The classification of financial instruments carried at fair value on the basis of a hierarchy of levels pursuant to IFRS 7 is illustrated as follows. This hierarchy reflects the significance of the inputs used to determine fair value. The following levels are distinguished:
Level 1 – unadjusted quotations recorded on an active market for the assets or liabilities to be measured; Level 2 – inputs different from the quoted prices referred to at the preceding sub-indent, and that are
observable on the market either directly (as in the case of prices) or indirectly (because they are de- rived from prices);
Level 3 – inputs that are not based on observable market data.
The following table shows assets and liabilities carried at fair value at December 31, 2012, divided into the three levels defined above:
FINANCIAL ASSETS
Note amount at Carrying
12/31/2012 Level 1 Level 2 Level 3
Financial assets carried at fair value through profit and loss:
Securities held for trading 18 224,717 755 223,962 - Current derivative financial instruments 27 42,208 - 42,208 - Hedging financial instruments:
Current derivative financial instruments 27 5,495 - 5,495 - Available-for-sale financial assets:
Equities 105,782 73,602 11,939 20,241 Investment funds 12,343 - 12,343 - Other financial assets 12 118,125 73,602 24,282 20,241
Total Assets 390,546 74,357 295,948 20,241
FINANCIAL LIABILITIES
Financial liabilities carried at fair value through profit and loss:
Current derivative financial instruments 27 (44,756) - (44,756) - Hedging financial instruments:
Current derivative financial instruments 27 (51,592) - (51,592) -
The situation at December 31, 2011 was as follows:
FINANCIAL ASSETS
Note amount at Carrying
12/31/2012 Level 1 Level 2 Level 3
Financial assets carried at fair value through profit and loss
Securities held for trading 18 160,503 832 159,671 - Current derivative financial instruments 27 62,281 - 62,281 - Hedging financial instruments
Current derivative financial instruments 27 8,065 - 8,065 - Available-for-sale financial assets
Equities 114,664 71,229 10,943 32,492 Investment funds 12,373 30 12,343 - Other financial assets 12 127,037 71,259 23,286 32,492
Total Assets 357,886 72,091 253,303 32,492
FINANCIAL LIABILITIES
Financial liabilities carried at fair value through profit and loss:
Current derivative financial instruments 27 (51,795) - (51,795) - Hedging financial instruments:
Current derivative financial instruments 27 (52,117) - (52,117) -
Total liabilities (103,912) - (103,912) -
During 2012, there were no transfers from level 1 to level 2 or vice-versa. The following table shows the changes that occurred in level 3 during 2012:
(in thousands of euro)
12/31/2012 12/31/2011
Opening balance 32,492 40,604 Increases / Subscription of capital 1,981 1,824
Disposals (136) (5,274)
Impairment (12,055) (1,110)
Fair value adjustments through Equity (2,029) (3,341)
Other changes (12) (211)
Closing balance 20,241 32,492
The item increases / subscription of capital refers to the capital increase for the investment in F.C. Inter- nazionale S.p.A. (euro 638 thousand), in Equinox Two SCA (euro 993 thousand) and S.In.T. S.p.A (euro 350 thousand).
5. cApitAl mAnAGement policieS
The Group’s objective is to maximise the return on net invested capital while maintaining the ability to operate over time, ensuring adequate returns for its shareholders and benefits for the other stakeholders, with a sustainable financial structure.
In order to achieve these objectives, as well as pursue sat- isfactory earnings results and generate cash flows, the Group may adjust its dividend policy and the configuration of the Company’s capital.
The main indicators used by the Group to manage its capi- tal are:
R.O.I. (Return on Investments) – Ratio between operat- ing income and average net invested capital: the indi- cator represents the capacity of business results to re- munerate net invested capital, construed as the sum of non-current assets and net working capital. The Group’s objective is for this ratio to be greater than the weighted average cost of capital (WACC);
Gearing: this is calculated as the ratio between net fi- nancial position and equity. It is an indicator of the sus- tainability of the ratio between debt and equity, which takes into account the market situation and trend in the cost of capital and debt at different times;
R.O.E. (Return on equity): this is calculated as the ratio between net income and average book value of equity. It is an indicator representing the Group’s ability to re- munerate its shareholders. The objective is for the indi- cator to be higher than the rate of return on a risk-free investment, correlated to the nature of the operated businesses.
Impairment refers mainly to impairment losses on the equity investments in Alita- lia S.p.A. (euro 4,775 thousand), F.C. Inter- nazionale S.p.A. (euro 6,655 thousand) and Tlcom I LP (euro 591 thousand).
The fair value adjustment through equity refers mainly to the investment in the Isti- tuto Europeo di Oncologia (euro 1,121 thou- sand) and Euroqube (euro 477 thousand). During the year, there were no transfers from level 3 to other levels or vice-versa. The fair value of financial instruments traded on active markets is based on the price quotations published at the report- ing date. These instruments, included in level 1, mainly consist of equity invest- ments classified as held for trading or available for sale.
The fair value of financial instruments not traded on active markets (e.g. derivatives) is measured by means of techniques that maximise the use of observable and avail- able market data. If the most material data for determining the fair value of a finan- cial instrument are observable, the instru- ment is included in level 2. The measure- ment techniques used to determine the fair value of these instruments include:
market prices for similar instruments; the fair value of interest rate swaps is
calculated by discounting estimated future cash flows based on observable yield curves;
the fair value of foreign exchange de- rivatives (forward contracts) is deter- mined by using the forward exchange rate at the reporting date.
The figures for 2012 and 2011 are shown below:
2012 2011
1 R.O.I. (operating income / average net invested capital) 19.15% 16.64%
2 Gearing 0.50 0.34
3 R.O.E. (Return on Equity) 17.39% 20.89%
The change in R.O.I. stems from the increase in operating income, while the decrease in R.O.E. reflects the decrease in net income for 2012 compared to the previous year. The net income for 2011 benefited from the recognition of deferred tax assets carried forward by the parent Pirelli & C. S.p.A.
6. eStimAteS AnD ASSumptionS
The preparation of the consolidated financial statements entails that management make estimates and as- sumptions which, under certain circumstances, are based on difficult and subjective assessments and esti- mates that are based on historical experience, and assumptions that are periodically considered reasonable and realistic in light of the circumstances. The results that actually emerge could therefore differ from such estimates. Estimates and assumptions are reviewed regularly and the effects of each change made to them are recognised in income for the year when the estimate is revised if the revision itself only affects that year, or also in subsequent periods if the revision affects both the current period and future ones.
In this context it is important to note that the situation caused by the current economic and financial crisis has entailed making extremely uncertain assumptions about future performance. Therefore, it cannot be ruled out that next year’s results will be different from those estimated and that adjustments to the carrying value of the relevant items might be necessary, including significant adjustments, which obviously cannot be estimated or foreseen at this time. Such estimates affect the carrying amounts of certain assets and liabili- ties, costs and revenues, and also disclosures relating to contingent assets/liabilities at the reporting date. The estimates and assumptions relate mainly to assessments of the recoverability of intangible assets, to the definition of the useful lives of property, plant and equipment, to the recoverability of receivables and to the recognition/measurement of provisions, pension schemes and other post-employment benefits and are based on data that reflect the current state of available knowledge.