Separate financial statements

Accounting standards and valuation criteria

Below we provide a summary of the significant accounting policies adopted for the preparation of the Separate Financial Statements as of and for the year ended 31 December 2013.

Intangible assets

Intangible assets are recorded as assets, pursuant to IAS 38 (Intangible Assets), wherever they are identifiable, it is probable that their use will generate future economic benefits, and their cost can be measured reliably.
These assets are measured at their purchase or production cost, including all ancillary charges attributable to them, and are amortised on a straight-line basis over their useful life. The amortisation rate applied for intangible fixed assets is 33% with the exception of specific cases where useful life is greater than three years. Useful lives are reviewed annually and any changes, where necessary, are applied prospectively.
There are no intangible fixed assets with an indefinite useful life. Research costs are expensed directly in the income statement in the period in which they are incurred.

Property, plant and equipment

Property, plant and equipment are recognised at the cost of acquisition or production. Expansion, modernisation and transformation costs and maintenance costs are capitalised only if they increase the future economic benefits of the asset to which they refer. Depreciation is calculated on a straight-line basis over the estimated useful life. When the tangible asset consists of several significant components having different useful lives, each component is depreciated accordingly. The value to be depreciated is the historical cost less the expected residual value, if material and reliably measurable.
Land is not depreciated, even if acquired together with a building. There were no finance lease transactions as defined in IAS 17.
The depreciation rates applied are as follows:

  % Percentage of depreciation
as of31.12.2013
Industrial buildings 2,75 5,5 43%
General plant 10 59%
Office forniure and fittings 12 66%
Electronic machinery 20 80%
Equipment 25 100%
Incremental expenses 8 25 58%

Impairment of assets (impairment test)

At least once a year, the company subjects its tangible and intangible assets to an impairment test to determine whether there are indications that they may be impaired. If such an indication exists, it is necessary to estimate the recoverable value of the asset to determine the amount of any write-downs.
The recoverable amount of an asset is the higher between its fair value, less the costs of the sale, and its value in use determined as the present value of expected future cash flows.
Impairment is recognised if the recoverable value is less than the carrying value. Should the impairment of a fixed asset, other than goodwill, subsequently no longer apply or be reduced, the carrying value of the asset or cash-generating unit is increased up to the new estimate of the recoverable value, without exceeding

Equity investment 

Equity investments in subsidiaries, joint ventures and associates are recognised at their acquisition or subscription cost, written down to reflect any permanent impairment losses. The positive difference, at the time of acquisition, between the acquisition cost and the share of the subsidiary's or associate's shareholders' equity attributable to the Company is therefore included in the carrying value of the equity investment.
Where the book value of equity investments exceeds the corresponding portion of shareholders' equity based on the latest approved financial statements, this value is maintained if it can be attributed to assets of the investee company (tangible fixed assets, inventory and/or goodwill).
Equity investments in other companies are carried at fair value with changes presented in shareholders' equity.
When fair value cannot be measured reliably, equity investments are measured at cost, written down for permanent impairment losses, if any, and dividends from such companies are included in "Net income from equity investments". 
When the reasons for the write-downs cease to exist, equity investments carried at cost are revalued to the extent of the write-downs that had been recognised and the effect is presented in the income statement.
The risk arising from any losses exceeding shareholders' equity is recognised in a specific reserve to the extent that the investor has committed to meet legal or constructive obligations vis-à-vis the investee company or in any case to cover its losses.

Financial assets

IAS 39 envisages classification of financial assets according to the following categories:

  • financial assets at fair value through profit or loss (FVTPL);
  • held-to-maturity (HTM) investments;
  • loans & receivables (L&R);
  • available-for-sale (AFS) financial assets.

Initially, all financial assets are recognised at their fair value, increased, in case of assets other than those classified as FVTPL, by ancillary costs.
At the time of underwriting, an assessment is made as to whether a contract contains embedded derivatives. Embedded derivatives are separated from the host contract if the latter is not measured at fair value, whenever analysis shows that the economic characteristics and risks of embedded derivatives are not closely related to those of the host contract.
The Company classifies its financial assets after initial recognition and, when appropriate and allowable, reviews this classification at the end of each year.

  • Financial assets at fair value through profit or loss (FVTPL)
    This category comprises:
    • assets held for trading (HFT);
    • assets designated as FVTPL financial assets at the time of initial recognition.

Assets held for trading are all those assets acquired for sale in the short term. Derivatives, including separated embedded derivatives, are classified as financial instruments held for trading unless they have been designated as effective hedging instruments. Gains and losses on assets held for trading are taken to the income statement.

  • Held-to-maturity (HTM) investments

Non-derivative financial assets with fixed or determinable payments are classified as "heldto- maturity (HTM) investments" whenever the Group intends and has the ability to hold them to maturity.
After initial recognition, HTM financial investments are measured at amortised cost, applying the effective interest method. Gains and losses are recognised in the income statement when the investment is derecognised for accounting purposes or if impairment occurs, as well as via
the amortisation process.
As of 31 December 2013, ERG held no investments classified as HTM.

  • Loans and receivables (L&R)

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not listed in an active market.
Following initial recognition, these assets are measured at amortised cost using the effective interest method, net of allowances, if any.
Gains and losses are recognised in the income statement when loans and receivables are derecognised for accounting purposes or if impairment occurs, as well as via the amortisation process.
Trade receivables are shown at their fair value, which corresponds to their nominal face, and are subsequently reduced for impairment, if any. Trade receivables whose due date is not consistent with normal trading terms and which do not earn interest are discounted to their
present value.

  • Available-for-sale (AFS) financial assets

Available-for-sale (AFS) financial assets are financial assets, other than derivative financial instruments, that have been designated as such or are not classified in any of the previous three categories.
Following initial recognition, AFS financial assets are measured at fair value and gains and losses are reported under a separate heading within shareholders' equity.
AFS financial assets include equity investments in companies other than subsidiaries and associates in which ERG S.p.A.'s direct or indirect ownership percentage is less than 20%.
When fair value cannot be reliably measured, equity investments are measured at cost, written down for impairment, if any, and dividends from such companies are included in "Other net income (loss) from equity investments".
When the reasons for the write-downs cease to exist, equity investments carried at cost are revalued to the extent of the write-downs that had been recognised and the effect is presented in the income statement.
The risk arising from any losses exceeding shareholders' equity is recognised in a specific reserve to the extent that the investor has committed to meet legal or constructive obligations vis-à-vis the investee company or in any case to cover its losses.

IAS 39 envisages the following measurement methods: fair value and amortised cost. 

Fair value

In case of securities widely traded in regulated markets, fair value is determined with reference to market prices at the close of trading on the Separate Financial Statements' date. Regarding investments for which no active market exists, fair value is determined using
measurement techniques based on:

  • Prices of recent arm's length transactions
  • Current fair market value of a substantially similar instrument
  • Discounted cash flow (DCF) analysis
  • Option pricing models.

Metodo del costo ammortizzato

"Investments held to maturity" and "Loans & receivables" are measured at amortised cost, calculated using the effective interest method, net of impairment provisions or allowances, if any. This calculation takes into account all purchase discounts or premiums and includes any fees which are an integral part of the effective interest rate and transaction costs.

Impairment of financial assets

At each Separate Financial Statements' date, ERG verifies whether a financial asset or group of financial assets has suffered impairment.
If there is objective evidence that a loan or receivable carried at amortised cost has suffered impairment, the amount of such impairment is measured as the difference between the asset's carrying value and the present value of future expected cash flows (excluding future loan
losses that have not been incurred) discounted at the financial asset's original effective interest rate calculated on the initial recognition date.
The carrying value of the asset is reduced via accrual of a provision. The impairment amount is recognised in the income statement.
ERG assesses the existence of factual evidence of impairment on an asset-by-asset basis.

If the amount of impairment subsequently decreases and this reduction can objectively be attributed to an event occurring after recognition of impairment, the value previously reduced can be reinstated. Any subsequent write-backs of value are recognised in the incomestatement, to the extent that the asset's carrying value does not exceed the amortised cost as of the write-back date.
In case of trade receivables, an allowance for uncollectible receivables is recognised when there is objective evidence (such as, for example, the likelihood of the debtor's insolvency or serious financial difficulties) that ERG will be unable to recover the amounts owed according to the original conditions.
The carrying value of the receivable is reduced via use of a specific provision. Receivables are derecognised if they are deemed unrecoverable.

Cash and cash equivalents

Cash and cash equivalents are presented, according to their nature, at face value.
In accordance with IAS 7 – Statement of cash flows, the definition of cash equivalents comprises cash on hand and bank and postal deposits repayable on demand, together with short-term, highly liquid investments that are readily convertible to a known amount of cash.
It also includes short-term investments whose reimbursement value is predetermined at the date of initial purchase/recognition.

Financial liabilities

IAS 39 envisages classification of financial liabilities according to the following categories:

  • Financial assets at fair value through profit or loss (FVTPL);
  • Other financial liabilities.

All loans taken out are initially recognised at the fair value of the amount received net of ancillary loan acquisition costs.
After initial recognition, loans are measured at amortised cost using the effective interest method. Every gain or loss is recognised in the income statement when the liability is settled, as well as via the amortisation process.
Financial liabilities at FVTPL include "liabilities held for trading".
Liabilities held for trading (HFT) are acquired for the purpose of short-term sale and comprise derivatives – including separated embedded derivatives – unless they have been designated as effective hedging instruments. Gains or losses on HFT liabilities are recognised in the
income statement.

Derecognition of financial assets and liabilities

A financial asset (or, where applicable, part of a financial asset or part of a group of similar financial assets) is derecognised (removed from the statement of financial position) when:

  • the rights to receive cash flows from the asset have expired;
  • ERG retains the right to receive cash flows from the asset, but has taken on a contractual obligation to pay them in their entirety and immediately to a third party;
  • ERG has transferred the right to receive cash flows from the asset and substantially all risks and rewards of ownership of the financial asset, or has neither transferred nor retained substantially all risks and rewards of the asset, but has transferred control of the asset.

In cases where ERG has transferred rights to receive cash flows from an asset and has neither transferred nor retained substantially all risks and rewards, or has not lost control of the asset, the asset is recognised in ERG accounts to the extent of ERG's residual involvement in such asset.
A financial liability is derecognised when the liability's underlying obligation has been extinguished, cancelled, or settled.

Derivate financial instruments and heading transactions 

Derivative financial instruments are initially recognised at their fair value on the date when they are stipulated. This fair value is then subject to periodic revaluation.
They are presented as assets when their fair value is positive and as liabilities when it is negative.
ERG carries out transactions with derivative instruments to hedge the risk stemming from interest rate fluctuations.
Derivatives are classified as hedging instruments, consistently with IAS 39, when the relationship between the derivative and the hedged item is formally documented and the effectiveness of the hedging, verified both beforehand and periodically, is high.
When derivatives hedge the risk of fluctuations in the fair value of the underlying hedged asset (fair value hedge), they are measured at their fair value and the effects are presented in the income statement; accordingly, the hedged instruments are adjusted to reflect changes in the fair value associated with the hedged risk.
When the derivative hedges the risk of fluctuations in the cash flows associated with the underlying hedged asset (cash flow hedge), the effective portion of changes in the fair value of the derivatives is initially recognised in shareholders' equity and subsequently presented in the income statement matching the economic effects produced by the hedged transaction.

Treasury shares

Treasury shares are presented as a reduction of shareholders' equity. The original cost of treasury shares, write-downs for impairment, and income and losses deriving from any subsequent sales are presented as changes in shareholders' equity.

Inventories

Raw materials and petroleum product inventories are measured at the lower of cost, determined on a quarterly basis according to the weighted average cost method, and market value.
Measurement of inventories includes the direct costs of materials and labour and indirect production costs (variable and fixed). Allowances are calculated to provide for materials, finished products, spare parts and other supplies considered as obsolete or slow-moving, based on their expected future use and realisable value.
Inventories of raw materials, ancillary materials, consumables and lubricants are measured at the lower of weighted average cost and market value.
Inventories of raw materials or petroleum products purchased for resale are measured at the lower value between the cost and net realisable value.

Foreign currency transcation

Transactions in foreign currencies are recognised at the exchange rate prevailing at the transaction date. Monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate prevailing at the Separate Financial Statements' date. Nonmonetary
items are maintained at the exchange rate prevailing at the transaction date except in case of a persistently unfavourable trend in the exchange rate. Exchange rate differences generated on derecognition of items at rates differing from those at which they had been
translated at the time of their initial recognition and those relating to monetary items at yearend are presented in the income statement under financial income and expenses.

Provisions for liabilities and charges

The company recognises provisions for liabilities and charges when:

  • there is a present legal or constructive obligation to third parties;
  • it is probable that the use of resources will be required to settle the obligation;
  • a reliable estimate can be made of the amount of the obligation.

Changes in estimates are reflected in the income statement in the period in which they occur. When the financial effect of time is significant and the dates of settlement of the obligations can be estimated, the provision is subject to discounting, utilising a discount rate that reflects the current time value of money. The increase in the provision connected to the passing of time is recognised in the income statement under "Financial income (expenses)".
When the liability relates to property, plant or machinery (for example dismantling and restoration of sites), the provision is presented as a contra asset against the asset to which it refers, and recognition in the income statement takes place through the depreciation process.

Significant contingent liabilities, represented by the following, are disclosed in the notes to the Separate Financial Statements:

  • possible (but not probable) obligations arising from past events, the existence of which will be confirmed only upon occurrence of one or more uncertain future events not wholly within the company's control;
  • present obligations arising from past events the amount of which cannot be reliably estimated, or for which it is probable that settlement will not be onerous.

Employee benefits

Until 31 December 2006, the employees' severance indemnities provision (TFR) of Italian companies was considered as a defined benefit plan. The rules for the provision were amended by Italian Law no. 296 dated 27 December 2006 ("2007 Budget Law") and subsequent decrees and regulations promulgated in the early months of 2007. In light of these amendments, and in particular with reference to companies with at least 50 employees, the TFR is currently considered a defined benefit plan solely for the portions accrued prior to 1
January 2007 and not yet liquidated as of the date of the Separate Financial Statements, whereas after said date it is deemed akin to a defined contribution plan.
The liability relating to defined benefit plans is determined, separately for each plan, on the basis of actuarial assumptions, by estimating the amount of the future benefits to which employees are entitled as of the reporting date, and accrued over the rights' vesting period; the liability is valued by independent actuaries. Gains and losses related to defined benefit plans arising from changes in the actuarial assumptions used, or changes in the plan's conditions, are recognised pro rata in the income statement for the remaining average working life of the employees participating in the plan, if and to the extent that their net off-balance-sheet value at the end of the previous year exceeds the higher between 10% of the liability pertaining to the plan and 10% of the fair value of the plan assets.

Stock option plan 

Under IFRS 2 (Share-based Payments), stock options in favour of employees are measured at fair value at the time of their assignment based on models taking into account the factors and elements prevailing at such time (option exercise price and duration, current price of
underlying shares, and expected volatility of share price and the like).
The right vests after a certain period and subject to certain conditions. The overall value of the options is apportioned pro rata temporis over the abovementioned period and presented under a specific shareholders' equity item, and recognised in the income statement.
The measured fair value of each option is neither reviewed nor updated at the end of each year, but remains definitively acquired in shareholders' equity; at the end of each year, however, the estimate of the number of options that will mature up to expiry is updated (and hence of the number of employees who will have the right to exercise the options).
The change in the estimate is recognised as a reduction of shareholders' equity and in the income statement.
The company has applied the provisions of IFRS 2 commencing on 1 January 2005 and therefore to all stock option plans implemented after that date.
As of 31 December 2013, there were no extant stock option plans.

Revenue recognition

Revenues from sales and services are recorded when actual transfer of the risks and rewards of ownership occurs, which coincides with the time of delivery or based on different contractual specifications, or on completion of the services.
Revenues stemming from partially provided services are recognised as earned pro rata over completion, provided that it is possible to determine their level of completion reliably and there are no significant uncertainties as to the amount and existence of revenues and related costs; otherwise, they are recognised within the limits of the recoverable costs incurred.

Dividends

Dividends are recognised when, following a shareholders' resolution, the right of shareholders to receive the payment is established.

Financial income and expenses

These are recognised under the accrual basis of accounting based on the interest due on the net value of financial assets and liabilities utilising the effective interest rate.

Income taxes

Current taxes are provided for based on the estimated tax charge for the period, taking into account also the effects relating to participation of most Group companies in "tax consolidation".
Income taxes are presented in the income statement, with the exception of those relating to items directly debited or credited to a shareholders' equity reserve. In these cases, the tax effect is also directly presented under shareholders' equity.
Furthermore, pursuant to the accrual basis of accounting, the financial statements include deferred tax assets and deferred tax liabilities arising from the temporary differences between statutory performance and the related taxable income, including those stemming from
previous years' tax losses.
Provisions for taxes that may arise from the transfer of undistributed profits of subsidiary companies are made only when there is a real intention to transfer such profits.
Deferred tax assets are only recognised in the Separate Financial Statements if their future recovery is probable.
Deferred taxes are calculated on the basis of the tax rates expected to be in force in the periods in which the taxable temporary differences will be reversed.
Deferred tax assets and deferred tax liabilities are classified under non-current assets and liabilities.
As a result of the promulgation of Italian Law Decree no. 201/2011 and of the subsequent implementing Instruction of the Italian Fiscal Revenue Agency's Director, Protocol no. 2012/140973 of 17 December 2012 (which approved the Application for reimbursement and
related instructions), in line with the indications provided by Assonime in Circular no. 1/2013, receivables were recognised deriving from the non-deduction, for IRES purposes, of the IRAP relating to expenses for employees and similar personnel for the tax period 2004, with total amount of approximately EUR 2 million.
On 15 July 2011, Italian Law no. 111/2011 was passed; it converted Italian Law Decree no. 98/2011 bearing Urgent provisions for the financial stabilisation of the Country (2011 Corrective Budget). In particular, the Law Decree amended Article 84 of the Unified Income Tax Act (TUIR) pertaining to the carrying forward of tax losses, eliminating the 5-year time limit prescribed for the purposes of determining whether prior years' tax losses can be carried forward (such losses, therefore, can be carried forward without limitation), and introducing a
quantitative limit to the utilisation of prior years' tax losses, i.e. 80% of the income produced in the following years.
The aforesaid quantitative limit of 80% does not apply for tax losses generated in the first three years from the incorporation of the company, provided that they refer to a new productive activity.
The new provisions had already been applied starting in 2011 and as clarified by circular 53/E 2011 by the Italian Fiscal Revenue Agency, also with effect on the tax losses generated prior to 2011 and still being carried forward according to previous regulations.

ERG S.p.A. - Genova

Paolo Merli

Head of Corporate Finance & Investor Relations

0039 010 2401376

ERG S.p.A. - Genova

Matteo Bagnara

Investor Relations

0039 010 2401423

ir@erg.it


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