually compatible actuarial assumptions;
 Financial assumptions are based on market expectations at the balance
sheet date, for the period over which the obligations are to be settled;
 The rate used to discount post-employment benefit obligations is
determined by reference to market yields at the balance sheet date on
high quality corporate bonds
 Plan assets are measured at their fair value at balance sheet date
 Obligations to determinate the present value of defined benefit
obligations and the fair value of any plan assets with sufficient regularity.

320
10.10. Measurement of post-employment DB plans’ oblig.
 Presentation of the net pension cost (income statement)
The net periodic pension cost (income) shall be included in the operating
income, by nature (direct labour, indirect labour, R&D, administration,
except for the Interest cost and the Expected return on plan assets, which
will be accounted for in Other financial expense ( Hyperion account :
“Reversal of discounting of pension provision”).
Other financial
Operating Cost
Net periodic pension cost Expense
Service Cost x
Interest Cost x
Expected Return on Plan Assets x
Amortization of Past Service Cost x
Amortization of actuarial (Gain) Loss x
Special Termination Benefits x
Curtailment gain x
Settlement (gain) loss x

321
10.11. Organization of the measurement process at Valeo
 Process
 The Group has assigned the measurement of its defined benefit plans to
external independent actuaries.
 The actuaries will perform the valuations in accordance with the Group
instructions regarding:
 The measurement dates (for the defined benefit obligations and for the
plan assets): 31/12/N;
 The external actuarial assumptions and the company specific actuarial

assumptions;
 The format and the content of the actuarial report.

322
10.11. Organization of the measurement process at Valeo
 Responsibilities
VALEO
Division Human Division Financial Division Chief

Ressource Controller Accountant
Determines the internal Reviews the consistency of data

assumptions used to measure the and assumptions provided to the Coordinates the measurement
obligations (turnover rate, salary actuary process
increase scales, assumed Records the net pension cost on a
retirement age) monthly basis
Informs the Group Consolidation
Department, when adopting a new
scheme or a major amendment to a
former scheme
Complete the IAS19 reporting form

to be transmitted to the Group
Consolidation Department before
the year end closing

323
10.12. First time adoption of IAS 19
 General principles
 Employee benefits shall be treated in accordance with the general principle

of IFRS1, i.e. any changes in previously applied accounting policies are
made retrospectively and the resulting changes are recognised in retained
earnings in the opening IFRS balance sheet at the date of the transition
(January 1, 2004).
 If certain actuarial assumptions were not made or were not consistent

between divisions under previous accounting policy, IFRS 1 requires that
the new assumptions shall reflect the conditions at the date of transition,
e.g. in relation to discount rates and the fair value of plan assets.

324
 Actuarial gains and losses – the “corridor” approach
 As authorised by IFRS1, Valeo has elected to recognise all cumulative

actuarial gains and losses up to the transition date (January 1, 2004).
However the “corridor-approach” will be applied for actuarial gains and
losses which arise after the transition date.
 This exemption may result in a significant charge to total equity at the

date of transition, but in return it will avoid amortising the cumulative
losses in income statement. Only those actuarial gains and losses
arising subsequent to the date of transition (January 1, 2004) will then
be recognised in income statement according to the corridor approach.
 Example:
 As at at 31/12/03, The PBO is equal to 100, the asset to 0, the
unrecognized actuarial loss to 20. The provision is equal to 80
 As the first time adoption date, the company will recognise in
balance sheet 20 of actuarial loss through equity. The provision will
then amount to 100.

325
 Unrecognised past service costs
 Past service costs are changes in the defined benefit obligation for
employee service in prior periods arising as a result of changes to plan
arrangements in the current period.
 Past service costs shall be recognised immediately to the extent it

relates to former employees or to active employees already vested.
 Otherwise, it shall be amortised on a straight-line basis over the

average period until the amended benefits become vested.
 IFRS 1 grants no exemption (as for unrecognized actuarial gains and

losses) to the requirement to identify and amortise the unvested past
service cost at the date of transition.

326
10.13. Example
 Situation as at December 31, 2003

 estimated obligation = 50 M€
 fair value of the plan assets = 10 M€
 provision = 40 M€
 As at January 1, 2004
 the present value of the defined benefit obligation is determined using
the "Projected Unit Credit" method (100M€)
 due to this change of method, the enterprise accounts for a
complementary obligation (+50 M€)
 the provision in the balance sheet is increased by 50 M€, against equity

327
10.13. Example
Projection at the end of 2004
 In 2004, there is no significant change in respect of the population of

participants and of actuarial assumptions
 As at December 31, 2004, the Projected Benefit Obligation has been valuated
at 119.3
 As at December 31, 2004, the fair value of the plan assets is determined and
compared to the projected value

328
10.13. Example
Reconciliation of the obligation
Change in the present value of the defined benefit obligation
Present value 1/1/2004 100
Current service cost in 2004 10

Interest cost 6,3
…/… benefits paid (0)
Actuarial (Gains) / losses 3
Present value 12/31/2004 119,3

329
10.13. Example
Reconciliation of the plan assets
Change in the fair value of the plan assets
Fair value of the plan assets 1/1/2004 10
Actual return in 2004 0,5

Employer contributions 0
…/… -
Benefits paid (0)
Fair value of the plan assets 12/31/2004 10,5

330
10.13. Example
Recognition in the income statement
Components of the Net Periodic Pension Cost

Current service cost in 2004 10
Interest cost 6,3
Expected return on assets in 2004 (0,7)
Amortization of past service cost 0
Amortization of actuarial gains&losses 0
…/… 0
Net expense recognised in the income
15,6
statement

331
10.13. Example
Determination of the net liability
in the balance sheet
Funded status 12/31/2004 (108,8)
Unrecognised actuarial (Gains) / losses * 3,2

Unrecognised past service cost 0
Net (liability) / asset recognised in the
(105,6)
balance sheet 12/31/2004
•loss of return on plan assets = actual 0,5 - expected 0,7 + Loss on PBO 3.0
•Funded Status = PBO 119.3 - Asset 10.5

332
10.13. Example
Statement of financial position
Amounts recognised in the balance sheet
Prepaid benefit cost 12/31/2004 0
Accrued benefit cost 12/31/2004 (105,6)

Net amount recognised in the balance
(105,6)
sheet 12/31/2004
Rate assumptions at the end of year :

salary 3%, discount 6%, expected return on plan assets 7%

333
10.13. Example
Reconciliation of provision
Reconciliation of amounts recognised in the balance sheet

(90)
sheet 1/1/2004
- Net expense recognised in the income
(15,6)
statement
+ Employer contributions 0

(105,6)
sheet 12/31/2004

334
9. Provisions
11. Appendix

11. Appendix
Applicable standards for 2005
IAS / IFRS Standards
IAS 1 Presentation of Financial Statements (revised 1997)
IAS 2 Inventories (revised 2003)
IAS 7 Cash Flow statement (revised 1992)
Net profit and loss for the period, fundamental errors and
IAS 8 changes in accounting policies (revised 2003)
IAS 10 Events after the balance sheet date (revised 2003)
IAS 11 Construction contracts (revised 1993)
IAS 12 Income taxes (revised 2000)
IAS 14 Segments Reporting (revised 1997)
Rules with modification in progress

or uncertainties for 2005
Stabilized Rules or evolution known
For application in 2005
Not applicable in 2005

336
11. Appendix
IAS 15 Information reflecting the effects of changing prices
IAS 16 Property, plant & equipment (revised 2003)
IAS 17 Leases (revised 2003)
IAS 18 Revenue (revised 1993)
IAS 19 Employee benefits (revised 2002)
Accounting for government grants and disclosure of

IAS 20 government assistance
The effects of changes in Foreign exchange rates

IAS 21 (revised 2003)
IAS 22 Business combinations (revised 1998)

337
11. Appendix
IAS 23 Borrowing costs
IAS 24 Related party disclosures (revised 2003)
IAS 26 Accounting and reporting by defined benefit plans

Consolidated financial statements and accounting for
IAS 27 investments in subsidiaries (revised 2003)
Accounting for investments in associates (revised
IAS 28 2003)
IAS 29 Financial reporting in hyperinflationary economies
IAS 30 Disclosures in financial statements fo banks and similar institutions
Financial reporting of interests in joint ventures

Financial instruments : disclosure and presentation

IAS 33 Earnings per share (revised 2003)

IAS 34 Interim financial reporting
IFRS conversion project Not applicable in 2005
338
11. Appendix
IAS
35 Discontinuing operations
IAS
36 Impairment of assets (revised 2004)
IAS Provisions, contingent liabilities and contingent
37 assets
IAS 38 Intangible assets (revised 2004)
IAS Financial instruments : Recognition and measurement

39 (revised 2003)
IAS 40 Investment propert (revised 2003)
IAS 41 Agriculture
First time adoption of International Financial Reporting
IFRS 1 Standards
IFRS 2 Share-Based Payment

IFRS
3 Business Combination Rules with modification in progress
339
11. Appendix
IFRS
4 Insurance Contracts
IFRS Non current assets held for sale and

5 discontinuing operations


340

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VALEO – IFRS Conversion Project

Worldwide Training Session

IFRS Conversion project

 Day 1 08:30 – 19:15

 Lunch 12:00 – 13:00

 Tangible assets & specialized tooling 13:00 – 14:45

IFRS conversion project

 Day 2 08:00 – 18:00

IFRS conversion project

2. Tangible assets and specialized tooling p.

IFRS Conversion project

 General context of IFRS deployment in Europe

 The IFRS valuation model

 IFRS will be mandatory for Valeo Group

 Applicable standards for 2005

 Valeo IFRS conversion project

IFRS conversion project

 17 existing different primary bases of

 A need for homogeneous accounting rules

IFRS conversion project

 IAS 2005 : European Commission Project

 IFRS will be mandatory from 2005 for Valeo consolidated accounts;

IFRS conversion project

 Required information to be published under IFRS:

First published set of IFRS accounts : 31 March 2005

IFRS conversion project

IFRS conversion project

 Assistance provided to the finance staff of the divisions for IFRS

IFRS conversion project

 Branch IFRS leaders :

 VWS : Ariane COMBLIN

IFRS conversion project

 Other accounting systems: Jean Roy (VES IT Director) coordinates the

IFRS conversion project

IFRS conversion project

IFRS Conversion project

1.1. Preliminary remarks

IFRS conversion project

1.5. Depreciation and amortization

1.6. Customer financing

1.8. Specific First Time Application (FTA) Steps

1.9. Release Hyperion

IFRS conversion project

IFRS conversion project

 Definition of an intangible asset:

 An intangible asset is measured initially at cost.

IFRS conversion project

IFRS conversion project

 Key concept 1: Research phase vs development phase.

 The research phase:

 Corresponds to original and planned investigations undertaken with the

 Expenditure on research phase are systematically expensed

IFRS conversion project

 The Development phase is the application of research findings or other

 For the production of materials, devices, products, processes, systems or

 Costs incurred under the development phase of a project have to be

IFRS conversion project

Key concept 1: Development phase vs research phase

 P3 projects: ‘Investigation of the viability of new ideas for technology,

IFRS conversion project

 P2 projects: ‘Creation of new validated generic standards to be used later in

 P1 projects: ‘Development of specific customer application. Must be based on