Accounting standards and policies

The most significant accounting standards and policies are described below.

 

Business combinations

Acquisitions of subsidiaries are accounted for under the acquisition method. The cost of the acquisition is determined as the sum of the fair value, at the date of exchange, of the assets given, the liabilities incurred or acquired, and the financial instruments issued by the Group in exchange for control of the acquired company.

The identifiable assets, liabilities and contingent liabilities of the acquired company that meet the conditions for recognition under IFRS 3 are accounted for at fair value at the date of acquisition, with the exception of non-current assets (or disposal groups), which are classified as held for sale under IFRS 5 and accounted for at fair value less costs to sell.

If the business combination is recognised in several phases, the purchaser has to recalculate the fair value of the investment previously held (in case of equity method valuation) or the group of net assets attributable to the subsidiary (in case of consolidation according to the proportional method) and recognise any resulting profit or loss in the income statement.

The purchaser has to recognise any contingent consideration at the fair value, at the date of acquisition. The change in fair value of the contingent consideration classified as asset or liability will be recognized according to the provisions included in IAS 39, in the income statement or in other comprehensive income. If the contingent consideration is classified in the shareholders’ equity, its value should not be recalculated until its settlement is recognised to the shareholders’ equity.

Goodwill arising on acquisition is recognised as an asset and initially valued at cost, represented by the excess of the cost of the acquisition over the Group’s interest in the fair value of the identifiable assets, liabilities and contingent liabilities acquired. This goodwill is not amortised, but is tested for impairment. If, on the other hand, the Group’s interest in the fair value of the identifiable assets, liabilities and contingent liabilities exceeds the cost of the acquisition, the relevant amounts are re-determined. If the Group’s interest in the resulting fair value of the identifiable assets, liabilities and contingent liabilities still exceeds the cost of the acquisition, the difference is immediately recognised in the income statement.

For every business combination, the purchaser must value any minority stake in the acquired entity at fair value or in proportion to the share of the minority interest in net identifiable assets of the acquired entity.

 

Non-current assets held for sale and discontinued operations

Non-current assets (and assets included in disposal groups) classified as held for sale are accounted for at the lower of their previous carrying amount and their fair value less costs to sell.

Non-current assets (and assets included in disposal groups) are classified as held for sale when their carrying amount is expected to be recovered through a sale transaction rather than through their continued use. This condition is only met when the sale is highly probable, the asset (or asset included in a disposal group) is available for immediate sale in its present condition and management is committed to the sale, which is expected to take place within twelve months of the classification of this item.

In the case of discontinued operations, the post-tax gain or loss on disposal and the matching comparative amounts for the previous year are shown separately in a specific item in the income statement.

 

Goodwill

Goodwill from business combinations (among which, as an example only, the acquisition of subsidiaries, jointly controlled entities, or the acquisition of business units or other extraordinary transactions) represents the excess of the cost of the acquisition over the Group’s interest in the fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary or jointly controlled entity at the date of the acquisition. Goodwill is recognised as an asset and is subject to an annual impairment review. Any impairment charges are immediately recognised in the income statement and are not subsequently reversed.

Goodwill emerging at the date of acquisition is allocated to each of the cash-generating units expected to benefit from the synergies deriving from the acquisition. Impairment charges are identified via tests that assess the capacity of each unit to generate cash sufficient to recover the portion of goodwill allocated to it. Should the recoverable amount of the cash-generating unit be less than the allocated carrying amount, an impairment charge is recognised. 

On the sale of a subsidiary or jointly controlled entity, any unamortised goodwill attributable to it is included in the calculation of the gain or loss on disposal.

 

Conversion of foreign financial statement items

ACEA SpA and its European subsidiaries have adopted the euro as their functional and presentation currency. Foreign currency transactions are initially recognised at the spot rate on the date of the transaction. Foreign currency monetary assets and liabilities are translated into the functional currency at the exchange rate at the end of the reporting period. Exchange differences are recognised in the consolidated income statement, with the exception of differences deriving from foreign currency loans taken out in order to hedge a net investment in a foreign entity. Such exchange differences are taken directly to shareholders’ equity until disposal of the net investment, at which time any differences are recognised as income or expenses in the income statement. The tax effect and tax credits attributable to exchange differences deriving from this type of loan are also taken directly to shareholders’ equity. Foreign currency non-monetary items accounted for at historical cost are translated at the exchange rate on the date the transaction was initially recorded. Non-monetary items accounted for at fair value are translated at the exchange rate at the date the value was determined.

The functional currency used by the Group’s Latin American companies is the official currency of the relevant country. At the end of the reporting period the assets and liabilities of these companies are translated into the Parent Company’s presentation currency at closing rates, whilst income and expenses are translated at average rates for the period or at the rates ruling at the date of the related transactions. Exchange differences, resulting from the use of different rates to translate income and expenses as opposed to assets and liabilities, are taken directly to shareholders’ equity and recognised as a separate component of equity. On disposal of a foreign economic activity, the cumulative exchange differences deferred in a separate component of shareholders’ equity are recognised in the income statement.

 

Revenue recognition

Revenue is recognised when the amount of revenue can be reliably measured and it is probable that the economic benefits associated with the transaction will flow to the Group. Depending on the type of transaction, revenue is recognised on the basis of the following specific criteria.

 

Sale of goods

Revenue is recognised when the significant risks and rewards of ownership of the goods have been transferred to the buyer, the revenue can be reliably measured and collectability is probable.

 

Rendering of services 

Revenue is recognised with reference to the stage of completion of the transaction based on the same criteria used for contract work in progress. When the amount of the revenue cannot be reliably determined, revenue is recognised only to the extent of the expenses recognised that are recoverable.

In particular, revenue from the sale and transport of electricity and gas is recognised at the time the service is provided, even when yet to be billed, and includes an estimate of the quantities supplied to customers between their last meter reading and the end of the period. Revenue is calculated on the basis of the related laws, provisions contained in Electricity and Gas Authority resolutions in effect during the period and existing provisions regarding equalisation. 

Revenue from integrated water services are determined on the basis of the Temporary Tariff Method (MTT), valid for determining tariffs for the years 2012 and 2013, approved with AEEG Resolution no. 585/12/R/idr.

Revenues for the year also include the adjustment relative to so-called pass-through items (i.e. electricity, wholesale water, concession fees), the details of which are provided in the aforementioned resolution.

 

Finance income

Interest income is recognised on a time proportion basis that takes account of the effective yield on the asset (the rate of interest required to discount the stream of future cash receipts expected over the life of the asset to equate to the initial carrying amount of the asset). Interest is accounted for as an increase in the value of the financial assets recorded in the accounts.

 

Dividend income

Dividend income is recognised when the shareholder’s right to receive payment is established.

Dividend income is classified as a component of finance income in the income statement.

 

Grants

Grants related to plant investments received from both public and private entities are accounted for at fair value when there is reasonable assurance that they will be received and that the conditions attaching to them will be complied with.

Water connection grants are recognised as non-current liabilities and taken to the income statement over the life of the asset to which they refer if they relate to an investment, or recognised in full as income if matched by costs incurred during the period.

Grants related to income (disbursed in order to provide an enterprise with immediate financial aid or as compensation for expenses and losses incurred in a previous period) are recognised in the income statement in full once the conditions for recognition have been complied with.

 

Construction contracts

Construction contracts are accounted for on the basis of the contractual payments accrued with reasonable certainty, according to the percentage of completion method (cost to cost), attributing revenue and profits on the contract to the individual reporting periods in proportion to the stage of contract completion. Any positive or negative difference between contract revenue and any prepayments received is recognised in assets or liabilities.

In addition to contract fees, contract revenue includes variations, price changes and the payment of incentives to the extent that it is probable that they will form part of actual revenue and that they can be reliably determined. Expected losses are recognised regardless of the stage of contract completion.

 

Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset (an asset that necessarily takes a substantial period of time to get ready for its intended use or sale) are capitalised as part of the cost of the asset until it is ready for use or sale. Income on the temporary investment of the borrowings is deducted from the capitalised borrowing costs.

All other borrowing costs are recognised as an expense in the period in which they are incurred.

 

 

Employee benefits

Post-employment employee benefits in the form of defined benefit and defined contribution plans (such as staff termination benefits, bonuses, tariff subsidies, as described in the notes) or other long-term benefits are recognised in the period the related right accrues. the valuation of the liabilities is performed by independent actuaries. Such funds and benefits are not financed.

The cost of the benefits involved in the various plans is determined separately for each plan based on the actuarial valuation method, using the projected unit credit method to carry out actuarial valuations at the end of the reporting period.

Actuarial gains and losses are recognised as income or expense if the net cumulative unrecognised actuarial gains and losses for each plan at the end of the previous reporting period exceeds the greater of 10% of the present value of the defined benefit obligation or 10% of the fair value of any plan assets at that date (the so-called corridor method). Such gains and losses are recognised on the basis of the expected average remaining working lives of the employees participating in the plan.

 

Share-based payment transactions (stock options)

The Group is required to recognise the goods or services received in a share-based payment transaction at the date the goods or services are consumed. The Group is required to recognise a corresponding increase in shareholders’ equity if the goods or services are received on the basis of a share-based payment transaction settled by the issuance of equity, or as a liability if the goods or services are acquired on the basis of a share-based payment transaction settled by the issuance of cash.

 

Leases

Leases are classified as finance leases when the terms of the contract substantially transfer all the risks and benefits of ownership of an asset to the lessee. All other leases are operating leases.

Assets held under a finance lease are recognised as assets belonging to the Group and accounted for at amounts equal to fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The underlying liability to the lessor is included in the statement of financial position as an obligation to pay future lease payments. Lease payments are apportioned between the capital element and the interest element, in such a way as to produce a constant periodic rate of interest on the remaining balance of the liability.

Finance costs, whether certain or estimated, are recognised on an accruals basis unless they are directly attributable to the acquisition, construction or production of an asset, which justifies their capitalisation.

Lease payments under operating leases are recognised as an expense in the income statement on a straight-line basis over the lease term. The benefits received or to be received as an incentive for entering into operating leases are also recognised on a straight-line basis over the lease term.

 

Taxation

Income taxes for the period represent the aggregate amount of current and deferred taxes.

Current taxes are based on the taxable profit (tax loss) for the period. Taxable profit (tax loss) differs from the accounting profit or loss as it excludes positive and negative components that will be taxable or deductible in other periods and also excludes items that will never be taxable or deductible. Current tax liabilities are calculated using the tax rates enacted or substantively enacted at the end of the reporting period, and taking account of tax instruments permitted by tax legislation (the domestic tax consolidation regime and/or tax transparency).

Deferred taxes are the taxes expected to be paid or recovered on temporary differences between the carrying amounts of assets and liabilities in the statement of financial position and the corresponding tax bases, accounted for using the liability method. Deferred tax liabilities are generally recognised on all taxable temporary differences, whilst deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary difference can be utilised. Deferred tax assets and liabilities are not recognised if the temporary differences derive from goodwill or the initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit nor loss.

Deferred tax liabilities are recognised on taxable temporary differences arising on investments in subsidiaries, associates and jointly controlled entities, unless the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that, based on the plans approved by the Parent Company’s Board of Directors, it is no longer probable that sufficient future taxable profit will be available against which all or part of the assets can be recovered.

Deferred taxes are determined using tax rates that are expected to apply to the period in which the asset is realised or the liability settled. Deferred taxes are taken directly to the income statement, with the exception of those relating to items taken directly to shareholders’ equity, in which case the related deferred taxes are also taken to equity.

 

Property, plant and equipment

Property, plant and equipment is stated at historical cost, including any directly attributable costs of making the asset ready for its intended use, less accumulated depreciation and any accumulated impairment charges.

The cost includes the costs of dismantling and removing the asset and cleaning up the site at which the asset was located, if covered by the provisions of IAS 37. The matching liability is accounted for in provisions for liabilities and charges. Each component of an asset with a cost that is significant in relation to the total cost of the item, and having a different useful life, is depreciated separately.

Land, whether free of constructions or annexed to civil and industrial buildings, is not depreciated as it has an unlimited useful life.

Depreciation is calculated on a straight-line basis over the expected useful life of the asset, applying the following rates:

Plant and machinery used in operations  1.25% - 6.67%

Other plant and machinery  4%

Industrial and commercial equipment used in operations 2.5% - 6.67%

Other industrial and commercial equipment   6.67%

Other assets used in operations  12.5%

Other assets  6.67% - 19.00%

Motor vehicles used in operations   8.33%

Other motor vehicles   16.67%

Plant and machinery in the course of construction for use in operations, or for purposes yet to be determined, is stated at cost, less any impairment charges. The cost includes any professional fees and, if applicable, interest expense capitalised. Depreciation of such assets, in line with all the other assets, begins when they are ready for use. In the case of certain complex assets subject to performance tests, which may be of a prolonged nature, readiness for use is recognised on completion of the related tests.

An asset held under a finance lease is depreciated over its expected useful life, in line with assets that are owned, or, if lower, over the lease term.

Gains and losses deriving from the disposal or retirement of an asset are determined as the difference between the estimated net disposal proceeds and the carrying amount of the asset and are recognised as income or expense in the income statement.

 

Investment property

Investment property, represented by property held to earn rentals or for capital appreciation or both, is stated at cost, including any negotiating costs less accumulated depreciation and any impairment charges.

Depreciation is calculated on a straight-line basis over the expected useful life of the asset. The rates applied range from a minimum of 1.67% to a maximum of 11.11%.

Investment property is eliminated from the accounts when sold or when the property is unusable over the long-term and its sale is not expected to provide future economic benefits.

Sale and lease-back transactions are accounted for based on the substance of the transaction. Reference should therefore be made to the policy adopted for leases.

Any gain or loss deriving from the elimination of an investment property is recognised as income or expense in the income statement in the period in which the elimination takes place.

 

 

Intangible assets

Intangible assets acquired separately or deriving from a business combination

Intangible assets acquired separately are capitalised at cost, whilst those deriving from a business combination are capitalised at fair value at the date of acquisition. After initial recognition, an intangible asset is carried at cost. The useful life of an intangible asset may be defined as finite or indefinite.

Intangible assets are tested for impairment annually: the tests are conducted in respect of each intangible asset or, if necessary, in respect of each cash-generating unit. Amortisation is calculated on a straight-line basis over the expected useful life of the asset, which is reviewed annually and any resulting changes, if possible, applied prospectively. Amortisation begins when the intangible asset is ready for use.

Gains and losses deriving from the disposal of an intangible asset are determined as the difference between the estimated net disposal proceeds and the carrying amount of the asset and are recognised as income or expense in the income statement.

 

Brands and patents

These assets are initially recognised at cost and amortised on a straight-line basis over the useful life of the asset.

 

Concessions

This item includes the value of the thirty-year right of Concession granted by Roma Capitale, regarding the use of fresh and waste water assets, formerly conferred to ACEA and subsequently transferred, as of 31 December 1999, to the spun-off company, ACEA Ato2, and relating to publicly owned assets belonging to the category of so-called “incidental public property” for fresh and waste water services. This right is amortised over the residual concession term (thirty years from 1998). The residual amortisation period is in line with the average term of contracts awarded by public tender.

This item also includes:

  • the net value at 1 January 2004 of the goodwill deriving from the transfer of sewerage services to ACEA Ato2 by Roma Capitale with effect from 1 September 2002,
  • the net value at 1 January 2004 of goodwill deriving from the acquisition of the Acque di Pisa Group by the subsidiary ABAB,
  • the net value at 1 January 2005 of goodwill deriving from the acquisition of G.O.R.I. by the subsidiary, Sarnese Vesuviano,
  • the goodwill, attributable to this item, deriving from the acquisition of Publiacqua by Acque Blu Fiorentine,
  • the goodwill, attributable to this item, deriving from ACEA’s acquisition of Umbra Acque,
  • the goodwill, attributable to this item, deriving from the acquisition of the A.R.I.A. Group, with particular reference to SAO, the company that manages the waste dump in Orvieto,
  • the goodwill, attributable to this item, deriving from ACEA’s acquisition of ACEA Ato5.

Concessions are amortised on a straight-line basis over the residual term of each concession.

 

 

Right on infrastructures

Pursuant to IFRIC 12, this item includes the aggregate amount of tangible infrastructures used for the management of the water service.

With reference to the application of IFRIC 12 to the concession of public lighting , the signing of the supplementary agreement, taking place on 15 March 2011 and effective from 1 January 2011, led to the full adoption of the financial assets model, also with reference to the residual right deriving from the public lighting concession.

It should also be remembered that, as described in the Consolidated Financial Statements 2010, based on the analyses carried out in last year concerning the reference legislative and concession framework to assess the applicability of the interpretation in question, in 2010 the ACEA Group chose to adopt a mixed method that in particular envisages the application of the intangible model, and therefore the posting under intangible assets of the residual right on the infrastructure that can be recovered with the cash flows generated by the service contract after 30 May 2015.

Since the expiry of supplementary agreement coincides with the concession and the cash flows are thus guaranteed by the contract until that date, the item “Rights on the infrastructure”, classified under intangible assets, was reclassified to financial receivables amounting to the value of the right on the infrastructure at 1 January 2011, taking into account the effect generated by the new contract duration.

As regards the rates used, the costs of intellectual property, included under intangible assets, are amortised over an estimated useful life of three years.

 

Impairment of assets

At each end of the reporting period, the Group reviews the value of its property, plant and equipment and intangible assets to assess whether there is any indication that an asset may be impaired (impairment test). If any indication exists, the Group estimates the recoverable amount of the asset in order to determine the impairment charge.

When it is not possible to estimate the recoverable amount of the individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

Intangible assets with indefinite useful lives, including goodwill, are tested for impairment annually and each time there is any indication that an asset may be impaired, in order to determine the impairment charge.

The test consists of a comparison between the carrying amount of the asset and its estimated recoverable amount.

The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. In calculating value in use, future cash flow estimates are discounted using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the business.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount is reduced to its recoverable amount. An impairment charge is immediately recognised as an expense in the income statement, unless the asset is represented by land or buildings, other than investment property, carried at a revalued amount, in which case the impairment charge is treated as a revaluation decrease.

When an impairment no longer exists, the carrying amount of the asset (or cash-generating unit), with the exception of goodwill, is increased to its new estimated recoverable amount. The reversal must not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment charge been recognised for the asset in prior periods. The reversal of an impairment charge is recognised immediately as income in the income statement, unless the asset is carried at a revalued amount, in which case the reversal is treated as a revaluation increase.

Where an impairment charge is recognised in the income statement, it is included among amortisation, depreciation and impairment charges.

 

Emission allowances and green certificates

Different accounting policies are applied to allowances or certificates held for own use in the “Industrial Portfolio”, and those held for trading purposes in the “Trading Portfolio”.

Surplus allowances or certificates held for own use, which are in excess of the company’s requirement in relation to the obligations accruing at the end of the year, are accounted for at cost in other intangible assets. Allowances or certificates assigned free of charge are accounted for at a zero value. Given that these are assets for instant use, they are not amortised but are tested for impairment. The recoverable amount is the higher of the asset’s value in use and its market value. If, on the other hand, there is a deficit, because the requirement exceeds the allowances or certificates in portfolio at the end of the reporting period, provisions are made in the financial statements for the charge needed to meet the residual obligation; this is estimated on the basis of any spot or forward purchase contracts already signed at the end of the reporting period; otherwise, on the basis of market prices.

Allowances or certificates held for trading in the “Trading Portfolio” are accounted for in inventories and measured at the lower of purchase cost and estimated realisable value, based on market trends.

Allowances or certificates assigned free of charge are accounted for at a zero value. Market value is established on the basis of any spot or forward sales contracts already signed at the end of the reporting period; otherwise, on the basis of market prices.

 

Inventories

Inventories are valued at the lower of cost and net realisable value. The cost comprises all materials and, where applicable, direct labour, production overheads and all other costs incurred in bringing the inventories to their present location and condition. The cost is calculated using the weighted average cost formula. The net realisable value is the estimated selling price less the estimated costs of completion and the estimated costs necessary in order to make the sale.

Impairment charges incurred on inventories, given their nature, are either recognised in the form of specific provisions, consisting of a reduction in assets, or, on an item by item basis, as an expense in the income statement in the period the impairment charge occurs.

 

Financial instruments

Financial assets and liabilities are recognised at the time the Group becomes party to the contract terms applicable to the instrument.

 

Trade receivables and other assets

Trade receivables, which have normal commercial terms, are recognised at face value less estimated provisions for the impairment of receivables.

The estimate of uncollectible amounts is made when collection of the full amount is no longer probable.

Trade receivables refer to the invoiced amount which, at the date of these financial statements, is still to be collected, as well as the receivables for revenues for the period relating to invoices that will be issued later.

 

Financial assets

Financial assets are recognised and derecognised at the trade date and initially recognised at cost, including any directly attributable acquisition costs.

At each future balance sheet date, the financial assets that the Group has a positive intention and ability to hold to maturity (held-to-maturity financial assets) are recognised at amortised cost using the effective interest method, less any impairment charges applied to reflect impairments.

Financial assets other than those held to maturity are classified as held for trading or as available for sale, and are stated at fair value at the end of each period.

When financial assets are held for trading, gains and losses deriving from changes in fair value are recognised in the income statement for the period. In the case of financial assets that are available for sale, gains and losses deriving from changes in fair value are recognised directly in a separate item of shareholders’ equity until they are sold or impaired. At this time, the total gains and losses previously recognised in equity are recycled through the income statement for the period. The total loss must equal the difference between the acquisition cost and current fair value.

The fair value of financial instruments traded in active markets is based on quoted market prices (bid prices) at the end of the reporting period. The fair value of investments that are not traded in an active market is determined on the basis of quoted market prices for substantially similar instruments, or calculated on the basis of estimated future cash flows generated by the net assets underlying the investment.

Purchases and sales of financial assets, which imply delivery within a timescale generally defined by the regulations and practice of the market in which the exchange takes place, are recognised at the trade date, which is the date the Group commits to either purchase or sell the asset.

Non-derivative financial assets with fixed or determinable payments that are not quoted in an active market are initially stated at fair value.

After initial recognition, they are carried at amortised cost using the effective interest method. The amortised cost of a financial asset means the amount recognised initially, less principal repayments and plus or minus accumulated amortisation using the effective interest method of the difference between the initial amount and the maturity amount, after any reductions. The effective interest method is a method of calculating the amortised cost of a financial asset (or group of financial assets) and allocating the interest income or expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts over the expected life, or contractual term if shorter, of the financial instrument to the net carrying amount of the financial asset.

In the case of financial assets stated at amortised cost, the income statement and statement of financial position are adjusted to take account of the difference between the payment or receipt calculated on the basis of the effective interest rate and the coupon interest to be collected/paid, recognised on the basis of the nominal rate of the instrument.

At each end of the reporting period, the Group assesses if there has been an impairment for a financial asset, or a group of financial assets. A financial asset or a group of financial assets is subject to impairment if there is evidence of an impairment, as a consequence of one or more events occurred after initial recognition (when there is a “loss event”) and this loss event has an impact - which can be reliably estimated - on future estimated cash flows of the financial asset or group of financial assets. An impairment can be represented by indicators such as financial difficulties, failure to meet obligations, non-payment of significant amounts, the probability that the debtor goes bankrupt or is subject to another form of financial reorganisation, and if data shows that there is a measurable decrease in future estimated cash flows, such as changes in situations or economic conditions linked with obligations.

 

Cash and cash equivalents

Cash and cash equivalents include cash at bank and in hand, demand deposits and highly liquid short-term investments, which are readily convertible into cash and are subject to an insignificant risk of changes in value.

 

Financial liabilities

Financial liabilities are stated at amortised cost. Borrowing costs (transaction costs) and any issue premiums or discounts are recognised as direct adjustments to the nominal value of the borrowing. Net finance costs are consequently re-determined using the effective rate method.

 

Derivative financial instruments

Derivative financial instruments are initially recognised at cost and then re-measured to fair value at subsequent end of the reporting periods. They are designated as hedging instruments when the hedging relationship is formally documented at its inception and the periodically verified effectiveness of the hedge is expected to be high.

Fair value hedges are recognised at fair value and any gains or losses recognised in the income statement. Any gains or losses resulting from the fair value measurement of the hedged asset or liability are similarly recognised in the income statement.

In the case of cash flow hedges, the portion of any fair value gains or losses on the hedging instrument that is determined to be an effective hedge is recognised in shareholders’ equity, whilst the ineffective portion is recognised directly in the income statement.

If the hedged contract commitment or forecast transaction results in recognition of an asset or a liability, the gains and losses on the instrument previously recognised directly in shareholders’ equity are transferred from equity and included in the initial measurement of the cost or carrying amount of the asset or liability.

In the case of cash flow hedges that do not result in recognition of an asset or a liability, the amounts recognised directly in shareholders’ equity are included in the income statement in the same period in which the hedged contract commitment or forecast transaction is ultimately recognised in the income statement.

In the case of fair value hedges, the hedged item is adjusted for changes in fair value attributable to the hedged risk and the resulting gain or loss recognised in the income statement. Gains and losses deriving from measurement of the derivative instrument are also recognised in the income statement.

Changes in the fair value of derivative instruments that do not qualify for hedge accounting are recognised in the income statement for the period in which they occur, with the exception of derivative instruments whose fair value is not reasonably determinable.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or when the instrument no longer meets hedge accounting criteria. At this time, accumulated gains and losses on the hedging instrument recognised directly in shareholders’ equity are retained in equity until the forecast transaction effectively occurs. If the forecast transaction is no longer expected to occur, the accumulated gains and losses recognised directly in shareholders’ equity are immediately taken to the income statement for the period.

 

 

Trade payables

Trade payables, which have normal commercial terms, are stated at face value.

 

Derecognition of financial instruments

Financial assets are derecognised when the Group has transferred all the related risks and the right to receive cash flows from the investments.

A financial liability (or portion of a financial liability) is derecognised when, and only when, it is extinguished, i.e. when the obligation specified in the contract is either fulfilled, cancelled or expires.

If a previously issued debt instrument is repurchased, the debt is extinguished, even if the Group intends to resell it in the near future. The difference between the carrying amount and the amount paid is recognised in the income statement.

 

Provisions for liabilities and charges

Provisions for liabilities and charges are made when the Group has a present (legal or constructive) obligation as a result of a past event, if it is more likely than not that an outflow of resources will be required to settle the obligation and the related amount can be reliably estimated.

Provisions are measured on the basis of management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period, and are discounted when the effect is significant. When the liability regards the cost of dismantling and/or repairing an item of property, plant and equipment, the initial provisions are accounted for as a contra entry in respect of the asset to which they refer. The provisions are released to the income statement through depreciation of the item of property, plant and equipment to which the charge refers.