Case study FIAT
Case study: FIAT GROUP’S FIRST-TIME ADOPTION OF IFRS
Question 1: What is Fiat’s key accounting policies? Which of Fiat’s key accounting policies are affected by the adoption of IFRS?
a. Fiat’s key accounting policies:
The Fiat Group has a tendency of engaging in financing accountings mechanism, selling a significant part of its finance, trade and tax receivables through either securitization programs or factoring transactions
b. Fiat’s key accounting policies are affected by the adoption of IFRS:
Three accounting changes by adoption of IFRS are related to Fiat’s critical accounting policies:
- The change to capitalization of development expenditures
- The change in the recognition of margins on sales with buy-back commitments.
- The change in (de)recognition of “sold” receivables.
The impact on its 2004 profit/loss will be profit-decreasing. Refer to Appendix A for the detailed impact figures.
In 2005, assuming that there is no R&D expenditure, the impact on the company’s 2005 profit will be from that of the amortized amount of the R&D expenditure from 2004. Hence, the expenses in 2005 will increase. However, if there is R&D expenditure in 2005, the effect on the profit/loss is minimal from the changes in accounting policy as the capitalization of development expenditures reduces the expenses in the profit and loss statement as the amount is amortized over the years and not recognized one-off in 2005.
The IFRS profit was a better reflection of the Fiat Group’s performance in 2004. IFRS better reflects the recognition of sales with buy-back commitment and allows for better matching as deferred costs are now expensed when incurred. It also better reflects the costs of employees as stock option compensation is now expensed.
Question 2: Summarize the differences between Fiat’s key accounting methods under Italian GAAP and those under IFRS. What characterizes the differences between two sets of methods? From the perspective of
Question 1: What is Fiat’s key accounting policies? Which of Fiat’s key accounting policies are affected by the adoption of IFRS?
a. Fiat’s key accounting policies:
The Fiat Group has a tendency of engaging in financing accountings mechanism, selling a significant part of its finance, trade and tax receivables through either securitization programs or factoring transactions
b. Fiat’s key accounting policies are affected by the adoption of IFRS:
Three accounting changes by adoption of IFRS are related to Fiat’s critical accounting policies:
- The change to capitalization of development expenditures
- The change in the recognition of margins on sales with buy-back commitments.
- The change in (de)recognition of “sold” receivables.
The impact on its 2004 profit/loss will be profit-decreasing. Refer to Appendix A for the detailed impact figures.
In 2005, assuming that there is no R&D expenditure, the impact on the company’s 2005 profit will be from that of the amortized amount of the R&D expenditure from 2004. Hence, the expenses in 2005 will increase. However, if there is R&D expenditure in 2005, the effect on the profit/loss is minimal from the changes in accounting policy as the capitalization of development expenditures reduces the expenses in the profit and loss statement as the amount is amortized over the years and not recognized one-off in 2005.
The IFRS profit was a better reflection of the Fiat Group’s performance in 2004. IFRS better reflects the recognition of sales with buy-back commitment and allows for better matching as deferred costs are now expensed when incurred. It also better reflects the costs of employees as stock option compensation is now expensed.
Question 2: Summarize the differences between Fiat’s key accounting methods under Italian GAAP and those under IFRS. What characterizes the differences between two sets of methods? From the perspective of