The main accounting principles and standards applied in preparation of the consolidated financial statements and of the Group aggregate financial disclosures are set forth below.
These Consolidated Financial Statements have been drawn on the going concern assumption, as the Directors have verified the inexistence of financial, performance or other indicators that could give rise to doubts as to the Group’s ability to meet its obligations in the foreseeable future. The risks and uncertainties relating to the business are described in the dedicated sections in the Report on Operations. A description of how the Group manages financial risks, including liquidity and capital risk, is provided in note 39.
The financial statements as of December 31, 2011 of the companies included in the scope of consolidation, prepared in accordance with Group accounting policies with reference to IAS/IFRS, have been used for consolidation purposes.
The scope of consolidation includes subsidiaries and associates.
All the companies over which the Group has the direct or indirect power to determine the financial and operating policies are considered subsidiaries.
The assets, liabilities, costs and revenues of the individual consolidated companies are fully consolidated on a line-by-line basis, regardless of the percentage owned, while the carrying value of consolidated investments held by the Holding Company and other consolidated companies is eliminated against the related share of equity.
All intercompany balances and transactions, including unrealised profits deriving from transactions between consolidated companies, are eliminated. Unrealised losses are eliminated, unless it is likely that they will be recovered in the future.
The financial statements of the subsidiaries are drawn up using the currency of the primary economic environment in which they operate (“functional currency"). The consolidated financial statements are presented in Euro, the functional currency of the Holding Company and hence the currency of presentation of the consolidated financial statements of the Sogefi Group.
The procedures for translation of the financial statements expressed in foreign currency other than the Euro are the following:
o the items of the Consolidated Statement of Financial Position are translated into Euro at the year-end exchange rates, taking account of any exchange risk hedging transactions;
- the Income Statement items are translated into Euro using the year’s average exchange rates;
- differences arising on translation of opening equity at year-end exchange rates are booked to the translation reserve, together with any difference between the income statement and the statement of financial position result;
- whenever a subsidiary with a different functional currency from the Euro is disposed of, any exchange differences included in equity are charged to the Income Statement.
The following exchange rates have been used for translation purposes:
|New romanian Leu||4.2371||4.3233||n.a.||n.a.|
|Hong Kong dollar||10.8237||10.0510||n.a.||n.a.|
An associate is an entity in which the Group is able to exert a significant influence, but without being able to control its financial and operating policies.
Equity investments in associates are consolidated applying the equity method, which means that the results of operations of associates and any changes in Other comprehensive income of the associates are reflected in the consolidated Income Statement and in Consolidated Statement of Other Comprehensive Income. If the carrying value exceeds the recoverable amount, the carrying value of the investment is adjusted by booking the related loss to the Income Statement.
Business combinations are recognised under the acquisition method. According to this method, the consideration transferred to a business combination is measured at fair value calculated as the aggregate of the acquisition-date fair value of the assets transferred and liabilities assumed by the Group and of the equity instruments issued in exchange for the control of the acquired entity. The acquisition-related costs of the transaction are generally booked to the income statement at the time they are incurred.
On the acquisition-date, the identifiable assets acquired and the liabilities assumed are recognised at their acquisition-date fair value; the following items represent exception to the above and are valued according to their reference principle:
- deferred tax assets and liabilities;
- assets and liabilities relating to employee benefits;
- liabilities or equity instruments relating to share-based payments of the acquired entity or share-based payments relating to the Group, issued as a replacement of contracts of the acquired entity;
- assets held for sale and discontinued assets and liabilities.
Goodwill is measured as the surplus between the sum of the consideration transferred to the business combination, the value of non-controlling interests and the fair value of the previously-held equity interest in the acquiree with respect to the fair value of the net assets transferred and liabilities assumed as at the acquisition-date. If the fair value of the net assets transferred and liabilities assumed as at the acquisition-date exceeds the sum of the consideration transferred, the value of non-controlling interests and the fair value of the previously-held equity interest in the acquiree, said surplus is immediately booked to the income statement as gain resulting from said transaction.
The share of non-controlling interests as at the acquisition-date may be measured at fair value or as a proportion of the net assets value in the acquiree. The measurement method adopted is decided on a transaction-by-transaction basis.
Business combinations made prior to January 1, 2010 were recognised in accordance with the previous version of IFRS 3.
Acquisition of Systèmes Moteurs Group
As mentioned above, Holding Company Sogefi S.p.A. purchased the French Group of components manufacturer Systèmes Moteurs S.A.S. on 29 July 2011, by buying 100% of the share capital of the parent company Mark IV Systèmes Moteurs S.A.S, which was later renamed Systèmes Moteurs S.A.S.
The Systèmes Moteurs Group is one of the world's largest producers of air intake and engine cooling systems. Supplier to the major world car manufacturers, the group has seven production plants (three of which are in France while the others are in Canada, Mexico, Romania and India), two research, development and innovation centres (in France and the United States) and is currently building a new production site in China. Mark IV Systèmes Moteurs generates around 60% of its revenues in Europe, has an increasing share of the market in North America and has started expanding in strong-growth countries such as China and India.
The total consideration paid in connection with the business combination amounts to Euro 146,501 thousand and includes a price adjustment after the net financial position and net working capital of Systèmes Moteurs Group at the acquisition date (Euro 2,373 thousand) were accurately determined, as well as the book value of Systèmes Moteurs S.A.S. indebtedness owed to Group Mark IV LLC as of July 29, 2011 for the amount of Euro 20,447 thousand, which was repaid by Sogefi S.p.A. to previous shareholders at the same date using an intercompany loan granted by Holding Company Sogefi S.p.A. to Systèmes Moteurs S.A.S..
As a result, the total consideration transferred in connection with the business combination amounted to Euro 146,501 thousand, which is obtained by adding up the Closing Purchase Price of Euro 123,681 thousand, the price adjustment of Euro 2,373 thousand and the indebtedness of the Systèmes Moteurs Group for the amount of Euro 20,447 thousand repaid to previous shareholders. Such consideration was paid using available credit lines and cash and cash equivalents.
Acquisition-related cost directly connected with the transaction reflecting the fees of consultants who assisted the Holding Company Sogefi S.p.A. with the legal, financial and tax due diligence amounted to Euro 4,391 thousand and were charged to item "Other non-operating expenses (income)" of the income statement.
The assets and liabilities values of the Systèmes Moteurs Group were determined on a provisional basis, as certain evaluation procedures had not been completed at the time of preparing these financial statements.
In compliance with IFRS 3, a final determination of the fair value of assets, liabilities and potential liabilities will be completed within twelve months from acquisition-date.
The portion of the condideration transferred in excess of the fair value of assets and net liabilities acquired was recognised under goodwill for the provisional amount of Euro 54,919 thousand.
Goodwill is supported by the favourable outlook in terms of revenues and financial performance of the Systèmes Moteurs Group, as outlined in the strategic plan for 2012-2015 and confirmed by the results achieved so far.
The following table reports the provisional fair values of acquired assets and liabilities and details of goodwill on acquisition of control date, namely July 29, 2011:
(in thousands of Euro)
Cash and cash equivalents
Other financial assets
Other receivables (*)
|TOTAL CURRENT ASSETS||117,896|
Property, plant and equipment (*)
Other tangible fixed assets
Intangible assets (*)
|TOTAL FIXED ASSETS||56,489|
|OTHER NON-CURRENT ASSETS|
Investments in associates
Deferred tax assets (*)
|TOTAL OTHER NON-CURRENT ASSETS||2,744|
|TOTAL NON-CURRENT ASSETS||59,233|
|TOTAL ASSETS (A)||177,129|
Bank overdrafts and short-term loans
Current portion of medium/long-term financial debts and other loans
TOTAL SHORT-TERM FINANCIAL DEBTS
Other short-term liabilities for derivative financial instruments
TOTAL SHORT-TERM FINANCIAL DEBTS AND DERIVATIVE FIN. INSTUMENTS
Trade and other payables
Other current liabilities
|TOTAL CURRENT LIABILITIES||72,572|
|OTHER LONG-TERM LIABILITIES|
Long-term provisions (*)
Deferred tax liabilities (*)
|TOTAL OTHER LONG-TERM LIABILITIES||12,990|
|TOTAL NON-CURRENT LIABILITIES||12,990|
|TOTAL LIABILITIES (B)||85,562|
|Transferred consideration for the acquisition||146,501|
|Net asset acquired (A)-(B)||91,567|
|Transferred consideration for the acquisition (**)||146,501|
|Cash and cash equivalents owned by the purchased group (**)||(8,311)|
|CASH FLOW FOR THE ACQUISITION||138,190|
(*) Fair Value measuring of these items is provisional in December 31, 2011
(**) As in the Consolidated Cash Flows Satement.
The fair value of trade receivables amounts to Euro 48,193 thousand, and comprises a gross value of Euro 48,258 thousand and allowance for doubtful accounts for the amount of Euro 65 thousand.
The fair value of item “Inventories” includes Euro 803 thousand generated by the recognition of the margins on finished products, semi-finished products and work in progress (the so-called “inventory step-up”). The same amount was released in the income statement as of December 31, 2011, under item “Other non-operating expenses (income)” after the relating products were sold.
The fair value valuation of land and buildings is final.
The fair value valuation process for “Plant and equipment” and the other “Intangible assets” has not been completed yet.
Potential liabilities arising out of product warranty risks were booked at Euro 1,430 thousand (which account for the claims submitted by certain customers as of December 31, 2011). The full amount of such potential liabilities had been used as of December 31, 2011. We believe that the balance left after full or partial insurance compensation will be repaid by the seller of Systèmes Moteurs S.A.S.' shares. For this reason, this amount was credited to “Other receivables”.
The fair value valuation of these potential liabilities and “Other receivables” is provisional.
In 2011 the Systèmes Moteurs Group contributed a share of Euro 135,708 thousand to the Sogefi Group's revenues and a share of Euro 4,572 thousand to the profit of the period.
It should be noted that the companies of the Systèmes Moteurs Group – except for the Indian subsidiary – adopted the same year-end date as the other companies of the Sogefi Group for their statutory financial statements after the acquisition date (July 29, 2011), i.e. changed year-end date from February 28 to December 31 of each.
The following accounting policies have been applied in the financial statements as of December 31, 2011.
Cash and cash equivalents
Cash and cash equivalents are those held to meet short-term cash needs, rather than for investment or other purposes. For an investment to be considered as cash or cash equivalent, it must be able to be readily converted into a known amount of cash and must be subject to an insignificant risk of change in value.
Inventories are stated at the lower of purchase or manufacturing cost, determined on a weighted average cost basis, and realisable value based on market trends, net of variable selling costs.
Manufacturing cost includes raw materials and all direct or indirect
production-related expenses. Financial expenses are excluded. Obsolete and slow-moving inventories are written down to their utilisable or realisable value.
Receivables included in current assets
Receivables are initially recognised at fair value of the consideration to be received, which usually corresponds to the nominal value shown on the invoice, adjusted (if necessary) to their estimated realisable value by making provision for doubtful accounts. Subsequently, receivables are measured at amortised cost, which generally corresponds to their nominal value.
Receivables assigned through without-recourse factoring transactions after which the related risks and benefits are definitively transferred to the assignee are derecognised from the statement of financial position at the time of transfer.
Tangible fixed assets
Tangible fixed assets mainly relate to industrial sites. Assets are shown at historical cost, net of accumulated depreciation and accumulated impairment losses.
Cost includes related charges, together with the portion of direct and indirect expenses reasonably attributable to individual assets.
Tangible fixed assets are depreciated each month on a straight-line basis using rates that reflect the technical and economic remaining lives of the related assets.
The depreciable value is the cost of an asset, or any other value representing the cost, less its residual value, where the residual value of an asset is the estimated value that the entity could receive at that time from its disposal, net of estimated disposal costs.
Depreciation is calculated from the month that the asset becomes available for use, or when it is potentially able to provide the economic benefits expected of it.
The annual average depreciation rates applied are as follows:
|Industrial buildings and light constructions||2.5-12.5|
|Plant and machinery||7-14|
|Industrial and commercial equipment||10-25|
|Assets under construction||n.a.|
Land, assets under construction and payments on account are not depreciated.
Ordinary maintenance costs are charged to the Income Statement.
Maintenance costs that increase the value, functions or useful life of fixed assets are recorded directly as the increase in the value of the assets to which they refer and depreciated over their residual useful lives.
Gains or losses on the disposal of assets are calculated as the difference between the sales proceeds and the net book value of the asset and are charged to the Income Statement for the period.
Grants are shown in the Statement of Financial Position as an adjustment of the book value of the asset concerned. Grants are then recognised as income over the useful life of the asset by effectively reducing the depreciation charge each year.
Assets under lease
There are two types of leases: finance leases and operating leases.
A lease is considered a finance lease when it transfers a significant and substantial part of the risks and benefits associated with ownership of the asset to the lessee.
As envisaged in IAS 17, a lease is considered a finance lease when the following elements are present, either individually or in combination:
- the contract transfers ownership of the asset to the lessee at 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 such that it is reasonably certain, at the inception of the lease, that it will be exercised;
- the lease term is for the major part of the useful life of the asset, even if title is not transferred;
- at the inception of the lease, the present value of the minimum lease payments is equal to the fair value of the asset being leased;
- the assets being leased are of such a specialised nature that only the lessee is able to use them without making major modifications.
Assets available to Group companies under contracts that fall into the category of finance leases are accounted for as tangible fixed assets at their fair value at the date of purchase or, if lower, at the present value of the minimum payments due under the lease; the corresponding liabilities to the lessor are shown in the Statement of Financial Position as financial debts. The assets are depreciated over their estimated useful lives.
Lease payments are split between the principal portion, which is booked as a reduction of financial debts, and interest. Financial expenses are charged directly to the Income Statement for the period.
Payments under operating lease contracts, on the other hand, are charged to the Income Statement on a straight-line basis over the life of the contract.
An intangible asset is only recognised if it is identifiable and verifiable, it is probable that it will generate economic benefits in the future and its cost can be measured reliably.
Intangible assets with a finite life are valued at purchase or production cost, net of amortisation and accumulated impairment losses.
The annual average amortisation rates applied are as follows:
|Industrial patents and intellectual property rights, concessions, licences, trademarks||20-33|
|Assets under construction||n.a.|
Amortisation is based on the asset’s estimated useful life and begins when it is available for use.
Research and development expenses
Research expenses are charged to the income statement as incurred in accordance with IAS 38.
Development expenses relating to specific projects are capitalised when their future benefit is considered reasonably certain by virtue of a customer’s commitment; they are then amortised over the entire period of future profits expected to be earned by the project in question.
The capitalised value of the various projects is reviewed annually - or more frequently if there are particular reasons for doing so - analysing its fairness to see if there have been any impairment losses.
Trademarks and licences
Trademarks and licences are valued at cost, less amortisation and accumulated impairment losses. The cost is amortised over the shorter of the contract term and the finite useful life of the asset.
The costs of software licences, including related charges, are capitalised and shown in the financial statements net of amortisation and any accumulated impairment losses.
It should be pointed out that a multi-year project has been launched to implement a new integrated ITC system across the Group. Relating costs are capitalised by Holding Company Sogefi S.p.A., that will licence the intellectual property rights on the ITC system for use by the subsidiaries involved in the implementation process receiving the payment of royalty fees.
Goodwill resulting from business combinations is initially recognised at cost as at the acquisition-date, as detailed in the paragraph above entitled “Business combinations”. Goodwill is not amortised but is tested annually for impairment, or more frequently if specific events or changed circumstances indicate a potential loss in value. Unlike other intangible assets, reversal of an impairment loss is not allowed for goodwill.
For impairment test purposes, goodwill was allocated to each of the Cash Generating Units (CGU) due to benefit from the acquisition.
The Sogefi Group currently encompasses five CGUs: Engine Systems – Fluid Filters (previously name “Filters”), Engine Systems – Air Intake and Cooling (Systèmes Moteurs Group), Car Suspension, Industrial Vehicles Suspension and Precision Springs.
The goodwill currently on the books only concerns the Engine Systems – Fluid Filters, Engine Systems – Air Intake and Cooling and the Car Suspension CGUs.
Intangible assets with an indefinite useful life
Intangible assets with an indefinite useful life are not amortised, but are tested annually for impairment, or more frequently if there is an indication that the asset may have suffered a loss in value. As of December 31, 2011, the Group has no intangible assets with an indefinite useful life.
Impairment losses of tangible and intangible fixed assets
If there are indications of possible losses in value, tangible and intangible fixed assets are subjected to impairment test, estimating the asset's recoverable amount and comparing it with its net book value. If the recoverable amount is less than the book value, the latter is reduced accordingly. This reduction constitutes an impairment loss, which is booked to the income statement.
For goodwill and any other intangible fixed assets with indefinite life, impairment test is carried out at least once a year.
With the exception of goodwill, if a previous writedown is no longer justified, a new recoverable amount is estimated, providing it is not higher than what the carrying value would have been if the writedown had never been made. This reversal is also booked to the income statement.
Equity investments in associates and joint ventures
The results, assets and liabilities of associates and joint ventures are consolidated under the equity method.
Equity investments in other companies and other securities
In accordance with IAS 39, equity investments in entities other than subsidiaries and associates are classified as financial assets available for sale which are measured at fair value, except in situations where the market price or fair value cannot be determined. In this case the cost method is used.
Gains and losses deriving from value adjustments are booked to a specific item in “Profit (loss) booked in Other Comprehensive Income”. In the case of objective evidence that an asset suffered an impairment loss or it is sold, the gains and losses previously recognised under “Profit (loss) booked in Other Comprehensive Income” are reclassified to the Income Statement.
For a more complete discussion of the principles regarding financial assets, reference should be made to the note specifically prepared on this matter (paragraph 3 "Financial assets").
Non-current assets held for sale
Under IFRS 5 "Non-current assets held for sale and discontinued operations", providing the relevant requirements are met, non-current assets whose book value will be recovered principally by selling them rather than by using them on a continuous basis, have to be classified as being held for sale and valued at the lower of book value or fair value net of any selling costs. From the date they are classified as non-current assets held for sale, their depreciation is suspended.
Loans are initially recognised at cost, represented by the fair value received, net of related loan origination charges.
After initial recognition, loans are measured at amortised cost by applying the effective interest rate method.
The amortised cost is calculated taking account of issuing costs and any discount or premium envisaged at the time of settlement.
A derivative is understood as being any contract of a financial nature with the following characteristics:
- its value changes in relation to changes in an interest rate, the price of a financial instrument, the price of a commodity, the exchange rate of a foreign currency, a price or interest rate index, a credit rating or any other pre-established underlying variable;
- it does not require an initial net investment or, if required, this is less than what would be requested for other types of contract likely to provide a similar reaction to changes in market factors;
- it will be settled at some future date.
For accounting purposes, a derivative’s treatment depends on whether it is speculative in nature or whether it can be considered an hedging instrument.
All derivatives are initially recognised in the Statement of Financial Position at cost as this represents their fair value. Subsequently, all derivatives are measured at fair value.
Any changes in the fair value of derivatives that are not designated as hedging instruments are booked to the Income Statement (under the item “Financial expenses (income), net”).
Derivatives that can be booked under the hedge accounting are classified as:
- fair value hedges if they are meant to cover the risk of changes in the market value of the underlying assets or liabilities;
- cash flow hedges if they are taken out to hedge the risk of fluctuations in the cash flows deriving from an existing asset or liability, or from a future transaction that is highly probable.
For derivatives classified as fair value hedges, the gains and losses that arise on determining their fair value and the gains and losses that derive from adjusting the underlying hedged items to their fair value are booked to the Income Statement.
For those classified as cash flow hedges, used for example, to hedge medium/long-term loans at floating rates, gains and losses that arise from their valuation at fair value are booked directly to Equity for the part that effectively hedges the risk for which they were taken out, whereas any part that proves ineffective is booked to the Income Statement (under the item “Financial expenses (income), net”).
The portion booked to Equity will be reclassified to the Income Statement (under the item “Financial expenses (income), net” in the period) when the hedged assets and liabilities impact the costs and revenues of the period.
Note that the Group has adopted a specific procedure for managing financial instruments as part of an overall risk management policy.
Trade and other payables
Payables are initially recognised at fair value of the consideration to be paid and subsequently at amortised cost, which generally corresponds to their nominal value.
Provisions for risks and charges
Provisions for risks and charges are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resource embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.
On the other hand, no provision is made in the case of risks for which there is only a possibility that a liability may arise. In this case, the risk is disclosed in the notes on commitments and risks without making any provision.
Provisions relating to corporate reorganizations are only set aside once they have been approved and raised a valid expectation to the parties involved.
Post-retirement and similar employee benefits
Group employees have defined-benefit and/or defined-contribution pension plans, depending on the conditions and local practices of the countries in which the group operates.
The Group’s responsibility is to finance the pension funds for the defined-benefit plans (including the employment termination indemnities currently applicable in Italy) and the annual cost recognised in the income statement are calculated on the basis of actuarial valuations that use the projected unit credit method. The part of the accumulated net value of actuarial profits and losses in excess of the higher between 10% of the present value of the defined-benefit obligation and 10% of the fair value of plan assets at the end of the previous reporting period is amortised over the average residual working life of the employees (“corridor approach”). On first-time adoption of IFRS, the Group decided to record all accumulated actuarial profits and losses existing on January 1, 2004, even though it had chosen to use the corridor approach for subsequent actuarial profits and losses.
The liability relating to benefits to be recognised on termination of employment recorded in the statement of financial position represents the present value of the defined-benefit obligation, adjusted by the actuarial profits and losses suspended in application of the corridor approach and by costs relating to past service to be recognised in future years, less the fair value of the plan assets. Any net assets determined using this calculation method are recognised as the lowest of their value and the sum of unrecognised net actuarial losses, the cost of past service to be recognised in future years, the present value of available repayments and reductions of future contribution to the plan.
In the event of an amendment to the plan that changes the benefits relating to past service or in the event of the application of a new plan relating to past service, the costs relating to past service are booked to the income statement on a straight-line basis for the average period until such time as said benefits are acquired. In the event of an amendment to the plan that significantly reduces the number of employees involved in the plan or that changes the clauses of the plan in such a way that a significant part of future service due to employees will no longer accrue the same benefits or will accrue them but to a lesser extent, the profit or loss relating to said reduction is immediately booked to the income statement.
All of the costs and income resulting from the measurement of funds for pension plans are booked to the income statement by functional area of destination, with the exception of the financial component relating to non-financed defined-benefit plans, which is included in Financial expenses.
The costs relating to defined-contribution plans are booked to the income statement when incurred.
Phantom stock options
With regard to phantom stock option plans, as envisaged by IFRS 2, in the section regarding “Cash-settled share-based payment transactions”, the fair value of the plan at the date of the financial statements is remeasured, with any changes in fair value recognised to the Income Statement as a cost with a corresponding entry to a provision.
Stock-based incentive plans
With regard to “Stock-based incentive plans“ (Stock options and Stock grants), as envisaged by IFRS 2 “Share-based payments”, the Group calculates the fair value of the option at the granting date, booking it to the Income Statement as a cost over the vesting period of the benefit. Given that this is an eminently imputed element, the ad hoc equity reserve in the Statement of Financial Position has been increased. This imputed cost is measured by specialists with the help of suitable economic and actuarial models.
Deferred taxes are calculated on the temporary differences between the book value of assets and liabilities and their tax bases, and classified under non-current assets and liabilities.
Deferred tax assets are accounted for only to the extent that it is probable that sufficient taxable profits will be available in the future against which they can be utilised.
The carrying amount of the deferred tax assets shown in the financial statements is subject to an annual review.
Deferred tax assets and liabilities are calculated at the tax rates expected to apply in the period when the differences reverse under the law of the countries in which the Group operates, considering current rates and those enacted or substantially enacted at the end of the reporting period.
Participation in CIR’s group tax filing system (applicable to Italian companies)
Each company jointing to the group Italian tax filing system transfers its tax profit or loss to the parent company. The parent company recognises a credit corresponding to the IRES (Italian tax on company income) that companies have to be paid. On the contrary, for companies that booked tax losses, the parent company recognises a debt corresponding to the IRES for the part of loss actually offset at group level.
Treasury shares are deducted from the equity. The original cost of treasury shares and the profit resulting from their subsequent sales are recognised as changes in equity.
Revenues from the sale of products are recognised at the time ownership passes (time of risks and rewards transfer), which is generally upon shipment to the customer. They are shown net of returns, discounts and accruals.
Revenues from services rendered are recognised at the time the services are provided.
Variable cost of sales
This represents the cost of goods sold. It includes the cost of raw and ancillary materials and goods for resale, as well as variable manufacturing and distribution costs, including the direct labour cost of production.
Manufacturing and R&D overheads
This category includes manufacturing overheads such as indirect labour cost of production, maintenance costs, consumable materials, building rents, and industrial equipment involved in production.
Also included are all R&D overheads, net of any development costs that are capitalised because of their future benefits and excluding amortisation which is booked to a separate item in the Income Statement.
Distribution and sales fixed expenses
These are costs that are essentially insensitive to changes in sales volumes, relating to personnel, promotion and advertising, external warehousing, rentals and other sales and distribution activities. This category, therefore, includes all fixed costs identified as being incurred after finished products have been stocked in the warehouse and directly related to their sale and distribution.
Administrative and general expenses
This category includes fixed labour costs, telephone expenses, legal and tax consulting fees, rents and rentals, cleaning, security and other general expenses.
These are credited to the Income Statement when there is a reasonable certainty that the company will meet the conditions for obtaining the grant and that the grants will therefore be received.
Restructuring costs and other non-operating expenses/income
These are figures that do not relate to the Group's normal business activities or refer to non-recurring activities and are classified as ordinary items and disclosed in the notes if they are of a significant amount.
The non-recurring nature of restructuring costs makes it appropriate for them to be disclosed separately, booking them in such a way that does not affect the operating result deriving from the Group's normal business activities.
Dividend income is recorded when the right to receive it arises. This is normally at the time of the shareholders' resolution that approves distribution of the dividends.
Dividends to be distributed are recognised as a payable to shareholders immediately after they have been approved.
Current taxes are booked on the basis of a realistic estimate of taxable income calculated according to current tax legislation in the country concerned, taking account of any exemptions and tax credits that may be due..
Earnings per share (EPS)
Basic EPS is calculated by dividing net result for the period attributable to the ordinary shareholders of the Holding Company by the weighted average number of ordinary shares outstanding during the period, net of treasury shares.
Diluted EPS is obtained by adjusting the weighted average number of shares outstanding to take account of all potential ordinary shares that could have a dilutive effect.
Translation of foreign currency items
Group companies prepare their financial statements in the local currency of the country concerned.
The functional currency of the Parent is the Euro and this is the presentation currency in which the consolidated financial statements are prepared and published.
Accounting for foreign currency transactions
Foreign currency transactions are initially translated at the exchange rate ruling on the transaction date.
At the end of the reporting period, monetary assets and liabilities expressed in foreign currency are retranslated at the period-end exchange rate.
Non-monetary foreign currency items valued at historical cost are translated at the exchange rate ruling on the transaction date.
Non-monetary items carried at fair value are translated at the exchange rate ruling on the date this value was determined.
Critical estimates and assumptions
Various estimates and assumptions regarding the future have to be made when preparing financial statements. They are the best estimates possible at the end of the reporting period. Given their nature, they could lead to a material difference in statement of financial position items in future years. The main items affected by these estimates are as follows:
- goodwill: for the purpose of the consolidated financial statements as of December 31, 2011 and more specifically of the impairment test, the Group took into account the trends expected for 2012 as determined based on the budget and the forecasts included in the 2013-2015 strategic plan for the following years. Budget and plan were prepared based on conservative assumptions and considering the uncertain economic and financial scenario that characterised the final part of the year 2011. Such forecasts do not indicate a need for impairment;
- pension plans: actuaries who offer their consulting services to the Group use different statistic assumptions in order to anticipate future events for the purpose of estimating pension plan expenses, liabilities and assets. Such assumptions concern discount rate, expected return on pension plan assets (this particular assumption concerns nearly exclusively British pension funds), future wage inflation rates, mortality and turnover rates;
- probability of recovering deferred tax assets for tax losses: as of December 31, 2011, deferred tax assets for tax losses incurred during the year under consideration or previous years were accounted for to the extent that it is probable that taxable income will be available in the future against which they can be utilised. Such probability is determined based on the fact that losses have originated under extraordinary circumstances that are unlikely to occur again.
Adoption of new accounting standards
Accounting standards, amendments and interpretations adopted from January 1, 2011
The following accounting standards were first adopted by the Group starting January 1, 2011.
On November 4, 2009, the IASB issued a revised version of IAS 24 - Related party disclosures that simplifies the disclosure requirements for government-related entities and clarifies the definition of a related party. Adoption of this amendment had no effects on the measurement on the Group’s financial statements or for the purposes of the Related party disclosures included in this Annual Financial Report
Accounting standards, amendments and interpretations effective from January 1, 2011 not applicable to the Group
The following amendments, improvements and interpretations effective from January 1, 2011 relate to issues not applicable within the Group on the date of this Annual Financial Report but may affect the accounting of future transactions or agreements:
- Amendment to IAS 32 – Financial instruments: Presentation: Classification of rights issued;
- Amendment to IFRIC 14 – Prepayments of a minimum funding requirements;
- IFRIC 19 – Extinguishing financial liabilities with equity instruments;
- Improvements to IAS/IFRS (2010).
Accounting standards and amendments not yet applicable and not early adopted by the Group
On November 12, 2009, the IASB issued IFRS 9 – Financial instruments; the same standard was amended on October 28, 2010. The standard, which is to be applied retrospectively from January 1, 2015, represents the first phase of a process in stages, the aim of which is to entirely replace IAS 39 and introduces new requirements for the classification and measurement of financial assets and financial liabilities and for the derecognition of financial assets. In particular, as regards financial assets, the new standard adopts a single approach based on how an entity manages its financial instruments and the contractual cash flows characteristics of the financial assets, in order to determine its valuation criteria and replacing the many different rules in IAS 39. The most significant effect of the standard regarding the financial liabilities relates to the accounting for changes in fair value attributable to changes in the credit risk of financial liabilities designated as at fair value through profit or loss. According to the new standard, these changes must be recognised under Other comprehensive income and will no longer be reclassified to Income Statement.
On December 20, 2010, the IASB issued a minor amendment to IFRS 1 – First-time Adoption of International Financial Reporting Standards (IFRS), to eliminate references to January 1, 2004 as the date of transition to IFRS's and provide guidance on how to present financial statements in accordance with IFRS after a period of hyperinflation. These amendments are to be applied for annual periods beginning on or after July 1, 2011.
On December 20, 2010, the IASB issued a minor amendment to IAS 12 – Income Taxes that requires an entity to measure the deferred tax relating to an asset depending on how the entity expects to recover the carrying amount of the asset (through continued use or sale). As a result of this amendment, SIC-21 Income Taxes – Recovery of Revalued Non-Depreciable Assets will no longer apply. This amendment is to be applied retrospectively beginning on or after January 1, 2012.
On May 12, 2011, the IASB issued IFRS 10 – Consolidated Financial Statements that is to supersede SIC-12 Consolidation – Special Purpose Entities (Special Purpose Vehicles) and parts of IAS 27 – Consolidated and Separate Financial Statements, which will be renamed Separate financial statements and shall establish how equity investments are to be accounted for in separate financial statements. This new standard is based on existing standards and introduces a new definition of control that determines which entities are to be consolidated in the consolidated financial statements of the parent. It also provides guidance on how to determine whether an investor controls its investee where control analysis is difficult (de facto control, potential voting rights, special purpose entities, etc.). This standard is to be applied retrospectively beginning on or after January 1, 2013.
On May 12, 2011, the IASB issued IFRS 11 – Joint Arrangements that is to replace IAS 31 – Interests in Joint Ventures and SIC-13 Jointly-controlled Entities — Non-monetary Contributions by Venturers. The new standard establishes criteria for identifying joint arrangements based on the rights and obligations arising out of agreements rather than their legal form and provides a single model to account for interests in joint ventures [according to the new definition established by IFRS 11] in the consolidated financial statements using the equity method. This standard is to be applied retrospectively beginning on or after January 1, 2013. After this standard was issued, IAS 28 – Investments in Associates was amended to include interests in joint ventures in its scope of application, as of the effective date of the new standard.
On May 12, 2011, IASB issued IFRS 12 – Disclosure of interests in other entities, a new standard that includes all of the disclosure requirements for subsidiaries, joint arrangements, associates, special purpose entities and other non-consolidated special purpose vehicles. This standard is to be applied retrospectively beginning on or after January 1, 2013.
On May 12, 2011, IASB issued IFRS 13 – Fair Value Measurement that explains clearly how to measure fair value for the purposes of statutory financial statements and is applicable to all IFRSs that require or allow fair value measurements or disclosures based on fair value. This standard is to be applied for annual periods beginning on or after January 1, 2013.
On June 16, 2011, IASB issued an amendment to IAS 1 – Presentation of Financial Statements requiring entities to group all items presented in Other Comprehensive Income depending on whether they can be reclassified to profit or loss. This amendment is effective for periods beginning on or after July 1, 2012.
On June 16, 2011, IASB issued an amendment to IAS 19 – Employee Benefits that eliminates the option to defer recognition of actuarial gains and losses using the corridor approach, and requires that surplus or deficit be presented in full in the statement of financial position, service cost and net interest cost be recognised separately in the income statement, and actuarial gains and losses arising out the remeasurement of assets and liabilities occurred during each year be booked to Other comprehensive income. In addition, the return on assets included in net financial expenses must be calculated using the discount rate used to measure the obligation. Expected return on assets will no longer be used for this calculation. Finally, the amendment introduces new disclosures to be presented in the notes to the financial statements. This amendment is effective for the year beginning on January 1, 2013 and is applied retrospectively.
On December 16, 2011, the IASB issued an amendment to IAS 32 - Financial instruments: Presentation and to IFRS 7 - Financial Instruments: Disclosures establishing the (offsetting) criteria for financial assets and liabilities. IASB clarified that the right to set-off is enforceable at the end of the reporting period and not contingent on a future event; in addition, such right is enforceable for all counterparties both in the normal course of business and in the event of insolvency or bankruptcy (depending on specific laws governing the agreement between the parties and applicable bankruptcy laws). The amendments to IFRS 7 concerned disclosures on financial (derivatives) instruments subject to enforceable master netting arrangements or similar arrangements even when they are not offset according to the provisions of IAS 32. The amendments to disclosures on the offsetting of financial instruments are effective for the year beginning on January 1, 2013 (comparative disclosures apply retrospectively).
At the date of this Annual Financial Report, the European Union has not yet completed the homologation process needed for the adoption of the amendments and standards outlined above.
On October 7, 2010, the IASB issued several amendments to IFRS 7 – Financial instruments: Disclosures effective for accounting periods beginning on or after July 1, 2011. The amendments were released in order to provide better understanding of transfers of financial assets (derecognition), and of the possible effects deriving from any risk that may remain with the entity that transferred the assets. The amendments also require additional disclosures in the event that a disproportionate amount of such transfer transactions occurs near the end of a reporting period. Application of this amendment will not have any effects on the measurement on the Group’s financial statements.