Consolidated financial statement

Summary of significant accouting standards 

Significant accounting standards adopted for the preparation of the Consolidated Financial Statements as of and for the year ended 31 December 2013 are described below. They are the same as for the previous year, except for differences described in the paragraph "Accounting principles, amendments and interpretations applied starting on 1 January 2013"

Intangible assets

Intangible assets are recognised 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. Useful lives are reviewed annually and any changes, where necessary, are applied prospectively.

In general, intangible assets are amortised over a maximum period of 5 years with the exception of:

  • the right acquired from ENEL for connection of the IGCC plant to grid connection lines, amortised over the period of use contractually provided for with expiry in 2020;
  • authorisation for operation of service stations and authorisations and surface rights for the wind farms, amortised in relation to the contractual term.

There are no intangible assets with an indefinite useful life or development costs. Research costs are expensed directly in the income statement in the period in which they are incurred.
Other intangible assets recognised following a business combination are presented separately from goodwill if their fair value can be measured reliably.

Goodwill 

In a business combination, the identifiable assets acquired and the identifiable liabilities and contingent liabilities assumed are recognised at their fair value as of the acquisition date.
If control is acquired, the positive difference between the cost of acquisition and the Group's share of the fair value of these assets, liabilities and contingent liabilities is classified as goodwill and recognised in the Consolidated Statement of Financial Position as an intangible
asset.
Any negative difference ("negative goodwill") is instead recognised in the Consolidated Income Statement at the time of the business combination.
Goodwill is not amortised, but is subjected to impairment tests pursuant to IAS 36 Impairment of Assets every year, or more frequently if specific events or circumstances indicate the possibility that there may have been any impairment.

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.
Cyclical maintenance costs are recognised as assets in the Consolidated Statement of Financial Position as a separate component of the main asset during the year in which they are incurred and are included in the depreciation process on the basis of their estimated useful life.
The cost of the assets, where there are present obligations to do so, includes charges for dismantling, removal of assets and site restoration to be incurred at the time facilities are abandoned, which are presented as a contra-asset in a specific provision. These charges are
recognised starting on the date when they can be reliably estimated for those assets for which future disposal, and the time when this will happen, is foreseeable.

Capitalised charges are allocated to the Consolidated Income Statement via depreciation.
Depreciation is calculated on a straight-line basis over the estimated useful life. When the tangible fixed 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. Assets revertible free of charge are depreciated over the estimated life of the asset or the duration of the concession, whichever is shorter.
There were no significant finance lease transactions as defined in IAS 17.

The depreciation rates applied are as follows:

  %
Industrial and commercial buildings 2,75- 7,34
Lightweight constructions 10,0
General plant 8,45 - 10,0
IGCC plant * 5,4
CCGT plant * 6,9
Service stations 7,4
Motor vehicles, furniture and furnishings, sundry assets 8,38 - 25,0

* average rates

With regard to wind turbines, depreciation rates are determined taking into account the different economic useful lives of each component of the wind farm (Component Analysis).

Impairment of assets (impairment test)

At least once a year, the Group 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.
When it is not possible to estimate the recoverable value of an individual asset, the Group estimates the recoverable value of the cash-generating unit to which the asset belongs.
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 the value that would have been determined if no impairment had been recognised.

Joint venture 

These are companies on whose activity the Group has joint control as defined by IAS 31 – Interests in Joint Ventures. The Consolidated Financial Statements include the Group's share of the results of the joint venture, measured under the equity method, starting from the date
when joint control starts until the time when it ceases to exist.
If the Group's share of the losses of the joint ventures exceeds the carrying value of the investment in the Consolidated Financial Statements, the value of the investment is written down to zero and the share of additional losses is not recognised, except and to the extent towhich the Group is obligated to be liable for them.

Associated 

These are companies in which the Group exercises significant influence, but not control or joint control, over financial and operating policies, as defined by IAS 28 – Investments in associates. The Consolidated Financial Statements include the Group's share of the results of the associates, measured under the equity method, starting from the date when significant influence starts until the time when it ceases to exist. If the Group's share of the associate's losses exceeds the carrying value of the investment in the Consolidated Financial Statements, the value of the investment is written down to zero and the share of additional losses is not recognised, except and to the extent to which the Group is obligated to be liable for them.

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 Group 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. As of 31 December 2013, no financial asset had been designated as FVTPL.

  • 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, the Group 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 Consolidated Income Statement when loans & receivables are derecognised for accounting purposes or if impairment occurs, as well as via the amortisation process.
Trade receivables are presented at their fair value, which corresponds to their face value, and are subsequently reduced to account for uncollectible receivables, 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 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 prescribes 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 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.

Amortised cost

"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 Consolidated Financial Statements' date, the Group 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 discounted at the asset's original effective interest rate.

The carrying value of the asset is reduced via accrual of a provision. The impairment amount is recognised in the income statement. The Group 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 income statement, 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 the Group 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. The Group 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.

Cash and cash equivalent 

Cash and cash equivalents are presented, according to their nature, at face value. In accordance with IAS 7, the definition of cash equivalents comprises cash on hand and bank/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 shortterm 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 liabilities 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.
As of 31 December 2013, no financial liability had been designated at FVTPL.

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;
  • the Group 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;
  • the Group has transferred the right to receive cash flows from the asset and has transferred 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 same.

In cases where the Group 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 Group accounts to the extent of the Group'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 transaction

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 the fluctuations in raw material and product prices, foreign currency exchange and interest rates.
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 Consolidated Income Statement matching the economic effects produced by the hedged transaction.
Changes in the fair value of derivatives that do not have the formal requisites to qualify as hedges under IAS/IFRS are presented in the Consolidated Income Statement.

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 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 short-term resale are measured at the lower value between fair value net of sale costs and the cost.

Foreign currency transactions

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 financial statements' date. Non-monetary 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 year-end are presented in the income statement under financial income and expenses.

Provisions for liabilities and charges

ERG records provisions for liabilities and charges when:

  • there is a present legal or constructive obligation to third parties;
  • it is probable that the use of Group 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 Consolidated 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 Consolidated 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 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 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.

Revenue recognition

Revenues from sales and services are recognised when the actual transfer of risks and rewards of ownership occurs, which coincides with the time of delivery or based on different contractual specifications, or upon completion of the services.
ISAB Energy's sales revenues are based on a sale contract to the GSE regulated by the price established in Regulation 6/1992 of the Inter-ministerial Prices Committee (CIP/6), signed for 20 years and already authorised by the EU for 15 years. Regulation 6/1992 provides for recognition of a subsidised price for the first eight years of operation (2000-2008).
This subsidised component represents an advance on the overall sales price that can be obtained from the contract: therefore, the subsidy is recognised as revenues in proportion to the quantities of energy sold over the quantities expected to be sold over the entire lifetime of the contract. 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.
Revenues are presented net of returns, discounts, rebates and allowances, as well as of any directly related taxes.
If a deferment of payment is expected, which does not fall under normal commercial terms, the financial component that will be attributed as income in the deferment period is separated from revenues. Since exchanges of goods or services of a similar nature and value do not constitute
sales transactions, they do not give rise to recognition of revenues and costs.
Revenues relating to "green certificates" are recognised based on production in the period and are calculated on the basis of the legal regulations and prevailing resolutions of the Italian Electricity Authority during the period, also taking into account the prevailing pro tempore
equalising regulations.
Grants related to assets are recognised at the time when a formal assignment is made and any possible restriction on their collection is removed and they are recognised in the Consolidated Income Statement over the useful life of the related assets, with the purpose of matching their
economic-technical depreciation.

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 in the Consolidated Income Statement based on the interest due on the net value of financial assets and liabilities, utilising the effective interest rate.

Income tax

Current taxes are accrued based on the estimated tax burden for the period, also taking into account 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 liabilities arising temporary differences between the statutory values and related tax values.
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 financial statements if their future recovery is probable. With regards to deferred tax assets related to tax losses that can be carried forward, please see the following paragraph.
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.
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.

On 14 September 2011, Law no. 148/2011 was approved, converting Law Decree no. 138/2011 bearing Urgent measures for the financial stabilisation and economic development of the Country. The law introduced the following changes pertaining to the IRES rate surcharge
("Robin Tax"):

  • temporary increase of the IRES rate surcharge from 6.5% to 10.5% for 2011, 2012 and 2013;
  • broadened range of energy industry operators to which the surcharge is applicable; specifically, the surcharge is applicable also to the renewably energy segment (i.e. wind, photovoltaic, etc.);
  • change of the limits to the application of the surcharge; it will be applicable only if, in the previous tax period, revenues exceeded EUR 10 million (previously, the limit was EUR 25 million), and taxable income exceeded EUR 1 million.

The actual effect of the changes, on the contrary, has entailed, starting in 2011, higher current taxes for the Group, both in terms of higher tax rates and of a higher number of Group companies subject to the Robin Tax surcharge.

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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