APC 2007 Annual Report Download - page 113

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Consolidated financial statements at December 31, 2007
Supplementary pension benefits
The Group also provides supplementary pension benefits
to a limited number of active and retired senior executives.
These defined benefit obligations are accrued for based
on the contractual terms of the agreements, which provide
guaranteed minimum benefits over and above those paid
under general pension schemes.
Other commitments
Provisions are booked to cover the cost of providing health-
care benefits for certain retired employees in Europe and
the United States.
The Group also records for all its subsidiaries an obliga-
tion for seniority-related benefits (primarily long service
awards in its French subsidiaries).
1.19 - Share-based payments
The Group grants different types of share-based payment
to senior executives and certain employees. These include:
Options to buy existing Schneider Electric shares and/or
to subscribe new shares.
Shares granted without consideration.
Stock Appreciation Rights ("SARs").
IFRS 2 – Share-based payment – applies only to plans set
up after November 7, 2002 that did not vest prior to Janu-
ary 1, 2005.
In accordance with IFRS 2, these plans are valued on the
date of grant, using the Cox, Ross, Rubinstein binomial op-
tion pricing model, and are recognized as an expense over
the vesting period, generally three or four years depending
on the country.
A contra entry is posted to the treasury stock reserve for
stock grants and stock options. In the case of SARs, a lia-
bility is recorded corresponding to the amount of the re-
measured benefit at the closing date.
As part of its commitment to employee share ownership,
Schneider Electric gave its employees the opportunity to
purchase shares at a discount stock price during the year
(note 14.5).
1.20 - Provisions for contingencies
A provision is recorded when the Group has a present ob-
ligation as a result of a past event, and a reliable estimate
can be made of the amount of the obligation. If the obliga-
tion is not probable and cannot be reliably estimated, but
remains possible, it is classified as a contingent liability and
disclosed in the notes to the consolidated financial state-
ments. Provisions are calculated on a case-by-case or sta-
tistical basis. Long-term provisions (greater than one year)
are discounted. Discounting adjustments to long-term pro-
visions were calculated at a rate of 3.8% at December 31,
2007 and December 31, 2006.
Provisions are primarily set aside to cover:
Economic risks.
These include tax risks arising from tax audits performed
by various local tax administrations and financial risks aris-
ing primarily on guarantees given to third parties in rela-
tion to certain assets and liabilities.
Customer risks.
These provisions primarily concern liability claims arising
from alleged defects in products sold to customers and
other third parties and are determined on a case-by-case
basis.
Product risks.
These provisions comprise:
- Provisions recorded on a statistical basis for the residual
cost of product warranties not covered by insurance. Such
warranties may run up to 18 months.
- Provisions to cover disputes concerning defective prod-
ucts and recalls of clearly identified products.
Environmental risks.
These provisions are primarily set aside to cover potential
reclamation costs.
Restructuring costs, when the Group has prepared a de-
tailed formal plan for the restructuring and has either an-
nounced or started to implement the plan at year-end.
1.21 - Financial liabilities
Financial liabilities primarily comprise bonds and short and
long-term bank debt. These liabilities are initially recorded
at fair value, taking into account any direct transaction
costs, and subsequently measured at amortized cost
based on their effective interest rate.
1.22 - Financial instruments and
derivatives
Risk hedging management is centralized. The Group’s pol-
icy is to use derivative financial instruments exclusively to
manage and hedge changes in exchange rates, interest
rates or prices of certain raw materials. Derivative financial
instruments are never used for speculative purposes.
These risks are managed and hedged primarily through
the use of swaps, options and futures, depending upon the
nature of the Group’s exposure.
Foreign currency hedges
The Group periodically enters into foreign currency con-
tracts to hedge foreign currency transactions. Some of
these contracts are designated as hedges of operating re-
ceivables and payables carried in the balance sheets of
Group companies. The Group does not apply hedge ac-
counting to these instruments because at year-end, for-
eign currency contracts are marked to market and gains
or losses are recorded in "Other financial income and ex-
pense". These gains or losses offset the losses or gains
arising from converting foreign currency payables and re-
ceivables into the reporting currency at year-end rates, in
accordance with IAS 21 –
The Effects of Changes in For-
eign Exchange Rates.
The Group may also hedge recurring future transactions
or planned acquisitions or disposals of investments. In ac-
cordance with IAS 39, these are treated as cash flow
hedges. The hedging instruments are recognized in the
balance sheet and are measured at fair value at the pe-
riod-end. The portion of the gain or loss on the hedging in-
strument that is determined to be an effective hedge is
accumulated in equity, under "Other reserves", and recog-
nized in the income statement when the hedged transac-
tion affects profit or loss. The ineffective portion of the gain
or loss on the hedging instrument is recognized in "Other
financial income and expense".
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