Notes on the main items of the statement of financial position


 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

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. Receivables assigned through recourse factoring transactions are not derecognised.

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:

  %
Land n.a.
Industrial buildings and light constructions 2.5-12.5
Plant and machinery 7-14
Industrial and commercial equipment 10-25
Other assets 10-33
Assets under construction n.a.

Land, assets under construction and payments on account are not depreciated.

Ordinary maintenance costs are charged to the Consolidated 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 Consolidated 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 Consolidated 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 Consolidated 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.

Intangible assets

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:

  %
Development costs 20-33
Industrial patents and intellectual property rights, concessions, licences, trademarks 10-33
Customer relationship 5
Trade name 5
Software 10-50
Other 20-33
Goodwill n,a,
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 Consolidated 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.

Customer Relationship
Customer relationship represents the value of the Systemes Moteurs Group's customer portfolio measured at the acquisition date, as determined during the Purchase Price Allocation process.

Brand name
Brand name represents the value of the "Systemes Moteurs" brand name measured at the acquisition date as determined during the Purchase Price Allocation process.

Software
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 in 2011 to implement a new integrated IT system across the Group. Relating costs are capitalised by Holding Company Sogefi S.p.A., that will licence the intellectual property rights on the IT system for use by the subsidiaries involved in the implementation process receiving the payment of royalty fees. The useful life of the fixed asset is estimated in 10 years and amortisation begins when implementation at the site of each individual subsidiary is completed.

Goodwill
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 named “Filters”), Engine Systems – Air Intake and Cooling (Systemes Moteurs Group), Car Suspension, Industrial Vehicles Suspension and Precision Springs.
The goodwill currently on the books only concerns the following CGUs: Engine Systems – Fluid Filters, Engine Systems – Air Intake and Cooling and Car Suspension.

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, 2013, 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 useful 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 other companies and other securities

In accordance with IAS 39, equity investments in entities other than subsidiaries, joint ventures 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 reliably determined. In this case the cost method is used.
Gains and losses deriving from changes in fair values are booked to a specific item 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 “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

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.

Derivatives

A derivative is understood as being any contract of a financial nature with the following characteristics:

  1. 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;
  2. 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;
  3. 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 Consolidated 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 Consolidated Income Statement (under the item “Financial expenses (income), net”).

Derivatives that can be booked under the hedge accounting are classified as:

  • fair value hedge if they are meant to cover the risk of changes in the market value of the underlying assets or liabilities;
  • cash flow hedge 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 Consolidated 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 Other Comprehensive Income for the part that effectively hedges the risk for which they were taken out. The portion booked to Other Comprehensive Income will be reclassified to the Consolidated 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.

When the hedge of the instrument is determined to be ineffective, the hedging relationship is discontinued and the following amounts are booked to the Consolidated Income Statement (under the item “Financial expenses (income), net”):

  • the change in fair value of the hedging instrument, since the date when the hedging relationship was last proved to be effective is immediately recognised in the Income Statement;
  • the reserve previously booked to Other Comprehensive Income is recognised in the Income Statement over the same period of time over which underlying hedged item affects the Income Statement.

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 risk 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 Consolidated Income Statement are calculated on the basis of actuarial valuations that use the projected unit credit method.

The liability relating to benefits to be recognised on termination of employment recorded in the Consolidated Statement of Financial Position represents the present value of the defined-benefit obligation, less the fair value of the plan assets. Any net assets determined are recognised at the lowest of their value and the present value of available repayments and reductions of future contribution to the plan.

Pursuant to the amendments to IAS 19 “Employee Benefits” effective as of January 1, 2013, the Group recognises actuarial gains and losses immediately to “Other Comprehensive Income”, so that the full amount of the provisions for the defined benefits (net of plan assets) is recognised in the consolidated financial position. The amendments further require any changes in the defined benefit provision value and plan assets value in respect of the previous period to be categorised into three components: the cost components of work performed during the reporting period must be recognised in the Consolidated Income Statement as service costs; net interest costs calculated by applying the appropriate discount rate to the opening balance of defined benefit provision net of assets must be booked to the Consolidated Income Statement as net financial expenses and the actuarial gains and losses resulting from the remeasurement of assets and liabilities must be booked to “Other comprehensive income”. In addition, the return on assets included in net interest costs must be calculated using the discount rate applicable to liabilities and no longer the expected return on the assets.

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 (under service costs). 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 gains or losses relating to said
reduction is immediately booked to the Consolidated Income Statement (under service costs).

All of the costs and income resulting from the measurement of funds for pension plans are presented in 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 Consolidated Income Statement when incurred.

In accordance with IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”, the amendments were applied retrospectively adjusting Shareholders' equity as at December 31, 2012 for the amount of Euro 15,038 thousand (net of tax effect) and income statement as at December 31, 2012 for the amount of Euro 1,079 thousand (net of tax effect). Impact as at January 1, 2012 was Euro 11,631 thousand (net of tax effect).

(in thousands of Euro) January 1, 2012 January 1, 2012
restated
Variance
OTHER NON-CURRENT ASSETS      

Other receivables

14,102 2,161 (11,941)

Deferred tax assets

48,637 49,111 474
TOTAL ASSETS 1,036,161 1,024,694 (11,467)
OTHER LONG-TERM LIABILITIES      

Long-term provisions

70,595 73,505 2,910

Deferred tax liabilities

44,838 42,092 (2,746)
TOTAL LIABILITIES 821,959 822,123 164
SHAREHOLDERS' EQUITY      

Reserves and retained earnings (accumulated losses)

110,515 98,884 (11,631)

Group net result for the period

24,046 24,046 -
TOTAL SHAREHOLDERS' EQUITY 214,202 202,571 (11,631)
(in thousands of Euro) December 31,
2012
December 31,
2012  restated
Variance
OTHER NON-CURRENT ASSETS      

Other receivables

17,022 6,789 (10,233)

Deferred tax assets

57,530 60,178 2,648
TOTAL ASSETS 1,022,295 1,014,710 (7,585)
OTHER LONG-TERM LIABILITIES      

Long-term provisions

70,869 80,676 9,807

Deferred tax liabilities

43,648 41,294 (2,354)
TOTAL LIABILITIES 807,000 814,453 7,453
SHAREHOLDERS' EQUITY      

Reserves and retained earnings (accumulated losses)

105,421 91,462 (13,959)

Group net result for the period

29,325 28,246 (1,079)
TOTAL SHAREHOLDERS' EQUITY 215,295 200,257 (15,038)
(in thousands of Euro) December 31,
2012
December 31,
2012 restated
Variance
CONSOLIDATED INCOME STATEMENT      

Variable cost of sales

927,302 927,396 94

Distribution and sales fixed expenses

39,267 39,279 12

Administrative and general expenses

71,883 72,005 122

Other non-operating expenses (income)

24,696 23,845 (851)

Financial expenses (income), net

16,474 18,537 2,063

Income taxes

13,771 13,410 (361)
TOTAL GROUP NET RESULT 1,093,393 1,094,472 1,079
(in thousands of Euro) December 31,
2012
December 31,
2012 restated
Variance
CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME      

Net result before non-controlling interests

32,530 31,451 (1,079)

Actuarial gains (losses)

- (3,370) (3,370)

Tax effect on the items that will not be reclassified to income statement

- 1.335 1,335

Profit (loss) booked to translation reserve

(10,556) (10,849) (293)
TOTAL GROUP COMPREHENSIVE RESULT 21,974 18,567 (3,407)
  December 31,
2012
December 31,
2012 restated
Variance
EARNINGS PER SHARE (EPS) (Euro)      
Basic 0.260 0.250 (0.010)
Diluited 0.259 0.249 (0.010)

Other long-term benefits
Other long-term employee benefits relate to the French subsidiaries and include “Jubilee or other long-service benefits” that are not expected to be paid fully within the twelve months following the end of the reporting period during which the employee has rendered service for those benefits.

The valuation of other long-term benefits usually does not present the same degree of uncertainty as post-employment benefits. This is why IAS 19 requires a simplified method of accounting for such benefits. Unlike the accounting method required for post-employment benefits, this method (which requires actuarial valuation) does not require discounting effects to be taken to “Other Comprehensive Income”.

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 with a corresponding entry to a provision.

Share-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 Consolidated 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 Consolidated Statement of Financial Position has been increased. This imputed cost is measured by specialists with the help of suitable economic and actuarial models.

Deferred taxation

Deferred taxes are calculated on the temporary differences between the booked 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.
Current and deferred taxes are recognised in the Consolidated Income Statement, except for those relating to items directly charged or credited to Other Comprehensive Income or other equity items, in which case tax effect is recognised directly under Other comprehensive income or equity.

Participation in CIR's group tax filing system (applicable to Italian companies)

Each company participating 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 (debit for the transferor company). 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 (credit for the transferor company).
In connection with the Group tax filing system, those companies that record non-deductible net financial expenses may use the excess tax benefits available for offset of other Group companies (thus making such expenses deductible) for a consideration. Such consideration, in an amount proportionate to the resulting tax benefit and applicable to excess tax benefits arising in Italy only, has been paid to the parent company CIR and is treated as expense for those companies that obtain the excess tax benefit and as revenue for those that transfer it.

Treasury shares

Treasury shares are deducted from equity. The original cost of treasury shares and the profit/loss resulting from their subsequent sales are recognised as changes in equity.

Revenues recognition

Revenues from the sale of products are recognised at the time ownership passes (time of risks and benefits transfer), which is generally upon shipment to the customer. They are shown net of returns, discounts and allowance.
The proceeds from the sale of tooling to customers can be recognised as follows:

  1. the full amount is recognised at the time risks and benefits of the tooling are transferred (if said transfer is deferred, margin is booked to “Other current liabilities”);
  2. the amount is recognised by means of an increase of the sales price of the products manufactured using the relevant tooling, throughout a variable time frame depending on the number of products sold (in this case the unrealised value of the tooling is booked to “Inventory – Contract work in progress and advances”).

Revenues from services rendered are recognised at the time the services are provided.

Income Statement Presentation

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 Consolidated 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.

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 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, posting them in such a way that does not affect the operating result deriving from the Group's normal business activities.

Operating grants

These are credited to the Consolidated 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.

Dividends

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

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. Diluited 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

Functional currency
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 the Consolidated 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 the Consolidated Statement of Financial Position items in future years. The main items affected by these estimates are as follows:

  • goodwill – impairment test: for the purpose of determining the value in use of the Cash Generating Units, the Group took into account the trends expected for 2014 as determined based on the budget and the forecasts included in the 2015-2017 strategic plan for the following years (adjusted to eliminate any estimated benefits from future projects and reorganisations). Budget and plan were prepared in line with forecasts for the automotive industry made available by the industry’s most important sources. 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, future rates of salary increase, mortality and turnover rates;
  • recoverability of deferred tax assets on tax losses: as of December 31, 2013, deferred tax assets on tax losses incurred in the year or during 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 also determined based on the fact that such losses have originated under extraordinary circumstances that are unlikely to occur again in the future and that these assets could be recovered throughout an unlimited or long-term time frame;
  • derivatives: the fair value of derivatives was estimated with the help of third-party consultants based on assessment models in accordance with industry practice, in compliance with the new requirements of IFRS 13 (calculation of DVA- Debit valuation adjustment);
  • Provision for product warranties/Other non-current receivables: please note that the determination of the fair value of assets and liabilities arising from the acquisition of Systèmes Moteurs S.A.S. in 2011 had led to the recognition of assets and liabilities in connection with:
    • liabilities booked to long-term provisions for the fair value of potential liabilities connected with warranty risks;
    • other receivables, which represent the estimated amount left after full or partial insurance compensation and indemnities paid by suppliers that will be repaid by the seller of Systèmes Moteurs S.A.S.' shares.
      In order to evaluate said items, the Group considered all information and assumptions available on reporting date referred to the settlement status of any claims payable to automotive manufacturers involved and the indemnity process (i.e. claims receivables, status of international arbitration proceedings against seller, etc.). Closing time of said disputes cannot be estimated so far.

Adoption of new accounting standards

IFRS accounting standards, amendments and interpretations applicable since Janury 1, 2013

The following accounting standards, amendments and interpretations were first adopted by the Group starting January 1, 2013:

  • On May 12, 2011, IASB issued IFRS 13 – Fair value measurement, clarifying the measurement of the fair value for the purpose of the financial statement and applying to all situations in which IFRS permit or require a fair value measurement or the presentation of disclosures based on fair value, with some limited exceptions. In addition, this standard requires more detailed information to be disclosed on fair value measurement (fair value hierarchy) compared to IFRS 7 requirements. The standard has been effective prospectively since January 1, 2013. The adoption of this principle had an effect of approximately Euro 964 thousand on the fair value evaluation of the Group's derivative liabilities (due to the inclusion of the debt valuation adjustment component) before the related tax effect.
  • On June 16, 2011, IASB issued amendments to IAS 19 – Employee benefits that eliminate the option to defer the recognition of actuarial gains and losses, known as the “corridor method”, and require all actuarial gains and losses to be booked to “Other comprehensive income” immediately, so that the full net amount of the provisions for the defined benefits (net of plan assets) is recognised in the Consolidated Financial Position. The amendments further require any changes in the defined benefit provision and plan assets over the previous period to be subdivided into three components: the cost components of work performed during the reporting period must be recognised in the Consolidated Income Statement as service costs; net interest costs, calculated by applying the appropriate discount rate to the opening net balance of defined benefit provision net of assets, must be booked to Consolidated Income Statement as net financial expenses and the actuarial gains and losses, resulting from the remeasurement of assets and liabilities, must be booked to “Other Comprehensive Income”. In addition, the return on assets included in net interest costs must be calculated using the discount rate applicable to liabilities and no longer the expected return on the assets. The amendments also introduce the requirement for supplementary disclosures to be provided in the notes. The amendment is applicable retrospectively from financial periods beginning on or after January 1, 2013.
    The effects of the adoption of the new principle on the Group's Consolidated financial statements are outlined at paragraph “2.3 Accounting policies”.
  • 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 the Income Statement. The amendment is applicable from financial periods beginning on or after July 1, 2012. The amendment adoption required a new layout of "Other comprehensive income".
  • On December 16, 2011, IASB issued certain amendments to IFRS 7 – Financial instruments: Disclosures. The amendments require information about the effect or potential effect of offsetting financial assets and liabilities on an entity's financial position. These amendments are to be applied retrospectively for periods beginning on or after January 1, 2013. The required disclosures should be provided retrospectively. The adoption of these amendments has had no effect on these Group Consolidated Financial Statements.
  • On May 17, 2012 IASB published document Annual Improvements to IFRSs: 2009-2011 Cycle, amending standards as part of the annual improvement process, which is designed to make necessary, but not urgent, amendments to IFRSs. Outlined below are those amendments that impact the presentation, recognition and measurement of the items of the Consolidated Financial Statements. Those related to changes in new terminology having minimal accounting impacts, or those that concern standards or interpretations not applicable to the Group have been omitted:
    • IAS 1 Presentation of Financial Statements – Comparative information: clarifies that any additional comparative information provided must be presented in accordance with IAS/IFRS. It also clarifies that when an entity changes an accounting principle or makes adjustments/restatements retrospectively, it must include an opening statement of financial position at the beginning of the comparative period (“third statements of financial position” in the financial statements); related disclosures are not required for such “third statements of financial position”, except for the affected items, in the supporting notes.
    • IAS 16 Property, Plant and Equipment – Classification of servicing equipment: clarifies that servicing equipment must be classified under Property, plant and equipment if used during more than one accounting period. Otherwise, they must be classified as inventory.
    • IAS 32 Financial Instruments: Presentation – Taxes relating to distributions to holders of an equity instrument and transaction costs on equity transaction: clarifies that such income taxes are accounted according to IAS 12.
    • IAS 34 Interim Financial Reporting – Total assets for a reportable segment: clarifies that total assets must be disclosed only if such information is regularly provided to the chief operating decision maker of the entity and there has been a material change from the amounts disclosed in the last annual financial statements for the reportable segment.

The proposed amendments are effective for the years beginning on or after January 1, 2013. Early adoption is allowed. The adoption of these amendments has had no effect on measurements and had limited effect in terms of disclosures on the Group Consolidated Financial Statements of the Company.

IFRS and IFRIC accounting standards, amendments and interpretations approved by the European Union but not yet applicable and not early adopted by the Group

  • On May 12, 2011, 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 will establish how equity investments are to be accounted for in the Separate financial statements. The key changes introduced by this new principle are as follows:
    • under IFRS 10, all types of entities are to be consolidated according to a single basic principle, i.e. the principle of control. The changes introduced remove the perceived inconsistency between the former IAS 27 (based on control) and SIC 12 (based on the transfer of risk and benefits);
    • a more detailed definition of control has been introduced, based on three elements: (a) power over the investee; (b) exposure, or rights, to variable returns from the investor's involvement with the investee; (c) ability on the part of the investor to use its power over the investee to affect the amount of the investor’s returns;
    • for the purpose of determining whether an investor has control over an investee, IFRS 10 requires investor to focus on the activities that significantly affect the investee's return;
    • for the purpose of determining whether an investor has control over an investee, IFRS 10 requires that only substantive rights to be considered, i.e. those rights that can be exercised when significant decisions need to be taken concerning the investee;
    • IFRS 10 provides application guidance on evaluating whether control exists in complex situations, such as de facto control, potential voting rights, situations in which it is necessary to assess whether the decision-maker is acting as a principal or an agent, etc.

Generally speaking, IFRS 10 application requires significant insight on a certain number of application issues.
This standard is to be applied retrospectively from January 1, 2014. The adoption of this new principle will have no impact on the scope of consolidation of the Group.

  • On May 12, 2011, 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. Without prejudice to the criteria for determining joint control, the new standard provides criteria for the accounting of joint arrangements that focus on the rights and obligations of the arrangement, rather than its legal form and requires a single method to account for interests in jointly-controlled entities in the Consolidated Financial Statements, the equity method. According to IFRS 11, the existence of a separate vehicle alone is not sufficient to classify a joint arrangement as a joint venture. This new standard is to be applied retrospectively from January 1, 2014. 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. The adoption of this new principle will have no impact on the Consolidated Financial Statements of the Group.
  • 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 to be stated in the Consolidated Financial Statements. This standard is to be applied retrospectively from January 1, 2014. The adoption of this new principle will have effects in terms of disclosures within the Consolidated Financial Statements.
  • On December 16, 2011, IASB issued certain amendments to IAS 32 – Financial Instruments: presentation to clarify the application of certain offsetting criteria for financial assets and financial liabilities in IAS 32. These amendments are to be applied retrospectively for periods beginning on or after January 1, 2014. The adoption of this new principle will have no impact on Consolidated Financial Statements of the Group.
  • On June 28, 2012, IASB published document Consolidated Financial Statements, Joint Arrangements, and Disclosure of Interests in Other Entities: Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12). The purpose of this document is to clarify the transition rules in IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities. These amendments have been applied - along with the reference standards - for years beginning on January 1, 2014, unless adopted earlier.
  • The amendments to IFRS 10, IFRS 12 and IAS 27 “Investment Entities” issued on October 31, 2012 introduce an exemption from the consolidation of subsidiaries for investment entities, unless the investees provide them with services related to their investment activities. Under these amendments, an investment entity must measure its investment in subsidiaries on a fair value basis. In order to qualify as investment entity, an entity must:
    • obtain funds from one or more investors for the purpose of providing them with professional investment management services;
    • commit to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income or both;
    • measure and evaluate the performance of substantially all of its investments on a fair value basis.

These amendments are to be applied - along with the reference standards - for years beginning on January 1, 2014, unless adopted earlier.

  • On May 29, 2013, IASB issued some amendments to IAS 36 Impairment of Assets – Recoverable amount disclosures for non-financial assets. These amendments clarify that the additional disclosures on the recoverable amount of assets (including goodwill) or cash-generating units when such recoverable amount is based on fair value less costs of disposal, are only required for those assets for which an impairment loss was recognised or reversed during the reporting period. These amendments are to be applied retrospectively for financial periods beginning on January 1, 2014. The adoption of this new principle will have no impact on Consolidated financial statements of the Group.
  • On June 27, 2013, IASB issued some amendments to IAS 39 “Financial instruments: Recognition and measurement – Novation of derivatives and continuation of hedge accounting”. These amendments introduce certain exceptions to the hedge accounting requirements in IAS 39 applicable when an existing derivative is required to be replaced with a new derivative for laws or regulations mandate clearing, either directly or indirectly, through a central counterparty (CCP). These amendments are to be applied retrospectively for financial periods beginning on January 1, 2014. Early adoption is allowed. The adoption of this new principle will have no impact on the Consolidated Financial Statements of the Group.

IFRS accounting standards, amendments and interpretations not yet endorsed by the European Union.

The European Union has not yet completed its endorsement process for the standards and amendments below reported at the date of these financial statements.

  • On May 20, 2013, IFRIC interpretation 21 – Levies was issued. The interpretation clarifies when a liability for levies imposed by government agencies should be recognised, both for levies that are accounted for in accordance with IAS 37 – Provisions, Contingent Liabilities and Contingent Assets, and those for which the settlement timing and amount are certain. The adoption of this new principle will have no impact on the Consolidated Financial Statements of the Group.
  • On November 12, 2009, IASB issued IFRS 9 – Financial instruments: the same standard was amended on October 28, 2010. The standard, applicable retrospectively from January 1, 2015, represents the first part 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. 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 in “Other Comprehensive Income” and will no longer be recognised in the Consolidated Income Statement. The Group is assessing any potential effects linked to the application of this principle.
  • On November 19, 2013, IASB published document “IFRS 9 Financial Instruments - Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39” concerning the new hedge accounting model. The document aims at responding to some criticisms made to IAS 39 requirements for hedge accounting, which are often considered as too stringent and not suitable for reflecting the entities' risk management policies. The main new features are the following:
    • changes to the types of transactions eligible for hedge accounting, namely extending the risks for non-financial assets/liabilities eligible for hedge accounting;
    • change in the way forward contracts and options are recognised when they are included in a hedge accounting transaction in order to decrease Income Statement volatility;
    • changes to effectiveness test by replacing the current method based on 80-125% range with the principle of the “economic relationship” between hedged item and hedging instrument. Moreover, no retrospective effectiveness test of the hedging relationship is required any more;
    • the increased flexibility of the new accounting rules is offset by additional disclosure required on the company risk management activities.


FINANCIAL ASSETS
 

Classification and initial recognition

In accordance with IAS 39, financial assets are to be classified in the following four categories:

  1. financial assets at fair value through profit or loss;
  2. held-to-maturity investments;
  3. loans and receivables;
  4. available-for-sale financial assets.

The classification depends on the purpose for which assets are bought and held. Management decides on their initial classification at the time of initial recognition, subsequently checking that it still applies at the end of each reporting period.

The main characteristics of the assets mentioned above are as follows:

Financial assets at fair value through profit or loss
This is made up of two sub-categories:

  • financial assets held specifically for trading purposes;
  • financial assets to be measured at fair value under the fair value option designation.

This category also includes all financial investments, other than equity instruments that do not have a price quoted on an active market, but for which the fair value can be determined.
Derivatives are included in this category, unless they are designated as hedging instruments, and their fair value is booked to the Consolidated Income Statement.

At the time of initial recognition, financial assets held for trading are recognised at fair value, not including the transaction costs or income associated with the same instruments, which are recognised in the Consolidated Income Statement.

All of the assets in this category are classified as current if they are held for trading purposes or if they are expected to be sold within 12 months from the end of the reporting period.

Designation of a financial instrument to this category is considered final (IAS 39 envisages some exceptional circumstances in which said financial assets may be reclassified in another category) and can only be done on initial recognition.

Held-to-maturity investments
These are non-derivative assets with fixed or determinable payments and fixed maturities which the Group intends to hold to maturity (e.g. subscribed bonds).
The intention and ability to hold the security to maturity must be evaluated on initial recognition and confirmed at the end of each reporting period.
In the case of early disposal of securities belonging to this category (for a significant amount and not motivated by particular events), the entire portfolio is reclassified to financial assets available for sale and restated at fair value.

Loans and receivables
These are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market and in which the Group does not intend to trade.
They are included in current assets except for the portion falling due beyond 12 months from the end of the reporting period, which is classified as non-current.

Available-for-sale financial assets
This is a residual category represented by non-derivative financial assets that are designated as available for sale and which have not been assigned to one of the previous categories.
“Available-for-sale financial assets” are recorded at their fair value including related purchase costs.
They are classified as non-current assets, unless management intends to dispose of them within 12 months from the end of the reporting period.

Subsequent measurement

Gains and losses on “Financial assets at fair value through profit or loss” (cat. 1) are immediately booked to the Consolidated Income Statement.
“Available-for-sale financial assets” (cat. 4) are measured at fair value unless a market price or the fair value of equity instruments cannot be reliably determined. In this case the cost method is used.
Gains and losses on “Available-for-sale financial assets” (cat. 4) are booked to a separate item under Other comprehensive income until they have been sold or cease to exist, or until it has been ascertained that they have suffered an impairment loss. When such events take place, all gains or losses recognised and booked to Other comprehensive income up to that moment are transferred to the Consolidated Income Statement.

Fair value is the amount for which an asset could be exchanged, or that would be paid to transfer a liability (exit price) in an arm’s length transaction between informed and independent parties. Consequently, it is assumed that the holder is a going-concern entity and that none of the parties needs to liquidate their assets in a forced sale at unfavourable conditions.

In the case of securities traded on regulated markets, fair value is determined with reference to the bid price at the close of trading at the end of the reporting period.
In cases where no market valuation is available for an investment, fair value is determined either on the basis of the current market value of another very similar financial instrument or by using appropriate financial techniques (such as discounted cash flow analysis).
Purchases or sales regulated at "market prices" are recognised on the day of trading, which is the day on which the Group takes a commitment to buy or sell the asset.

"Held-to-maturity investments" (cat. 2) and "Loans and receivables" (cat. 3) are measured at their "amortised cost" using the effective interest rate and taking account of any discounts or premiums obtained at the time of acquisition so that they can be recognised over the entire period until their maturity. Gains or losses are booked to the Income Statement either at the time that the investment reaches maturity or when an impairment arises, in the same way that they are recognised during the normal process of amortisation that is part of the amortised cost method.

Investments in financial assets can only be derecognised once the contractual rights to receive the cash flows deriving from such investments have expired (e.g. final redemption of bonds) or if the Group transfers the financial asset and all of the risks and benefits attached to it.


SEGMENT INFORMATION

OPERATING SEGMENTS

In compliance with the provisions of IFRS 8, the following information is provided by operating segments (business segments) and performance indicators that play a key role in the Group's strategic decisions.
As the analysis by business segments is given higher priority in the decision-making process, the analysis by geographic areas is not presented.

Business segments

With regard to the business segments, information concerning the two business units: Engine Systems and Suspension Components – is provided below. Figures for the Holding Company Sogefi S.p.A. and the subsidiary Sogefi Purchasing S.a.S. are also provided for the purpose of reconciliation with consolidated values.

The tables below provide the Group’s income statement and statement of financial position figures for 2012 and 2013:

(in thousands of Euro) 2012
  Engine Systems Business Unit Suspension Components Business Unit Sogefi SpA / Sogefi Purch. SaS Adjustments Sogefi consolidated f/s
REVENUES          
Sales to third parties 791,683 527,550 - - 1,319,233
Intersegment sales 940 1,054 20,099 (22,093) -
TOTAL REVENUES 792,623 528,604 20,099 (22,093) 1,319,233
RESULTS          
EBIT 39,000 32,312 (6,148) (1,766) 63,398
Financial expenses, net         (18,537)
Income from equity investments         -
Losses from equity investments         -
Result before taxes         44,861
Income taxes         (13,410)
Loss (profit) attributable to non-controlling interests         (3,205)
NET RESULT         28,246
STATEMENT OF FINANCIAL POSITION        
ASSETS          
Segment assets 507,599 416,152 571,748 (646,570) 848,929
Equity investments inassociates - - - - -
Unallocated assets - - - 165,781 165,781
TOTAL ASSETS 507,599 416,152 571,748 (480,789) 1,014,710
LIABILITIES          
Segment liabilities 318,572 256,843 431,470 (192,432) 814,453
TOTAL LIABILITIES 318,572 256,843 431,470 (192,432) 814,453
OTHER INFORMATION          
Increase in tangible and intangible fixed assets 46,592 30,311 9,294 (1,807) 84,390
Depreciation, amortisation and writedowns 35,676 24,545 6,349 (3,320) 63,250

 

(in thousands of Euro) 2013
  Engine
Systems
Business Unit
Suspension
Components
Business Unit
Sogefi
SpA /
Sogefi
Purch. SaS
Adjustments Sogefi
consolidated
f/s
REVENUES          
Sales to third parties 817,583 517,404 - - 1,334,987
Intersegment sales 983 1,211 22,312 (24,506) -
TOTAL REVENUES 818,566 518,615 22,312 (24,506) 1,334,987
RESULTS          
EBIT 45,712 35,680 (9,129) (3,137) 69,126
Financial expenses, net         (28,361)
Income from equity investments         -
Losses from equity investments         (289)
Result before taxes         40,476
Income taxes         (15,745)
Loss (profit) attributable to non-controlling interests         (3,607)
NET RESULT         21,124
STATEMENT OF FINANCIAL POSITION        
ASSETS          
Segment assets 518,717 407,510 622,739 (668,767) 880,199
Equity investments in associates - - - - -
Unallocated assets - - - 164,425 164,425
TOTAL ASSETS 518,717 407,510 622,739 (504,342) 1,044,624
LIABILITIES          
Segment liabilities 336,118 268,843 479,642 (228,892) 855,711
TOTAL LIABILITIES 336,118 268,843 479,642 (228,892) 855,711
OTHER INFORMATION          
Increase in tangible and intangible fixed assets 45,173 24,861 14,332 (489) 83,877
Depreciation, amortisation and writedowns 33,431 23,141 1,058 (3,031) 60,661

Please note that the Engine Systems Business Unit figures include the net book value of the Systemes Moteurs Group (in other words, net assets that were not adjusted to fair value for its Purchase Price Allocation) and the only adjustments for its Purchase Price Allocation relating to utilisation of product warranty provisions (contingent liabilities booked upon PPA); the remaining adjustments for its Purchase Price Allocation are posted in column "Adjustments".
Adjustments to “Intersegment sales” mainly refer to services provided by the Holding Company Sogefi S.p.A. and by the subsidiary Sogefi Purchasing S.a.S. to other Group companies (see note 40 for further details on the nature of the services provided). This item also includes intersegment sales between the Engine Systems Business Unit and the Suspension Components Business Unit.
The adjustments to “EBIT” refer to depreciation and amortisation linked to the revaluation of assets resulting from the acquisition of 40% of Sogefi Rejna S.p.A. and its subsidiaries in the year 2000 and of the Systemes Moteurs Group in the year 2011.
In the Statement of Financial Position, the adjustments to the item "Segment assets" refer to the consolidation entry of investments in subsidiaries and intercompany receivables.
Adjustments to “Unallocated assets” mainly include the goodwill and the fixed assets revaluations resulting from the acquisitions of: the Allevard Ressorts Automobile Group, 40% of Sogefi Rejna S.p.A., the Filtrauto Group, 60% of Sogefi M.N.R. Filtration India Private Ltd and the Systemes Moteurs Group.

“Depreciation, amortisation and writedowns” include writedowns of tangible and intangible fixed assets for the amount of Euro 3,030 thousand, Euro 1,360 thousand of which refer to industrial assets no longer used at subsidiary Shanghai Sogefi Auto Parts Co., Ltd and Euro 717 thousand reflect development projects relating to subsidiary Sogefi Engine Systems Shanghai Co., Ltd. that are no longer recoverable, Euro 1,033 thousand related to writedown of no longer used UK subsidiaries properties and, for the remaining portion, to diminished losses and reversals.

These assets were written down based on the recoverable value of assets at year-end date, which is considered to be to zero.

Information on the main customers

Note that revenues from sales to third parties as of December 31, 2013 accounting for over 10% of Group revenues refer to: Ford (12.4% of total revenues), PSA (12.4% of total revenues), and Renault/Nissan (10.7% of total revenues).

Information on the geographical areas

The breakdown of revenues by geographical area "of destination", in other words with regard to the nationality of the customer, is analysed in the Directors' Report and in the notes to the Consolidated Income Statement.

The following table shows a breakdown of total assets by geographical area:

(in thousands of Euro) 2012
  Europe South
America
North
America
Asia Adjustments Sogefi
consolidated
f/s
TOTAL ASSETS 1,367,211 124,948 101,619 74,468 (653,536) 1,014,710

 

(in thousands of Euro) 2013
  Europe South
America
North
America
Asia Adjustments Sogefi
consolidated
f/s
TOTAL ASSETS 1,436,837 102,635 99,498 87,398 (681,744) 1,044,624

 

NOTES ON THE MAIN ITEMS OF THE STATEMENT OF FINANCIAL POSITION

ASSETS

CASH AND CASH EQUIVALENTS

Cash and cash equivalents amounted to Euro 125,344 thousand versus Euro 85,209 thousand as of December 31, 2012 and break down as follows:

(in thousands of Euro) 12.31.2013 12.31.2012
Short-term cash investments 123,747 84,627
Cheques 1,539 521
Cash on hand 58 61
TOTAL 125,344 85,209

 

“Short-term cash investments” earn interest at a floating rate.

For further details, please refer to the Analysis of the net financial position in note 22 and to the Consolidated Cash Flow Statement included in the financial statements.

As of December 31, 2013, the Group has unused lines of credit for the amount of Euro 285,574 thousand. These funds are available for use on demand, because the conditions required for their availability are met.

Please note that this item includes Euro 3,276 thousand held by the Argentinean subsidiaries; use of this amount is temporarily subject to government restrictions that require an official authorisation for foreign payments (including dividend payouts). We would also point out that the Argentine Peso depreciated significantly after the end of the reporting period. Cash and cash equivalents of the Argentinean subsidiaries, considering the exchange rate at February 25, 2014 are Euro 2,725 thousand.

OTHER FINANCIAL ASSETS

“Other financial assets” can be broken down as follows:

(in thousands of Euro) 12.31.2013 12.31.2012
Securities held for trading 14 15
Held-to-maturity investments 7,462 8,199
Assets for derivative financial instruments 32 15
TOTAL 7,508 8,229

 

“Securities held for trading” are measured at fair value based on official sources at the time the financial statements are drawn up. They represent readily marketable securities which are used by the companies to optimise cash management.
“Held-to-maturity investments” are valued at amortised cost and include bonds of a Spanish prime banking institution.
“Assets for derivative financial instruments” total Euro 32 thousand and refer to the fair value of forward foreign exchange contracts. Further details can be found in the analysis of financial instruments contained in note 39.

INVENTORIES

The breakdown of inventories is as follows:

(in thousands of Euro) 12.31.2013 12.31.2012
  Gross Write-downs Net Gross Writedowns Net
Raw, ancillary and consumable materials 54,396 4,030 50,366 53,879 4,274 49,605
Work in progress and semifinished products 12,789 339 12,450 12,515 379 12,136
Contract work in progress and advances 31,134 113 31,021 41,224 57 41,167
Finished goods and goods for resale 56,223 6,933 49,290 53,173 7,497 45,676
TOTAL 154,542 11,415 143,127 160,791 12,207 148,584

 

The gross value of inventories showed a decrease of Euro 6,249 thousand, for the most part due to the unfavourable effect of exchange rates.
The decrease in “Contract work in progress and advances” represents tooling sold to customers, mostly in the Engine Systems Business Unit.

Writedowns consist for the most part of accruals for raw materials that can no longer be used for current production and for obsolete or slow-moving finished goods, goods for resale and ancillary materials. The increase in the provision reflects additional Euro 841 thousand set aside (booked to the income statement under “Variable cost of sales”) that were partly offset by products scrapped during the year for the amount of Euro 1,400 thousand and a negative exchange effect for Euro 233 thousand.

Inventories are encumbered by bank mortgages or liens totalling Euro 92 thousand to guarantee loans obtained by the subsidiary Allevard IAI Suspensions Private Ltd.

TRADE AND OTHER RECEIVABLES

Current receivables break down as follows:

(in thousands of Euro) 12.31.2013 12.31.2012
Trade receivables 140,572 156,245
Less: allowance for doubtful accounts 4,703 5,263
Trade receivables, net 135,869 150,982
Due from Parent Company 9,968 4,179
Tax receivables 20,504 21,815
Other receivables 7,827 9,109
Other assets 3,692 3,559
TOTAL 177,860 189,644

 

“Trade receivables, net” are non-interest bearing and have an average due date of 35 days, against 42 days recorded at the end of the previous year.
It should be noted that as of December 31, 2013, the Group factored trade receivables for Euro 79,541 thousand (Euro 65,114 thousand as of December 31, 2012), including an amount of Euro 46,026 thousand which was not notified and for which the Group continues to manage collection services. The risks and benefits related to these receivables have been transferred to the factor; therefore these receivables have been derecognised in the Statement of Financial Position debiting the consideration received from the factoring company.

Excluding the factoring transactions (Euro 79,541 thousand as at December 31, 2013 and Euro 65,114 thousand as at December 31, 2012) and the negative effect of exchange rates (Euro 8,100 thousand), net trade receivables showed an increase of Euro 7,414 thousand as a result of the increase in the Group’s business activities which occurred in the last quarter of 2013 with respect to the same quarter of the previous year.

Further adjustments were recorded to “Allowance for doubtful accounts” during the year for a total of Euro 491 thousand, against net utilisations of the allowance for the amount of Euro 900 thousand (see note 39 for further details). Writedowns, net of provisions not used during the period, were charged to Income Statement under the item “Variable cost of sales – Variable sales and distribution costs”.

“Due from Parent Company” as of December 31, 2013 is the receivable from the Parent Company CIR S.p.A. arising from the participation in the Group tax filing system on the part of the Italian companies of the Group. Item includes Euro 5,571 thousand referred to 2013 and booked to current taxes.
See chapter F for the terms and conditions governing these receivables from CIR S.p.A..

“Tax receivables” as of December 31, 2013 include tax credits due to the Group companies by the tax authorities of the various countries. The decrease in this item mainly reflects lower VAT credits. It does not include deferred taxes which are treated separately.

“Other receivables” are made up as follows:

(in thousands of Euro) 12.31.2013 12.31.2012
Amounts due from social security institutions 195 468
Amounts due from employees 252 293
Advances to suppliers 1,984 1,289
Due from others 5,396 7,059
TOTAL 7,827 9,109

 

The decrease in “Other receivables” refers for the most part to the remaining portion of the consideration for a real estate property sold during the previous year collected by subsidiary Sogefi Filtration do Brasil Ltda. The item also includes insurance compensations.

The item “Other assets” mainly includes accrued income and prepayments on insurance premiums, rents, indirect taxes relating to buildings and on costs incurred for sales activities.

TANGIBLE FIXED ASSETS

The net carrying amount of tangible fixed assets as of December 31, 2013 amounted to Euro 236,415 thousand versus Euro 252,345 thousand at the end of the previous year and breaks down as follows:

(in thousands of Euro) 2013
  Land Buildings, plant and machinery, commercial and industrial equipment Other assets Assets under construction and payments on account TOTAL
Balance at January 1 15,711 198,230 5,443 32,961 252,345
Additions of the period 48 17,377 1,162 17,443 36,030
Disposals during the period (115) (1,611) 17 (162) (1,871)
Exchange differences (200) (9,191) (564) (1,261) (11,216)
Depreciation for the period - (34,506) (1,633) - (36,139)
Writedowns/revaluations during the period - (2,181) (39) - (2,220)
Reclassification of non-current asset held for sale - - - - -
Other changes - 17,802 571 (18,887) (514)
Balance at December 31 15,444 185,920 4,957 30,094 236,415
Historical cost 15,444 771,336 25,282 30,788 842,850
of which: leases - gross value 331 11,375 68 - 11,774
Accumulated depreciation - 585,416 20,325 694 606,435
of which: leases - accumulated depreciation - 4,363 41 - 4,404
Net value 15,444 185,920 4,957 30,094 236,415
Net value - leases 331 7,012 27 - 7,370

 

(in thousands of Euro) 2012
  Land Buildings, plant and machinery, commercial and industrial equipment Other assets Assets under construction and payments on account TOTAL
Balance at January 1 15,774 215,183 4,845 24,880 260,682
Additions of the period 74 17,810 1,647 25,706 45,237
Disposals during the period (1,187) (2,047) (7) (30) (3,271)
Exchange differences (118) (4,271) (259) (853) (5,501)
Depreciation for the period - (38,072) (1,746) - (39,818)
Writedowns/revaluations during the period - (4,521) (313) - (4,834)
Reclassification of non-current asset held for sale - 744 - - 744
Other changes 1,168 13,404 1,276 (16,742) (894)
Balance at December 31 15,711 198,230 5,443 32,961 252,345
Historical cost 15,711 808,981 29,685 33,655 888,032
of which: leases - gross value 331 8,496 15 - 8,842
Accumulated depreciation - 610,751 24,242 694 635,687
of which: leases - accumulated depreciation - 3,668 15 - 3,683
Net value 15,711 198,230 5,443 32,961 252,345
Net value - leases 331 4,828 - - 5,159

 

Investments during the year amounted to Euro 36,030 thousand compared with Euro 45,237 thousand in the previous year.

The larger projects regarded the “Assets under construction and payments on account” and “Buildings, plant and machinery, commercial and industrial equipment” categories.

Major investments in the “Assets under construction and payments on account” category mainly reflect investments in the subsidiary Sogefi (Suzhou) Auto Parts Co., Ltd to expand production capacity, in subsidiaries LPDN GmbH and Allevard Rejna Autosuspensions S.A. to improve processes, as well as in the Brazilian subsidiaries mainly to improve processes and increase production capacity.

Among the most significant projects in the “Buildings, plant and machinery, commercial and industrial equipment” category, noteworthy are the investments in subsidiaries Sogefi (Suzhou) Auto Parts Co., Ltd relating to two new plants for suspension components and engine systems, in Sogefi Engine Systems Mexico S. de R.L. de C.V. to expand production capacity, in LPDN GmbH to improve production processes and maintain plants, and in Systèmes Moteurs S.A.S. to develop new products, improve production processes and maintain and renew plants.
“Disposals during the period” total Euro 1,871 thousand and refer nearly entirely to the sale of an industrial building of subsidiary Sogefi Rejna S.p.A. (in Melfi); the Euro 462 thousand gains from this sale transaction were recognised in “Losses (gains) on disposal”.

“Depreciation for the period” has been recorded in the appropriate item in the Consolidated Income Statement.

“Writedowns/revaluations during the period” totalled Euro 2,220 thousand, of which Euro 1,360 thousand reflect writedowns of plant and machinery of subsidiary Shanghai Sogefi Auto Parts Co., Ltd. that are no longer used and Euro 1,033 thousand refer to inactive real estate property of the British subsidiaries and the remaining portion reflects diminished impairment losses and reversals.
Impairment losses less reversals are booked to “Other non-operating expenses (income)”.

“Other changes” refer to the completion of projects that were under way at the end of the previous year and their reclassification under the pertinent items.

The balance of “Assets under construction and payments on account” as of December 31, 2013 includes Euro 116 thousand of advances for investments.

The main inactive assets, with a total net value of Euro 8,460 thousand, included in the item “Tangible fixed assets” refer to a property complex of the Holding Company Sogefi S.p.A. (in Mantova and in San Felice del Benaco) and to the Llantrisant site of subsidiary Sogefi Filtration Ltd for which the above depreciation was recognised. The book value of said assets will be recovered through their sale rather than through their continuous use. As we do not expect to sell them within one year, they are not subject to the accounting treatment envisaged by IFRS 5 and depreciation is continued.

No interest costs were capitalised to “Tangible fixed assets” during the year 2013.

Guarantees

As of December 31, 2013, tangible fixed assets are encumbered by mortgages or liens totalling Euro 9,463 thousand to guarantee loans from financial institutions, compared to Euro 13,046 thousand as of December 31, 2012. Guarantees existing as of December 31, 2013 refer to subsidiaries Sogefi Engine Systems Canada Corp., Systèmes Moteurs S.A.S, Allevard IAI Suspensions Private Ltd, United Springs B.V. and Sogefi M.N.R. Filtration India Private Ltd..

Purchase commitments

As of December 31, 2013, there are binding commitments to buy tangible fixed assets for Euro 1,907 thousand (Euro 480 thousand as of December 31, 2012) relating to the subsidiaries Allevard Rejna Autosuspensions S.A. and United Springs S.A.S.. Said commitments will be settled within 12 months.

Leases

The carrying value of assets under financial leases as of December 31, 2013 was Euro 11,774 thousand, and the related accumulated depreciation amounted to Euro 4,404 thousand.
The gross value of fixed assets under financial leases increased by Euro 2,932 thousand compared to December 31, 2012, and the increase relates to subsidiary Allevard Sogefi U.S.A. Inc..

The financial aspects of the lease payments and their due dates are explained in note 16.

INTANGIBLE ASSETS

The net balance as of December 31, 2013 was Euro 262,725 thousand versus Euro 239,577 thousand at the end of the previous year, and breaks down as follows:

(in thousands of Euro) 2013
  Development costs Industrial patents and intellectual property rights, concessions, licences and trademarks Other, assets under construction and payments on account Customer Relationship Trade name Systemes Moteurs Goodwill TOTAL
Balance at January 1 60,896 4,967 21,441 17,813 7,821 126,639 239,577
Additions of the period 27,830 14,104 5,913 - - - 47,847
Disposals during the period (8) (6) - - - - (14)
Exchange differences (2,344) (21) (422) - - - (2,787)
Amortisation for the period (17,079) (1,983) (706) (990) (435) - (21,193)
Writedowns during the period (753) - (66) - - - (819)
Other changes 2,257 11,003 (13,146) - - - 114
Balance at December 31 70,799 28,064 13,014 16,823 7,386 126,639 262,725
Historical cost 152,258 48,533 17,657 19,215 8,437 149,537 395,637
Accumulated amortisation 81,459 20,469 4,643 2,392 1,051 22,898 132,912
Net value 70,799 28,064 13,014 16,823 7,386 126,639 262,725
(in thousands of Euro) 2012
  Development costs Industrial patents and intellectual property rights, concessions, licences and trademarks Other, assets under construction and payments on account Customer Relationship Trade name Systemes Moteurs Goodwill TOTAL
Balance at January 1 47,598 7,455 11,495 18,803 8,256 126,639 220,246
Additions of the period 26,170 236 12,747 - - - 39,153
Disposals during the period (89) - (58) - - - (147)
Exchange differences (871) 1 (205) - - - (1,075)
Amortisation for the period (13,913) (2,735) (509) (990) (435) - (18,582)
Writedowns during the period (16) - - - - - (16)
Other changes 2,017 10 (2,029) - - - (2)
Balance at December 31 60,896 4,967 21,441 17,813 7,821 126,639 239,577
Historical cost 130,229 24,072 26,136 19,215 8,437 149,537 357,626
Accumulated amortisation 69,333 19,105 4,695 1,402 616 22,898 118,049
Net value 60,896 4,967 21,441 17,813 7,821 126,639 239,577

 

Investments during the year amounted to Euro 47,847 thousand.

The increases in “Development Costs” for the amount of Euro 27,830 thousand refer to the capitalisation of costs incurred by Group companies to develop new products in collaboration with leading motor vehicle manufacturers. The largest investments refer to the subsidiaries Systèmes Moteurs S.A.S., Filtrauto S.A., Sogefi Engine Systems Canada Corp., Sogefi Filtration do Brasil Ltda and Allevard Sogefi U.S.A. Inc..

Increases in “Industrial patents and intellectual property rights, concessions, licences and trademarks” amount to Euro 14,104 thousand and refer nearly entirely to the development and implementation of the new information system across the Sogefi Group. The integrated information system will be depreciated over a ten-year period starting from implementation date at each subsidiary.

Increases in “Other, assets under construction and payments on account”, for the amount of Euro 5,913 thousand, refer mainly to a large number of investments in the development and implementation of the new products not yet flowed into production. The largest investments went to fund development costs posted by subsidiaries Allevard Rejna Autosuspensions S.A., Sogefi Rejna S.p.A. and Sogefi Filtration d.o.o..

The item does not include advances to suppliers for the purchase of fixed assets.

“Development costs” principally include costs generated internally, whereas “Industrial patents and intellectual property rights, concessions, licences and trademarks” consist of factors that are acquired externally for the most part.
“Other, assets under construction and payments on account” include around Euro 9,614 thousand of costs generated internally.

The line “Writedowns during the period” includes writedowns of development costs for the amount of Euro 717 thousand capitalised in previous years by subsidiary Sogefi Engine Systems Shanghai Co., Ltd currently in liquidation.

There are no intangible assets with an indefinite useful life except for goodwill.

Goodwill and impairment test

From January 1, 2004 goodwill is no longer amortised, but subjected each year to impairment test.

The Company has identified five Cash Generating Units (CGUs):

  • engine systems – fluid filters (previously named “filters”)
  • engine systems – air intake and cooling (“Systemes Moteurs” Group)
  • car suspension
  • industrial vehicle suspension
  • precision springs

For the moment, it is possible to identify goodwill deriving from external acquisitions in three CGUs: engine systems - fluid filters, engine systems - air intake and cooling and car suspension.

The specific goodwill of “CGU Engine Systems – Fluid Filters” amounted to Euro 77,030 thousand; the goodwill of “CGU Engine Systems – Air Intake and Cooling” amounted to Euro 32,560 thousand; and the goodwill of “CGU Car Suspension” amounted to Euro 17,049 thousand.

Impairment tests have been carried out in accordance with the procedure laid down in IAS 36 to check whether there have been any losses in the value of this goodwill, by comparing the book value of the individual CGUs with their value in use, given by the present value of estimated future cash flows that are expected to result from the continuing use of the asset being tested for impairment.
We used the method that involves discounting unlevered cash flows, based on projections drawn up in budgets/long-term plans for the period 2014-2017 (adjusted to eliminate any estimated benefits from future projects and reorganisations), approved by management and in line with forecasts for the automotive industry (as estimated from the industry’s most important sources).

A discount rate of 8.6%, which reflects the weighted average cost of capital, was used. The same discount rate is used for all three CGUs. As a matter of fact, the three CGUs operate in the same sector and deal with the same kind of customers, and it is estimated that they are exposed to the same risk.

The terminal value was calculated using the "perpetual annuity" approach, assuming a growth rate of 2% and considering an operating cash flow based on the last year of the long-term plan (the year 2017), adjusted to project a stable situation “in perpetuity”, and based on the following main assumptions:

  • a balance between capital investment and depreciation (according to the rationale of considering the level of investment needed to "maintain" the business);
  • change in working capital equal to zero.

The weighted average cost of capital of the group is calculated as the weighted average of the followings: the cost of debt (taking into consideration own interest rates plus a spread) and the cost of capital, based on parameters for a group of firms operating in the European car components sector which are considered by the leading industry analysts to be Sogefi's peers. The values used to calculate the weighted average cost of capital (extrapolated from the main financial sources) are as follows:

  • financial structure of the industry: 27.3%
  • levered beta of the industry: 1.07
  • risk-free rate: 4.47% (annual average of risk-free rates of 10 year securities of the key markets in which the Group operates, weighted by sales revenues)
  • risk premium: 5.5%
  • debt cost spread: 3.8% (estimate based on the 2014 budget)

Sensitivity analyses were also carried out on two of the variables referred to above, with the growth rate of terminal value being set to zero or the weighted average cost of capital being increased by two percentage points. None of the scenarios used highlighted the need to post an impairment.

As far as the sensitivity analysis goes, it should be noted that:

  • the impairment test reached break-even point at the following discounting rates (growth rate of terminal value remaining unchanged at 2% and all other plan assumptions being equal): 18.39% for CGU Engine Systems - Fluid Filters; 23.03% for CGU Engine Systems - Air Intake and Cooling; and 10.36% for CGU Car Suspension;
  • the impairment test reached break-even point with a significant reduction in EBIT during the periods covered by plans and in terminal value: -20% for CGU Car Suspension and over -60% for CGU Engine Systems - Fluid Filters and for CGU Engine Systems - Air Intake and Cooling.

The test based on the present value of the estimated future cash flows turns out a value in use of the CGUs that exceeds their carrying value, so no impairment has been posted.

INVESTMENTS IN JOINT VENTURES

As of December 31, 2013, the investment in joint venture Mark IV Assets (Shanghai) Auto Parts Co. Ltd was written down in its full amount as there is a plan to wind up the company and it is not expected that its net carrying amount will be recovered. The resulting writedown of Euro 289 thousand was taken to “Losses (gains) from equity investments”. It should be noted that the subsidiary repaid a portion of capital in the amount of Euro 6 thousand during the reporting period.

OTHER FINANCIAL ASSETS AVAILABLE FOR SALE

As of December 31, 2013, these totalled Euro 439 thousand, compared with Euro 489 thousand as of December 31, 2012 and break down as follows:

(in thousands of Euro) 12.31.2013 12.31.2012
Equity investments in other companies 439 489
Other securities - -
TOTAL 439 489

 

The balance of “Equity investments in other companies” essentially refers to the 22.62% shareholding in the company AFICO FILTERS S.A.E.. The equity investment was not classified as associate due to the lack of Group’s members in the management bodies of the company (which means the Group does not exert significant influence on the company).
The decrease in the item refers to company Sogefi Allevard Srl, which was wound up in 2013.

FINANCIAL RECEIVABLES AND OTHER NON-CURRENT RECEIVABLES

“Other receivables” break down as follows:

(in thousands of Euro) 12.31.2013 12.31.2012
Substitute tax - 576
Pension fund surplus 2,876 2,631
Other receivables 28,706 26,950
TOTAL 31,582 30,157

 

“Pension fund surplus” refers to subsidiary Sogefi Filtration Ltd, as the company is entitled to any surplus upon plan termination, as outlined in note 19.

"Other receivables" include an indemnification asset of Euro 23,368 thousand owed by the seller of Systèmes Moteurs S.A.S.' shares – booked upon the PPA of the Systemes Moteurs Group – relating to the recovery of expenses charged by customers following claims on the quality of products sold, based on warranties given by the same seller(after possible partial indemnities obtained from insurers and suppliers). Sogefi S.p.A. initiated international arbitration proceedings against the seller of Systèmes Moteurs S.A.S' shares to collect the payables, as provided for by the acquisition contract.
The item “Other receivables” also includes tax credits, including fiscal credits on purchases of assets made by the Brazilian subsidiaries, fiscal credits relating to the research and development activity of the French subsidiaries, VAT credits of subsidiary Sogefi (Suzhou) Auto Parts Co., Ltd and non-interest bearing guarantee deposits for leased properties. These receivables will be collected over the coming years.

DEFERRED TAX ASSETS

As of December 31, 2013, this item amounted to Euro 59,620 thousand compared with Euro 60,178 thousand as of December 31, 2012.
This amount relates to the expected benefits on deductible temporary differences, booked to the extent that it is probable that it will be recovered. Reference should be made to note 20 for a further discussion of this matter.

NON-CURRENT ASSETS HELD FOR SALE

As at December 31, 2013, there are no non-current assets held for sale.

FINANCIAL DEBTS TO BANKS AND OTHER FINANCING CREDITORS

These break down as follows:

Current portion

(in thousands of Euro) 12.31.2013 12.31.2012
Bank overdrafts and short-term loans 6,885 8,377
Current portion of medium/long-term financial debts 76,750 89,596
of which: leases 1,118 814
TOTAL SHORT-TERM FINANCIAL DEBTS 83,635 97,973
Other short-term liabilities for derivative financial instruments 93 1,011
TOTAL SHORT-TERM FINANCIAL DEBTS AND DERIVATIVE FINANCIAL INSTRUMENTS 83,728 98,984

 

Non-current portion

(in thousands of Euro) 12.31.2013 12.31.2012
Financial debts to banks 213,675 267,773
Other medium/long-term financial debts 118,664 8,821
of which: leases 6,607 4,880
TOTAL MEDIUM/LONG-TERM FINANCIAL DEBTS 332,339 276,594
Other medium/long-term liabilities for derivative financial instruments 21,378 13,708
TOTAL MEDIUM/LONG-TERM FINANCIAL DEBTS AND DERIVATIVE FINANCIAL INSTRUMENTS 353,717 290,302

 

Bank overdrafts and short-term loans

For further details, please refer to the Analysis of the net financial position in note 22 and to the Consolidated Cash Flow Statement included in the financial statements.

Current and non-current portions of medium/long-term financial debts

As of December 31, 2013, details were as follows (in thousands of Euro):

Company Bank/Credit Institute Signing date Due date Original amount loan Interest rate Current portion (in thousands of Euro) Non-current portion (in thousands of Euro) Total amount (in thousands of Euro) Real
Guarantees
Sogefi S.p.A. Unicredit S.p.A. Jun-2006 Mar-2014 100,000 Euribor 3m + 110 bps variable 5,550 - 5,550 N/A
Sogefi S.p.A. European Investment Bank - tr. A Dec - 2010 Apr - 2016 20,000 Euribor 3m + 316 bps variable 5,000 7,444 12,444 N/A
Sogefi S.p.A. Banca Europea degli Investimenti tr. B Dec - 2010 Apr - 2016 20,000 Euribor 3m + 187 bps variabile 5,000 7,443 12,443 N/A
Sogefi S.p.A. Banca Monte dei Paschi di Siena S.p.A. Mar - 2011 Mar - 2017 25,000 Euribor 3m + 225 bps variable 6,250 13,905 20,155 N/A
Sogefi S.p.A. Intesa San Paolo S.p.A. Apr - 2011 Dec-2016 60,000 Euribor 3m + 260 bps variable 8,000 15,603 23,603 N/A
Sogefi S.p.A. Banca Carige Italia S.p.A. Jul - 2011 Sep - 2017 25,000 Euribor 3m + 225 bps variable 4,855 14,126 18,981 N/A
Sogefi S.p.A. Ge Capital Interbanca S.p.A. Oct - 2011 Jun - 2017 10,000 Euribor 3m + 230 bps variable 2,000 4,956 6,956 N/A
Sogefi S.p.A. Syndacate loan Dec - 2012 Dec - 2017 200,000 Euribor 3m + 475 bps variable - 116,235 116,235 N/A
Sogefi S.p.A. Banco do Brasil S.A. Dec - 2012 Apr - 2017 15,000 Euribor 3m + 315 bps variable 3,750 11,157 14,907 N/A
Allevard Rejna Autosuspensions S.A. CIC Bank May - 2013 May - 2014 4,000 Euribor 3m + 150 bps variable 4,000 - 4,000 N/A
Systèmes Moteurs Sas CIC Bank May - 2013 May - 2014 3,500 Euribor year + 150
bps variable
3,500 - 3,500 N/A
Sogefi Filtration S.A. Banco de Sabadell May - 2011 May -2016 7,000 Euribor 3m + 225 bps variable 1,400 2,100 3,500 N/A
Shanghai Sogefi Auto Parts Co., Ltd Unicredit S.pA. May - 2013 May - 2014 5,400 7.28% fixed 5,096 - 5,096 N/A
Sogefi (Suzhou) Auto Parts Co., Ltd* ING Bank Mar - 2013 Mar - 2015 3,972 9.84% fixed - 12.30% fixed - 3,972 3,972 N/A
Sogefi Engine Systems Canada Corp. Ge Capital Nov - 2012 Nov - 2017 2,897 B/A 3m+4.65%
variable
600 1,963 2,563 YES
Sogefi Engine Systems Canada Corp.  Ge Capital Nov - 2012 Nov - 2017 2,897 6.16% fixed 597 1,969 2,566 YES
Sogefi Filtration do Brasil Ltda Banco Itau BBA Feb - 2013 Mar - 2016 6,376 5.5% fixed - 6,377 6.377 N/A
Other loans           21,152 6,425 27,577 N/A
TOTAL           76,750 213,675 290,425  

(*) The amount is originated by some loans stipulated from March to September 2013, whose tax rate is included in the indicated range (tax min. 9.84% - tax max. 12.30%).

Line “Other loans” includes other minor loans, as well as financial lease payments in accordance with IAS 17.

Other short-term liabilities for derivative financial instruments

The item includes the short-term portion of the fair value of interest risk hedging contracts and exchange risk hedging contracts.
Reference should be made to chapter E for a further discussion of this matter.

Other medium/long-term financial debts

As of December 31, 2013, details were as follows (in thousands of Euro):

Company Bank/Credit Institute Signing date Due date Original amount loan Interest rate Total amount (in thousands of Euro) Real
Guarantees
Sogefi S.p.A.  Private placement May - 2013 May - 2023 USD 115,000 Fixed coupon 600 bps 82,908 N/A
Sogefi S.p.A. Private placement May - 2013 May - 2020 Euro 25,000 Fixed coupon 505 bps 24,926 N/A
Other financial debts           10,830 N/A
TOTAL           118,664  

 

Line “Other financial debts” includes other minor loans, as well as financial lease payments in accordance with IAS 17.

As can be seen from the table above, Sogefi S.p.A. made two private placements in the US bond market in May 2013.
A US private placement of bonds to prime US institutional investors for a total amount of USD 115 million for a 10-year term was completed on May 3, 2013 and will be amortised starting from the fourth year. The fixed coupon rate on this issue is 600 basis points.
A second US private placement of bonds to a prime institutional investor for the amount of Euro 25 million was completed on May 22, 2013 and will be repaid in a single instalment in May 2020. The fixed coupon rate on this issue is 505 basis points.

On May 6, 2013, the Holding Company Sogefi S.p.A. redeemed two loans obtained from Banca Sella S.p.A. in advance for a total amount of Euro 15,000 thousand (Euro 10,000 thousand had been drawn down in July 2012 and were to fall due in January 2014, whereas another Euro 5,000 thousand draw-down made in February 2013 was to fall due in July 2014).

On May 20, 2013, the Holding Company Sogefi S.p.A. repaid the revolving portion of the loan from Intesa Sanpaolo S.p.A. for the amount of Euro 30 million which had been drawn down in December 2012. The funds will remain available for draw-down to the Holding Company Sogefi S.p.A. until the loan expires in December 2016.

Furthermore, note that, contractually, the spreads relating to the loans of the Holding Company Sogefi S.p.A. are reviewed every six months on the basis of the computation of the consolidated NFP/normalised consolidated EBITDA ratio. For an analysis of the covenants relating to loans outstanding at the end of the period, please refer to the note below entitled “Analysis of the financial position”.

Other medium/long-term financial liabilities for derivative financial instruments

The item includes the medium/long-term portion of the fair value of the interest and exchange risk hedging instruments.
Reference should be made to chapter E for a further discussion of this matter.

Finance leases

The Group has finance leases as well as rental and hire contracts for building, plant and machinery that, according to their type, cover almost the entire useful life of the asset concerned. The assets held under these leases, rental and hire contracts are booked in accordance with IAS 17 as though they were fixed assets owned by the company, disclosing their historical cost, depreciation, the financial cost and the residual liability.

Future payments deriving from these contracts can be summarised as follows:

(in thousands of Euro) Instalments Capital
Within 12 months 1,731 1,118
Between 1 and 5 years 4,776 3,533
Beyond 5 years 3,545 3,074
Total lease payments 10,052 7,725
Interests (2,327) -
TOTAL PRESENT VALUE OF LEASE PAYMENTS 7,725 7,725

 

The contracts included in this item refer to the following subsidiaries:

  • Sogefi Filtration Ltd for a long-term rental contract for the production site in Tredegar.
    The contract expires in September 2022 and the original total amount of the contract was Euro 3,179 thousand; the future capital payments amount to Euro 2,382 thousand and the annual nominal rate of interest applied by the lessor is 11.59%.
    The Group has given sureties for this contract.
    This rental contract has been accounted for as financial leases, as required by IAS 17, where the present value of the rent payments coincided approximately with the fair value of the asset at the time the contract was signed.
  • Allevard Rejna Autosuspensions S.A. has a lease contract for the Lieusaint production site. The contract expires in October 2014 and the original total amount of the contract was Euro 2,108 thousand, the future capital payments amount to Euro 344 thousand and the annual nominal rate of interest applied by the lessor is 3-month Euribor plus a spread of 60 basis points. The Group has not given any sureties for this contract.
    There are no restrictions of any nature on this lease. There is a purchase option at the end of the contracts to buy the assets at the price of Euro 1. Given that it is probable that the options will be exercised, considering the low redemption value of the assets, this contract has been accounted for as a finance lease, as foreseen by IAS 17.
  • Allevard Sogefi USA Inc. has entered into the following lease contracts for the Prichard production site relating to:
  1. plant, machinery and improvements to the building for an original amount of Euro 1,160 thousand. The contract expires in May 2019, the future capital payments amount to Euro 684 thousand and the annual interest rate applied by the lessor is equal to 3.92%. The Group has given sureties for this contract;
  2. plant, machinery and improvements to the building for an original amount of Euro 2,175 thousand. The contract expires in July 2019, the future capital payments amount to Euro 1,328 thousand and the annual interest rate applied by the lessor is equal to 3%. The Group has given sureties for this contract.
  3. plant, machinery and improvements to the building for an original amount of Euro 3,151 thousand. The contract expires in June 2023, the future capital payments amount to Euro 2,988 thousand and the annual interest rate applied by the lessor is equal to 3.24%. The Group has given sureties for this contract.
    There are no restrictions of any nature on these leases. Upon expiry of the contracts ownership of the assets is transferred to the lessee without payment of any purchase price. These contracts are therefore accounted for as financial leases, as required by IAS 17.

TRADE AND OTHER CURRENT PAYABLES

The amounts shown in the financial statements can be broken down into the following categories:

(in thousands of Euro) 12.31.2013 12.31.2012
Trade and other payables 285,410 282,050
Tax payables 4,557 12,203
TOTAL 289,967 294,253

 

Details of trade and other payables are as follows:

(in thousands of Euro) 12.31.2013 12.31.2012
Due to suppliers 223,573 212,891
Due to the parent company 130 597
Due to tax authorities for indirect and other taxes 8,442 10,846
Due to social and security institutions 21,671 20,710
Due to employees 27,572 30,024
Other payables 4,022 6,982
TOTAL 285,410 282,050

 

The amounts “Due to suppliers” are not subject to interest and on average are settled in 73 days, in line with the year 2012.
There is no significant concentration of payables due to any one supplier or small group of suppliers.

The amounts “Due to suppliers” increased by Euro 10,682 thousand (by Euro 18,077 thousand on a constant currency basis); this is mainly due to business growth in the last portion of 2013 compared to the same period of 2012.

Item “Due to the Parent Company” reflects the consideration due for the fiscal surplus transferred by companies that have joined the CIR Group tax filing system. For further details, please refer to note 40.

The decrease in amounts “Due to tax authorities for indirect and other taxes” reflects VAT debts and other tax debt for the most relating to the French subsidiaries.

The amounts “Due to employees” were impacted by lower provisions for annual leaves and bonus amounts to be paid.

The decrease in line “Other payables” is mainly due to a reclassification of certain amounts between this item and Trade receivables.

The decrease in “Tax payables” relates for the most part to subsidiaries Sogefi Engine Systems Canada Corp. and LPDN GmbH, which had benefited from lower payment of tax advances for the year during the previous financial period.

OTHER CURRENT LIABILITIES

“Other current liabilities” include adjustments to costs and revenues for the period so as to ensure compliance with the accruals based principle (accrued expenses and deferred income) and advances received from customers for orders still to be delivered.

LONG-TERM PROVISIONS AND OTHER PAYABLES

These are made up as follows:

(in thousands of Euro) 12.31.2013 12.31.2012
Pension funds 31,321 36,213
Provision for employment termination indemnities 7,685 7,867
Provision for restructuring 16,870 7,720
Provisions for disputes with tax authorities 878 546
Provision for phantom stock options 1,299 30
Provision for product warranties and other risks 22,538 27,329
Agents' termination indemnities 96 90
Lawsuits 985 881
TOTAL 81,672 80,676

 

Details of the main items are given below.

Pension funds

The amount of Euro 31,321 thousand represents the amount set aside at year end by the various Group foreign companies to cover the liabilities of their various pension funds.
We point out that as of December 31, 2013, the pension fund of the subsidiary Sogefi Filtration Ltd shows a surplus of Euro 2,876 thousand, which was booked to “Other receivables”, as explained in note 13. The net amount of the liabilities to the various pension funds as of December 31, 2013 is therefore equal to Euro 28,445 thousand, as presented in the following table:

(in thousands of Euro) 12.31.2013 12.31.2012
Opening balance 33,582 30,088
Cost of benefits charged to income statement 640 4,214
"Other Comprehensive Income" (2,756) 2,000
Contributions paid (2,898) (2,873)
Exchange differences (123) 153
TOTAL 28,445 33,582
of which booked to Liabilities 31,321 36,213
of which booked to Assets (2,876) (2,631)

 

The following table shows all of the obligations deriving from “Pension funds” and the present value of the plan assets for the year 2013 and the two previous years.

(in thousands of Euro) 12.31.2013 12.31.2012 12.31.2011
Present value of defined benefit obligations 186,866 189,037 179,577
Fair value of plan assets 158,421 155,455 149,489
Deficit 28,445 33,582 30,088
Liability recorded to "Long-term provisions" 31,321 36,213 30,088
Surplus recorded to "Other receivables" (2,876) (2,631) -

 

Changes in the "Present value of defined benefit obligations" for the year 2013 were as follows:

(in thousands of Euro) 12.31.2013 12.31.2012
Present value of defined benefit obligations at the beginning of the period 189,037 179,577
Current service cost 1,918 2,084
Financial expenses 7,698 8,754
Remeasurement (gains)/losses    
- Actuarial (gains)/losses arising from changes in demographic assumptions (2,921) 140
- Actuarial (gains)/losses arising from changes in financial assumptions 6,261 8,042
- Actuarial (gains)/losses arising from experience (2,563) (4,147)
- Actuarial (gains)/losses arising from "Other long-term benefits" 56 -
Past service cost (824) -
Contribution paid by plan participants 253 492
Settlements/Curtailments (2,054) (2,644)
Exchange differences (3,306) 3,561
Benefits paid (6,689) (6,822)
Present value of defined benefit obligations at the end of the period 186,866 189,037

 

“Actuarial (gains)/losses arising from changes in financial assumptions” are mainly due to increasing wage inflation rates and inflation rates in British pension funds.
“Actuarial (gains)/losses arising from experience” reflect the difference between actuarial assumptions and what occurred in practice (for instance, in terms of employee turnover, salary increase or inflation rate).

With regard to the balances of companies that use functional currencies other than the Euro, please note that the Consolidated Income Statement items are translated into Euro using the average exchange rate of the reporting period; the present value of obligations at beginning and end of period was translated at the exchange rate ruling at the relevant date.

Changes in the fair value of plan assets are illustrated in the table below:

(in thousands of Euro) 12.31.2013 12.31.2012
Fair value of plan assets at the beginning of the period 155,455 149,489
Interest income 6,634 7,296
Remeasurement (gains)/losses:    
- Return on plan assets 3,533 2,027
Non investment expenses (480) (154)
Contributions paid by the company 1,363 1,728
Contributions paid by the plan participants 253 492
Settlements/curtailments - (3,162)
Exchange differences (3,181) 3,411
Benefits paid (5,156) (5,672)
Fair value of plan assets at the end of the period 158,421 155,455

With regard to the balances of companies that use functional currencies other than the Euro, please note that the Consolidated Income Statement items are translated into Euro using the average exchange rate of the reporting period, whereas the fair value of assets at beginning and end of period was translated at the exchange rate ruling at the relevant date.

Details of the amounts recognised in “Other comprehensive income” are given below:

(in thousands of Euro) 12.31.2013 12.31.2012
Return on plan assets (excluding amounts included in net interests expenses on net liability assets) (3,533) (2,027)
Actuarial (gains)/losses arising from changes in demographic assumptions (2,921) 140
Actuarial (gains)/losses arising from financial assumptions 6,261 8,042
Actuarial (gains)/losses arising from experience (2,563) (4,155)
Value of the net liability (asset) to be recognised in "Other Comprehensive income" (2,756) 2,000

The amounts charged to the Consolidated Income Statement can be summarised as follows:

(in thousands of Euro) 12.31.2013 12.31.2012
Current service cost 1,918 2,084
Net interest cost 1,064 1,458
Past service cost (824) -
Actuarial (gains)/losses recognised during the year on "Other long-term benefits" 56 -
Non investment expenses 480 154
Settlements/Curtailments (2,054) 518
TOTAL 640 4,214

The item “Past service cost” refers to subsidiary Allevard Springs Ltd and reflects a change made to the plan.
Item “Settlements/Curtailments” includes Euro 1,967 thousand relating to subsidiary Filtrauto S.A. for the restructuring process under way.

Items “Current service cost" (less Euro 87 thousand taken to “Settlements/Curtailments”) and “Non investment expenses” are included in the various “Labour cost” lines of Consolidated Income Statement items.
Item “Past service cost” is included in line “Other non-operating expenses (income)” in the Consolidated Income Statement.
Line “Financial expenses, net” is included in “Financial expenses (income), net”.
“Actuarial (gains) losses recognised during the year” are included in “Other nonoperating expenses (income)”.
Item “Settlements/Curtailments” is included in line “Restructuring costs” for the amount of Euro 1,967 thousand and in item “Labour cost” for the amount of Euro 87 thousand.

Defined-benefit plans expose the Group to the following actuarial risks:

  • Investment risk (only applies to British subsidiaries that hold plan assets): the present value of the defined-benefit obligation is calculated at a discount rate determined with reference to returns on AA-rated Eurozone corporate bonds; if the return on plan assets is lower than this rate, the plan will be in deficit. For this reason, and considering the long-term nature of plan liabilities, the British companies' funds diversified their portfolios to include investment in properties, debt instruments and equity instruments.
  • Interest risk: a decrease in the discount rate will lead to an increase in plan liability; however, if plan assets are present, such increase will be partially offset by an increase in the return on plan investments.
  • Longevity risk: the value of the defined-benefit obligation is calculated taking into account the best possible estimate of the mortality rate of plan beneficiaries; an increase in life expectancy leads to an increase in the resulting obligation.
  • Inflation risk/salary increase: the value of the definite-benefit plan with reference to employees in service is calculated taking into account future pay rises and inflation rate: an increase in these elements causes the relevant obligation to increase.

The following table shows the breakdown of “Pension funds” by geographical area of the relevant subsidiaries:

(in thousands of Euro) 12.31.2012
  Great Britain France Other TOTAL
Present value of defined benefit obligations 158,852 26,625 3,560 189,037
Fair value of plan assets 155,408 - 47 155,455
Deficit 3,444 26,625 3,513 33,582
(in thousands of Euro) 12.31.2013
  Great Britain France Other TOTAL
Present value of defined benefit obligations 158,622 24,814 3,430 186,866
Fair value of plan assets 158,365 - 56 158,421
Deficit 257 24,814 3,374 28,445

The decrease in Great Britain deficit is due to the ordinary contributions made during the year, which exceeded the related current service cost, and to the dynamics of actuarial valuations.

The decrease in France deficit is mainly due to the effect of the restructuring plan under way that will reduce the number of beneficiaries.

Note that the actuarial valuations of the “Pension funds” are carried out in collaboration with external specialists.

The following paragraphs summarise the pension systems in the geographical areas that affect the Group the most: Great Britain and France.

Great Britain

In Great Britain, pension plans are mainly private, being made with fund management companies and administered independently from the company.
They are classified as defined-benefit plans subject to actuarial valuation that are accounted as provided for by IAS 19.
With regard to plan governance, administrators are representatives of employees, former employees and employer; they are required by law to act in the interest of the fund and of all main stakeholders and are responsible for the investment policies adopted for plan assets.
With regard to the nature of employee benefits, employees are entitled to a postemployment annuity calculated by multiplying a portion of the wage earned at retirement age by the number of years of service until retirement age.

The main assumptions used in the actuarial valuation of these “Pension funds” were as follows:

  12.31.2013 12.31.2012
Discount rate % 4.6 4.5
Expected rate of return on debt instruments % 4.5-5.0 5.0
Expected rate of return on capital instruments % 7.0 7.0
Expected rate of return on cash % 2.0 2.0
Expected annual wage rise % 3.5-3.95 2.8-3.8
Annual inflation rate % 3.5 2.8
Retirement age 65 65

 

The higher “Discount rate” versus the previous year reflects the upward trend in returns on AA-rated UK corporate bonds (13-year duration) recorded in 2013.

Changes in the present value of the UK funds obligation for 2012 and 2013 were as follows:

(in thousands of Euro) 12.31.2013 12.31.2012
Present value of defined benefit obligations at the beginning of the period 158,852 152,169
Current service cost 283 810
Financial expenses 6,730 7,436
Remeasurement (gains)/losses:    
- Actuarial (gains)/losses arising from changes in demographic assumptions (2,813) -
- Actuarial (gains)/losses arising from changes in financial assumptions 5,786 3,344
- Actuarial (gains)/losses arising from experience (1,195) (3,918)
Past service cost (824) -
Contribution paid by plan participants 253 492
Settlements/Curtailments - 518
Exchange differences (3,297) 3,561
Benefits paid (5,153) (5,560)
Present value of defined benefit obligations at the end of the period 158,622 158,852

 

Changes in the fair value of UK plan assets are illustrated in the table below:

(in thousands of Euro) 12.31.2013 12.31.2012
Fair value of plan assets at the beginning of the period 155,408 146,304
Interest income 6,630 7,155
Remeasurement (gains)/losses:    
Return on plan assets 3,533 2,030
Non investment expenses (480) (154)
Contribution paid by the company 1,341 1,733
Contribution paid by plan participants 253 492
Settlements/Curtailments - -
Exchange differences (3,167) 3,408
Benefits paid (5,153) (5,560)
Fair value of plan assets at the end of the period 158,365 155,408

 

Allocations of the fair value of plan assets based on type of financial instrument were as follows:

(in thousands of Euro) 12.31.2013 12.31.2012
Debt instruments 27.1% 29.0%
Equity instruments 47.8% 40.7%
Real estate investments 2.0% 2.2%
Cash 15.0% 14.4%
Derivatives 6.3% 11.7%
Other assets 1.8% 2.0%
TOTAL 100.0% 100.0%

 

The fair value of these financial instruments was measured based on quoted prices available in active markets.

Asset allocation at the end of the year 2013 shows an increase in equity instruments compared to debt instruments. This increase does not reflect a change in investment strategy, but rather the fund's dynamic management strategy that requires asset allocation to be adjusted to present economic conditions and future expectations.

Debt instruments are mostly foreign corporate securities. Equity instruments are mostly foreign securities (emerging country securities constitute a minimal share).

The Trustee Board reviews the plan's investment strategies and diversifies them by risk and asset profitability. These strategies take into account the nature and duration of liabilities, the fund's financing needs and the employer's ability to meet the fund's commitments. The fund of subsidiary Sogefi Filtration Ltd uses derivative financial instruments to hedge the risk of changes in liability value connected with interest rates and inflation.

Actual returns on plan assets are reported below:

  12.31.2013 12.31.2012
Actual rate of return on debt instruments % -4.0 / 0 +3
Actual rate of return on equity instruments % +17.0 / +18.0 +14
Actual rate of return on cash % 0 / +0.5 -
Actual rate of return on plan assets % +6.0 / +12.0 +7

 

Average overall return on plan assets for the year 2013 was 6.4% for subsidiary Sogefi Filtration Ltd (total assets as of December 31, 2013 were Euro 145,525 thousand) and 12.3% for subsidiary Allevard Springs Ltd (total assets as of December 31, 2013 amounted to Euro 12,840 thousand).

With regard to the impact of the defined-benefit plan of the UK companies on the Group's future cash flows, expected contributions to the plans for the next year totalEuro 1,354 thousand.

Average obligation duration as of December 31, 2013 is approximately 19 years.

In compliance with the revised IAS 19, a sensitivity analysis was performed to determine how the present value of the obligation changes as the most significant actuarial assumptions change, other actuarial assumptions being equal.
Considering the peculiar operation of UK funds, the following actuarial assumptions are considered significant:

  • Discount rate
  • Rate of salary increase
  • Life expectancy

An overview of the changes in the present value of the obligation triggered by changes in these actuarial assumptions is provided below:

(in thousands of Euro) 12.31.2013
  +1% -1%
Discount rate (24,908) 29,597
Rate of salary increase 119 (116)
(in thousands of Euro) 12.31.2013
  + 1 year - 1 year
Life expectancy 3,513 (3,434)

 

France

Pensions in France are essentially based on state pension plans and the responsibility of the company is limited to paying the contributions established by law.
In addition to this basic assistance guaranteed by the state, retiring employees are also entitled to other additional amounts under collective labour agreements that are determined based on length of service and salary level, and are only paid if the employee reaches retirement age in the company. An employee leaving the company before retirement age will lose these additional benefits.
These additional benefits are recognised as a liability for the company and, in accordance with IAS 19, they are considered as defined-benefit plans subject to actuarial valuation.

In addition to the retirement indemnity, a collective labour agreement provides for a “Jubilee benefit” (which is calculated with a different method at each different French subsidiary) that vests upon reaching 20, 30, 35 and 40 years of service with the company. Under the IAS 19, this “Jubilee benefit” falls under the residual category of “Other long-term benefits” and is subject to actuarial valuation; actuarial gains (losses) must be recognised in the Income Statement for that year. Employees will lose the bonus falling due upon the different service jubilee bonuses if they leave the company before reaching the years of service mentioned above.

The main assumptions used in the actuarial valuation of these “Pension funds” were as follows:

  12.31.2013 12.31.2012
Discount rate % 3.0-3.2 3.0-3.3
Expected annual wage rise % 2.0-2.5 2.0-2.5
Annual inflation rate % 2.0 2.0
Retirement age 60-67 60-65

 

The “Discount rate” is calculated based on the returns on Eurozone AA-rated corporate bonds (duration of 10-13 years).

Changes in the "Present value of defined benefit obligations" were as follows:

(in thousands of Euro) 12.31.2013 12.31.2012
Present value of defined benefit obligations at the beginning of the period 26,625 21,052
Current service cost 1,576 1,236
Financial expenses 849 1,026
Remeasurement (gains)/losses:    
- Actuarial (gains)/losses arising from changes in demographic assumptions (16) 149
- Actuarial (gains)/losses arising from changes in financial assumptions 553 4,289
- Actuarial (gains)/losses arising from experience (1,449) (246)
Settlements/Curtailments (2,054) -
Benefits paid (1,270) (881)
Present value of defined benefit obligations at the end of the period 24,814 26,625

 

The sensitivity analysis of the French funds was performed by varying the following actuarial assumptions:

  • Discount rate
  • Rate of salary increase

An overview of the changes in the present value of the obligation triggered by changes in these actuarial assumptions is provided below:

(in thousands of Euro) 12.31.2013
  +1% -1%
Discount rate (2,812) 2,935
Rate of salary increase 3,890 (3,381)

 

Provision for employment termination indemnities

This aspect only concerns the Group's Italian companies, where pensions are represented by state plans and the company's responsibility is limited to regular payment of social contributions each month.
In addition to state-provided pensions, employees are entitled by law to a termination indemnity that accrues in accordance with length of service and is paid when an employee leaves the company.
The termination indemnity is calculated based on the length of service and taxable remuneration of each employee.
The corresponding liability is put aside in a specific provision and the amounts accrued in previous years are subject to annual revaluation based on the official cost-of-life index and at the legal interest rates; it is not associated with any conditions or accrual periods, nor does it require any financial provision; as a result, there are no assets underlying the provision.
This termination indemnity is considered as a defined-benefit provision, but subject to actuarial valuation for the part relating to the expected future benefits in respect of past service (which is the part subject to annual revaluation).
Further to the amendments to the “Provision for employment termination indemnities” introduced by Law 296 of December 27, 2006 and subsequent decrees and regulations issued in the early part of 2007, for companies with 50 or more employees (Sogefi Rejna S.p.A.), the portions of the provision accruing as from January 1, 2007 are transferred - at employee's option - to the treasury fund held by INPS (the Italian social security authority) or to supplementary pension funds, and are considered as “definedcontribution plans”. These amounts therefore do not require actuarial valuation and are no longer booked to the “Provision for employment termination indemnities”. The “Provision for employment termination indemnities” accruing up to December 31, 2006
is still a “defined-benefit plan”, consequently requiring actuarial valuation, which however will no longer take account of the component relating to future salary increase.
In accordance with the IAS 19, for companies with less than 50 employees (Holding Company Sogefi S.p.A.) the provision is entirely accounted for as a “Definite-benefit plan” and is subject to actuarial valuation.

The assumptions taken into consideration when carrying out the actuarial valuation of the “Provision for employment termination indemnities” were as follows:

  • Macroeconomic assumptions:
  1. discount rate (IBoxx Eurozone Corporate AA Index): 2.5% (2.05% as of December 31, 2012)
  2. annual inflation rate: 2% (2% as of December 31, 2012)
  3. annual increase in termination indemnity: 3% (3% as of December 31, 2012)
  • Demographic assumptions:
  1. rate of voluntary resignations: 3% - 10% of the workforce (same assumptions adopted as of December 31, 2012);
  2. retirement age: it was assumed that employees would reach the first of the requirements valid for mandatory general social security (same assumptions adopted as of December 31, 2012);
  3. probability of death: the RG48 mortality tables produced by the General State Accounting Body were used (same assumptions adopted as of December 31, 2012);
  4. probability of advanced settlement: an annual value of 2% - 3% each year was assumed (same assumptions adopted as of December 31, 2012);
  5. INPS' table split by age and gender was used for the probability of disability (same assumptions adopted as of December 31, 2012).

The provision changed as follows during the period:

(in thousands of Euro) 12.31.2013 12.31.2012
Opening balance 7,867 6,491
Accruals for the period 260 348
Amounts recognised in "Other Comprehensive Income" (209) 1,370
Contributions paid (233) (342)
TOTAL 7,685 7,867

 

The amounts charged to the Income Statement can be summarised as follows:

(in thousands of Euro) 2013 2012
Current service cost 100 80
Interest costs 160 268
TOTAL 260 348

 

Average obligation duration as of December 31, 2013 is approximately 9 years.

The sensitivity analysis of the provision for employment termination indemnities is outlined below. The table below shows the changes in the provision triggered by changes in the following actuarial assumptions:

  • Discount rate
  • Rate of salary increase
(in thousands of Euro) 12.31.2013
  +0.5% -0.5%
Discount rate (262) 278
Rate of salary increase 8 (8)

 

Provision for restructuring

These are amounts set aside for restructuring operations that have been officially announced and communicated to those concerned, as required by IAS/IFRS.

The provision changed as follows during the period:

(in thousands of Euro) 12.31.2013 12.31.2012
Opening balance 7,720 2,484
Accruals for the period 15,750 7,103
Utilisations (6,046) (1,666)
Provisions not used during the period (303) (158)
Other changes - (20)
Exchange differences (251) (23)
TOTAL 16,870 7,720

 

“Accruals for the period” refer nearly entirely to the subsidiary Filtrauto S.A. (the Group started the negotiation plan to shut down the Saint Père plant and relocate production from the Argentan plant to Vire).
“Utilisations” have been booked as reductions of provisions previously set aside, mainly in the Engine Systems business unit after the Llantrisant manufacturing plant was shut down.
The “Provisions not used during the period” relate to amounts previously set aside which turned out to be excessive compared with the amount actually spent.
Movements in the “Accruals for the period” net of the “Provisions not used during the period” occurred during the year total Euro 15,447 thousand; this figure is booked to the Consolidated Income Statement under “Restructuring costs”.

Provisions for disputes with tax authorities

This refers to tax disputes under way with local European tax authorities, for which the appropriate provisions have been made, even though the final outcome is not yet certain.

The provision changed as follows during the period:

(in thousands of Euro) 12.31.2013 12.31.2012
Opening balance 546 80
Accruals for the period 378 500
Utilisations (46) (34)
TOTAL 878 546

 

Provision for phantom stock options

This item amounts to Euro 1,299 thousand (Euro 30 thousand as of December 31, 2012) and refers to the fair value of incentive schemes providing for cash payment, known as phantom stock options, for the Director who filled the role of Managing Director of the Holding Company at the date of issue of the relevant schemes.
The increase in the provision reflects the increased fair value of the phantom stock options compared to the previous period, mostly as a result of the Sogefi stock price appreciation in the year 2013. The increase in the provision has been included in the Income Statement under “Directors' and statutory auditors' remuneration”.
More details on the phantom stock option plans can be found in note 29.

Provision for product warranties and other risks

The provision changed as follows during the period:

(in thousands of Euro) 12.31.2013 12.31.2012
Opening balance 27,329 33,974
Accruals for the period 1,085 581
Utilisations (5,386) (3,653)
Provisions not used during the period (432) (1,770)
Other changes - (1,790)
Exchange differences (58) (13)
TOTAL 22,538 27,329

 

The item reflects for the most part liabilities connected with product warranty risks of the Systemes Moteurs group and other liabilities accounted for during the PPA process relating to the acquisition of the group. Negotiations with the counterparties involved are under way to reach settlement agreements.
The “Provisions not used during the period” mainly refer to provisions made in previous years, that were then found to be excessive following an updated assessment of the risk or of the amounts actually spent.

Agent’s termination indemnities and Lawsuits

The provisions changed as follows during the period:

(in thousands of Euro) 12.31.2012
  Agent's termination indemnities Lawsuits
Opening balance 86 887
Accruals for the period 4 235
Utilisations - (132)
Provisions not used during the period - (93)
Exchange differences - (16)
TOTAL 90 881
(in thousands of Euro) 12.31.2013
  Agent's termination indemnities Lawsuits
Opening balance 90 881
Accruals for the period 6 405
Utilisations - (228)
Provisions not used during the period - (38)
Exchange differences - (35)
TOTAL 96 985

 

Amounts stated in the financial statements represent the best possible estimates of liabilities at year-end date. Item “Lawsuits” includes litigation with employees and third parties.

Other payables

“Other payables” amount to Euro 257 thousand (Euro 179 thousand as of December 31, 2012).

DEFERRED TAX ASSETS AND LIABILITIES

The following details of deferred tax assets and liabilities are provided in light of the IAS/IFRS disclosure requirements.

(in thousands of Euro) 12.31.2013 12.31.2012
  Amount of temporary differences Tax effect Amount of temporary differences Tax effect
Deferred tax assets:        
Allowance for doubtful accounts 3,258 937 3,081 882
Fixed assets amortisation/writedowns 29,798 9,163 24,018 7,358
Inventory writedowns 4,928 1,602 5,318 1,732
Provisions for restructuring 8,822 2,990 778 214
Other provisions - Other payables 50,978 16,984 60,081 19,638
Fair value derivative financial instruments 16,508 4,541 14,242 3,919
Other 15,324 5,316 13,419 4,899
Deferred tax assets for tax losses incurred during the year - - 7,517 2,588
Deferred tax assets for tax losses incurred during previous years 56,861 18,087 58,174 18,948
TOTAL 186,477 59,620 186,628 60,178
Deferred tax liabilities:        
Accelerated/excess depreciation and amortisation 75,416 22,040 85,091 25,379
Difference in inventory valuation methods 775 213 758 211
Capitalisation of R&D costs 42,300 14,384 39,450 13,424
Other 6,493 1,678 8,233 2,280
TOTAL 124,984 38,315 133,532 41,294
Deferred tax assets (liabilities) net   21,305   18,884
Temporary differences excluded from the calculation of deferred tax assets (liabilities):
Tax losses carried forward 65,423 21,025 62,715 20,354

 

The tax effect has been calculated on the basis of the rates applicable in the various countries, which are in line with those of the previous year, except for the tax rate in force in Great Britain (20% as of December 31, 2013 compared to 23% in the previous year).

The change in “Deferred tax assets (liabilities), net” compared with December 31, 2012 amounts to Euro 2,421 thousand and differs by Euro 433 thousand from the amount shown in the Consolidated Income Statement under “Income taxes – Deferred tax liabilities (assets)” (Euro 2,854 thousand) due to:

  • movements in financial items that did not have any effect on the Consolidated Income Statement and therefore the related negative tax effect amounting to Euro 550 thousand has been accounted for as Other comprehensive income (expenses) (positive effect of the fair value of derivatives designated as cash flow hedges was Euro 620 thousand;
    negative effect of actuarial gains/losses arising from the adoption of the revised IAS 19 was Euro 1,170 thousand);
  • reclassifications or exchange differences for the amount of Euro 117 thousand.

The increase in “Provisions for restructuring” basically refers to restructuring of the subsidiary Filtrauto S.A..

The decrease in the tax effect in the item “Other provisions - Other payables” mostly originates from a reduction of the liabilities connected with pension funds and provisions for product warranty risks assumed with the acquisition of the Systemes Moteurs group after the relating liability was partly paid.

Item “Other” of deferred tax assets includes various types of postings, such as for example costs for which tax deduction is deferred (for example, employees' bonus entitlements, indirect taxes that are deducted upon actual payment, intercompany service costs in Argentinean subsidiaries that are deducted upon actual payment), or against international double taxation to be used in future periods to reduce the tax liabilities of Spanish subsidiary Sogefi Filtration S.A..

“Deferred tax assets for tax losses incurred during previous years” relate to subsidiaries Allevard Sogefi U.S.A. Inc. (Euro 6,802 thousand; Euro 7.109 thousand as of December 31, 2012), Allevard Rejna Autosupensions S.A. (Euro 4,760 thousand; Euro 5,084 thousand as of December 31, 2012), Sogefi Filtration Ltd (Euro 2,933 thousand; Euro 3,416 thousand as of December 31, 2012), Sogefi Filtration S.A. (Euro 1,972 thousand; Euro 2,308 thousand as of December 31, 2012), United Springs S.A.S. (Euro 921 thousand; Euro 1,031 thousand as of December 31, 2012) and Systèmes Moteurs S.A.S. (Euro 699 thousand; Euro 2,588 thousand as of December 31, 2012). These taxes were recognised because it is believed to be probable that taxable income will be available in the future against which such tax losses can be utilised. Such probability is determined based on the fact that losses have originated under extraordinary circumstances that are unlikely to occur again, such as restructuring plans currently under way or occurred in the past. It should also be noted that the losses incurred by the UK subsidiary can be carried forward indefinitely and those of the Spanish subsidiary must be utilised within 2028. The losses of the French subsidiary can be carried forward indefinitely but the new law passed in 2012 has maintained a limit for the amount that can be utilised each year, making recovery time longer.

Note that the deferred tax assets relating to the “Allowance for doubtful accounts” and to the “Inventory writedowns” include amounts that will mainly be reversed in the twelve months following year end.

As regards the figures shown under "Temporary differences excluded from the calculation of deferred tax assets (liabilities)", deferred tax assets were not booked as, at year end, there was not a probability that they would be recovered. “Tax losses carried forward” mainly relate to subsidiaries Allevard Sogefi U.S.A. Inc. (portion of losses not recognised in deferred tax assets because it can not be recovered in the specific period of the company's long-term plan), Allevard Rejna Autosupensions S.A. (portion of losses not recognised in deferred tax assets because it can not be recovered in the specific period of the company's long-term plan), S. ARA Composite S.A.S.., to the Chinese and UK subsidiaries of the Engine Systems business unit.

The increase in “Tax losses carried forward” is mainly traced back to the losses of certain companies that operate under the Suspension business unit and of the subsidiary Sogefi (Suzhou) Auto Parts Co., Ltd. No deferred tax assets were recognised for these losses because the cash flows for the specific period of the company's long-term plan only allow for the recovery of the deferred tax assets recognised during previous years.

SHARE CAPITAL AND RESERVES

Share capital

The share capital of the Holding Company Sogefi S.p.A. is fully paid in and amounts to Euro 60,924 thousand as of December 31, 2013 (Euro 60,712 thousand as of December 31, 2012), split into 117,162,292 ordinary shares with a par value of Euro 0.52 each.

During 2013 years the share capital increased from Euro 60,712 thousand (divided into n. 116,753,392 ordinary shares of par value of Euro 0.52 each) to Euro 60,924 thousand (divided into n. 117,162,292 ordinary shares). All the ordinary shares are fully paid. It doesn’t exist shares subject to rights, privileges and limits in the dividends distribution.

It is brought to the attention that proxies have been given to the Board of Directors for a maximum period of five years from the date of the Shareholders’ resolution dated April 23, 2009 registration in the Register of Enterprises to increase the share capital on one or more occasion up to a maximum of total par value of Euro 250 million and of further maximum par value of Euro 5.2 million to Directors and employees of the Company and its subsidiaries.

As of December 31, 2013, the Holding Company has 3,763,409 treasury shares in its portfolio, corresponding to 3.21% of share capital.

Movements in the shares outstanding are as follows:

(Shares outstanding) 2013 2012
No. shares at start of period 116,753,392 116,662,992
No. shares issued for subscription of stock options 408,900 90,400
No. of ordinary shares as of December 31 117,162,292 116,753,392
No. shares issued for subscription of stock options booked to "Other reserves" at December 31, 2013 60,000 -
Treasury shares (3,763,409) (3,981,095)
No. of shares outstanding as of December 31 113,458,883 112,772,297

 

The following table shows the changes in the Group’s equity:

(in thousands of Euro) Share capital Share premium reserve Reserve for treasury shares Treasury shares Translation reserve Legal reserve Cash flow hedging reserve Sharebased incentive plans reserve Actuarial gain/loss reserve Tax on items booked in Other Comprehensive Income Other reserves Retained earnings Net result for the period Total
Balance at December 31, 2011 60,665 12,145 7,691 (7,691) 3,721 12,320 (9,158) 2,319 (14,850) 5,741 3,111 83,535 24,046 183,595
Paid share capital increase 47 47 - - - - - - - - - - - 94
Allocat ion of 2011 net profit:                            
Legal reserve - - - - - - - - - - - - - -
Dividends - - - - - - - - - - - (14,716) - (14,716)
Retained earnings - - - - - - - - - - - 24,046 (24,046) -
Net purchase of t reasury shares - (1,396) 1,396 (1,396) - - - - - - - - - (1,396)
Recognit ion of share-based incent ive plans - - - - - - - 1,233 - - - - - 1,233
Other changes - - - - - - - - - - - (63) - (63)
Fair value measurement of financial assets available for sale - - - - - - - - - - - - - -
Fair value measurement of cash flow hedging inst ruments: share booked to equity - - - - - - (7,491) - - - - - - (7,491)
Fair value measurement of cash flow hedging inst ruments: share booked to income statement - - - - - - 2,121 - - - - - - 2,121
Actuarial gain/loss - - - - - - - - (3,370) - - - - (3,370)
Tax on items booked in Other Comprehensive Income - - - - - - - - - 2,811 - - - 2,811
Currency t ranslat ion differences - - - - (10,664) - - - - - - - - (10,664)
Net result for the period - - - - - - - - - - - - 28, 246 28,246
Balance at December 31, 2012 60,712 10,796 9,087 (9,087) (6,923) 12,320 (14,528) 3,552 (18,220) 8,552 3,111 92,802 28,246 180,420
Paid share capital increase 212 429 - - - - - - - - 126 - - 767
Allocat ion of 2012 net profit:                            
Legal reserve - - - - - - - - - - - - - -
Dividends - - - - - - - - - - - (14,667) - (14,667)
Retained earnings - - - - - - - - - - - 28,246 (28,246) -
Recognit ion of share-based incent ive planx - - - - - - - 1,562 - - - - - 1,562
Other changes - 495 (495) 495 - - - (511) - - - (121) - (137)
Fair value measurement of cash flow hedging inst ruments: share booked to equity - - - - - - (5,753) - - - - - - (5,753)
Fair value measurement of cash flow hedging inst ruments: share booked to income statement - - - - - - 3,493 - - - - - - 3,493
Actuarial gain/loss - - - - - - - - 2,965 - - - - 2,965
Tax on items booked in Other Comprehensive Income - - - - - - - - - (550) - - - (550)
Currency t ranslat ion differences - - - - (20,737) - - - - - - - - (20,737)
Net result for the period - - - - - - - - - - - - 21,124 21,124
Balance at December 31, 2013 60,924 11,720 8,592 (8,592) (27,660) 12,320 (16,788) 4,603 (15,255) 8,002 3,237 106,260 21,124 168,487

 

Share premium reserve
The share premium reserve amounted to Euro 11,720 thousand compared with Euro 10,796 thousand in the previous year.
The increase by Euro 429 thousand accounts for share subscriptions under stock option plans.
During 2013, the Holding Company Sogefi S.p.A. credited Euro 495 thousand to the Share premium reserve after the free grant of 217,686 treasury shares to 2011 Stock Grant beneficiaries.

Treasury shares
Item “Treasury shares” reflects the purchase price of treasury shares. Movements during the year amount to Euro 495 thousand and reflect the free grant of 217,686 treasury shares as reported in the note to “Share-based incentive plans reserve”.

Translation reserve
This reserve is used to record the exchange differences arising on the translation of foreign subsidiaries' financial statements.
Movements in the period show a decrease of Euro 20,737 thousand mainly attributable to the depreciation of the Brazilian real, Canadian dollar and Argentine peso against the Euro.

Reserve for actuarial gains/losses
This reserve reflects the net impact of the application of the amendment to IAS 19 “Employee Benefits” on other actuarial gains (losses) as at January 1, 2012. The item also includes actuarial gains and losses accrued after January 1, 2012 and recognised under Other Comprehensive Income.

Cash flow hedging reserve
This reserve has changed as a result of accounting for the cash flows deriving from instruments that for IAS 39 purposes are designated as “cash flow hedging instruments”. Changes during the period show a net decrease of Euro 2,260 thousand.

Share-based incentive plans reserve
The reserve refers to the credit to equity for share-based incentive plans, assigned to Directors and employees, resolved after November 7, 2002, including the portion relating to the share grant plan approved in 2013.
In 2013, further to 2011 Share Grant Plan beneficiaries exercising their rights and due to the corresponding free grant of 217,686 treasury shares, the amount of Euro 511 thousand, corresponding to the fair value at the grant date of these units, was reclassified from “Share-based incentive plans reserve” to “Share premium reserve” (for Euro 495 thousand) and to “Retained earnings reserve” (for Euro 16 thousand).

Retained earnings
These totalled Euro 106,260 thousand and include amounts of profit that have not been distributed.
The decrease of Euro 121 thousand mainly refers to the change in the percentage held in the subsidiary Allevard IAI Suspensions Private Ltd.

Tax on items booked in Other Comprehensive Income
The table below shows the amount of income taxes relating to each item of the Other Comprehensive Income:

(in thousands of Euro) 2013 2012
  Gross value Taxes Net value Gross value Taxes Net value
Profit (loss) booked to cash flow hedging reserve (2,260) 620 (1,640) (5,370) 1,476 (3,894)
Actuarial gain (loss) 2,965 (1,170) 1,795 (3,370) 1,335 (2,035)
Profit (loss) booked to translation reserve (21,319) - (21,319) (10,849) - (10,849)
Total Profit (loss) booked in Other Comprehensive Income (20,614) (550) (21,164) (19,589) 2,811 (16,778)

 

Non-controlling interests

The balance amounts to Euro 20,426 thousand and refers to the portion of shareholders' equity attributable to non-controlling interests.
These can be broken down as follows: Euro 2,820 thousand relating to subsidiary Shanghai Allevard Springs Co., Ltd; Euro 13,814 thousand relating to subsidiary Iberica de Suspensiones S.L.; Euro 482 thousand relating to subsidiary S.ARA Composite S.A.S.; Euro 356 thousand relating to subsidiary Allevard IAI Suspensions Private Ltd; Euro 2,889 thousand relating to subsidiary Sogefi M.N.R. Filtration India Private Ltd; Euro 65 thousand relating to subsidiary Sogefi Rejna S.p.A.


ANALYSIS OF THE NET FINANCIAL POSITION


The following table provides details of the net financial position as required by Consob in its communication no. DEM/6064293 of July 28, 2006 with a reconciliation of the net financial position shown in the Report on operations:

(in thousands of Euro) 12.31.2013 12.31.2012
A. Cash 125,344 85,209
B. Other cash at bank and on hand (held to maturity investments) 7,462 8,199
C. Financial instruments held for trading 14 15
D. Liquid funds (A) + (B) + (C) 132,820 93,423
E. Current financial receivables 32 15
F. Current payables to banks 6,885 8,377
G. Current portion of non-current indebtedness 76,750 89,596
H. Other current financial debts 93 1,011
I . Current financial indebtedness (F) + (G) + (H) 83,728 98,984
J. Current financial indebtedness, net (I) - (E) - (D) (49,124) 5,546
K. Non-current payables to banks 213,675 267,773
L. Bonds issued 107,834 -
M. Other non-current financial debts 32,208 22,529
N. Non-current financial indebtedness (K) + (L) + (M) 353,717 290,302
O. Net indebtedness (J) + (N) 304,593 295,848
Non-current financial receivables - -
Financial indebtedness, net including non-current financial receivables (as per the "Net financial position" included in the Report on operations) 304,593 295,848

 

Details of the covenants applying to loans outstanding at year end are as follows (see note 16 for further details on loans):

  • loan of Euro 100,000 thousand from Unicredit S.p.A.: the ratio of consolidated net financial position to consolidated normalised EBITDA has to be less than 4;
  • loan of Euro 40,000 thousand from European Investment Bank (EIB): the ratio of consolidated net financial position to consolidated normalised EBITDA has to be less or equal to 3.5; the ratio of consolidated normalised EBITDA to consolidated net financial expenses must not be less than 4;
  • loan of Euro 60,000 thousand from Intesa Sanpaolo S.p.A.: the ratio of consolidated net financial position to consolidated normalised EBITDA has to be less than or equal to3.5;
  • loan of Euro 25,000 thousand from Banca Carige Italia S.p.A.: the ratio of consolidated net financial position to consolidated normalised EBITDA has to be less than or equal to 3.5; the ratio of consolidated normalised EBITDA to consolidated net financial expenses must not be less than 4;
  • loan of Euro 10,000 thousand from GE Capital Interbanca S.p.A.: the ratio of consolidated net financial position to consolidated normalised EBITDA has to be lessthan or equal to 3.5; the ratio of consolidated normalised EBITDA to consolidated net financial expenses must not be less than 4;
  • loan of Euro 25,000 thousand from Banca Monte dei Paschi di Siena S.p.A.: the ratio of consolidated net financial position to consolidated normalised EBITDA has to be less than or equal to 3.5; the ratio of consolidated normalised EBITDA to consolidated net financial expenses must not be less than 4;
  • 2012 syndicated loan of Euro 200,000 thousand: the ratio of consolidated net financial position to consolidated normalised EBITDA has to be less than or equal to 3.5; the ratio of consolidated normalised EBITDA to consolidated net financial expenses must not be less than 4;
  • loan of Euro 15,000 thousand from Banco do Brasil S.A.: the ratio of consolidated net financial position to consolidated normalised EBITDA has to be less than or equal to 3.5; the ratio of consolidated normalised EBITDA to consolidated net financial expenses must not be less than 4;
  • bond issue of USD 115,000 thousand: the ratio of consolidated net financial position to consolidated normalised EBITDA has to be less than or equal to 3.5; the ratio of consolidated normalised EBITDA to consolidated net financial expenses must not be less than 4;
  • bond issue of Euro 25,000 thousand: the ratio of consolidated net financial position to consolidated normalised EBITDA has to be less than or equal to 3.5; the ratio of consolidated normalised EBITDA to consolidated net financial expenses must not be less than 4.

As of December 31, 2013 the Company was in compliance with these covenants.