NET FINANCIAL POSITION
33. Explanatory Notes as at 31 December
33.1. Accounting policies and basis of consolidation
FOREWORD
Maire Tecnimont S.p.A. (formerly Maire Holding S.p.A.) is an Italian joint-stock company registered in the Rome Register of Companies. The details of the registered offices and locations from which the Group’s core business is conducted are listed in the introduction to the financial statements.
The Consolidated Financial Statements as at 31 December 2008 are denominated in Euros as this is the currency in which most of the Group’s transactions are performed. Foreign operations are included in the consolidated financial statements in accordance with the principles described hereunder.
33.2. Accounting formats
Balance Sheet items have been classified as current and non-current. Income statement items have been classified by nature.
The Cash Flow Statement has been prepared using the indirect method, adjusting net income for the year for non-monetary components.
The Statement of Changes in Shareholders’ Equity shows total net income (loss) for the year and other changes in Shareholders’ Equity.
33.3. Accounting Principles, amendments and interpretations applicable in
2008
On 30 November 2006 IASB issued the accounting principle IFRS 8 – Operating Segments – which is effective for annual periods beginning on or after 1 January 2009 at it replaces IAS 14 – Segment Reporting. The new accounting principle requires the Company to prepare the sector information on the basis of the elements used by management in its operational decision-making process and therefore requires the identification of operating segments in accordance with the internal reporting, which is subject to continuous revisions by the management for the purpose of allocating the financial resources to the various business segments and analyzing their respective performances. The Group has not anticipated the application of this principle in the current financial statements, the adoption of which will not generate any effects from the valuation of the financial statement items perspective.
On 13 October 2008, IASB issued an amendment to IAS 39 – Financial Instruments: Recognition and Valuation and IFRS 7 – Financial Instruments: additional disclosure enabling, under specific circumstances, the reclassification of certain financial assets other than derivatives from the accounting category "valued at fair value through the Income Statement”. Furthermore, the amendment enables the transfer of borrowings and receivables from the accounting category "held for sale" to the accounting category "held until maturity", if the Company intends and has the capability to hold such instruments during a defined future period. The amendment is applicable from 1 July 2008, nevertheless, its adoption has not led to the reporting of any effect in these Financial Statements, given that the Group has not carried out any of the reclassifications allowed by this principle.
On 5 July 2007, the IFRIC issued the interpretation of IFRIC 14 “The Limit on a Defined Benefit Asset, Minimum Funding Requirements and Their Interaction, on IAS 19 – the limit on a defined benefit asset, the minimum funding requirements and their interaction applicable retrospectively from 1 January 2008. The interpretation draws the general guidelines on how to determine the limit amount set by IAS 19 for the recognition of defined benefit assets and provides an explanation on the accounting effects caused by the existence of a minimum
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funding requirement clause. The adoption of that interpretation has not generated material accounting effects in these Financial Statements.
On 30 November 2006, IFRIC issued the interpretation IFRIC 12 “Service Concession Arrangements” defining the recognition and valuation criteria to be adopted for the agreements between the public and private sectors in relation to the development, financing, management and maintenance of grantors’ infrastructure assets under concession arrangements. The provisions of IFRIC 12 are effective from 1 January 2008. Finally, we underscore that in relation to what has been already illustrated in the Explanatory Notes to the Financial Statements at 31 December 2007, the European Commission has not introduced any changes as for the homologation process of the IFRIC 12 Interpretation, referred to the concession arrangements’ recognition and valuation methods between a public-sector body and a private company (with specific reference to the recognition and valuation methods for disposable assets, the management of such assets, and the restoration and maintenance obligations on these assets). In relation to which, even though the IFRIC became effective on 1 January 2008, Maire Tecnimont Group shall adopt the IFRIC 12, if applicable, starting from the date on which the its homologation occurs consistently with the general IFRS application rules envisaging their application conditional to their homologation and publication ion the European Union Official Bulletin.
33.4. Accounting principles, amendments and interpretations not yet
applicable and not applied by the Group before the effective date
On 6 September 2007 IASB issued an updated version of IAS 1 – Presentation of Financial Statements, which must be applied from 1 January 2009. The new version of the principle requires that all changes generated through transactions with shareholders are presented in a Statement of Changes in Shareholders’ Equity. All transactions carried out with third parties (comprehensive income), instead, must be presented in a single statement of comprehensive income or in two separate statements (Income Statement and Comprehensive Income Statement). In any event, the changes generated by transactions with third parties cannot be included in the Statement of Changes in Shareholders’ Equity. Among other components of net profit: change in cash flow hedge reserve, change in actuarial gains and losses, change in retained earnings, actuarial and conversion losses, and the net result on financial activities held for sale. Up to now, the changes in these components result exclusively from the analysis of the changes in shareholders’ equity in which they are included. The adoption of this principle will not have any effects on the valuation of financial statement items.
On 17 January 2008 the IASB issued an updated version of IFRS 2 “Share-based payments”, which specifies the standards to be adopted when equity instruments assigned to employees are cancelled and that the vesting of the equity instruments assigned may be contingent solely upon the satisfaction of conditions related with the services rendered by the employee or company performances. The provisions of the new version of IFRS 2 apply from 1 January 2009.
On 10 January 2008, the IASB issued an updated version of IFRS 3 Business Combinations, and it has amended IAS 27 — Consolidated and Separate Financial Statements. The principal amendments to IFRS 3 refer to the elimination of the obligation to measure the fair value of each subsidiary’s asset and liability at any subsequent acquisition in the event of the progressive acquisition of subsidiaries. In these cases, the goodwill shall be determined as the difference between the value of the investments before the acquisition, the amount due and the net asset value. Moreover, in the event that the Company does not purchase 100% of the investment, the minority interest in the shareholders’ equity can be evaluated at the fair value or using the method illustrated above in IFRS 3. The updated version of the principle also envisages the recognition in the income statement of all costs stemming from the business aggregation and the recognition of liabilities for conditional payments on the date of the acquisition. On the other hand, in the amendment to IAS 27, the IASB stated that the changes in shareholdings that do not imply a loss of control must be treated as equity transactions and, therefore, taken to equity. Further, it establishes that when a controlling company cedes
Consolidated Financial Statements and Explanatory Notes
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its control over a subsidiary but continues to own a minority stake, the latter must be evaluated at the fair value and any potential gains or losses generated by the loss of control must be posted to the income statement. Finally, the amendments to IAS 27 envisage that all losses attributable to the minority interests must be allocated to the portion of shareholders’ equity attributable to them, even if those exceed their respective stakes in the subsidiary’s equity. The new provisions must be applied starting 1 January 2010. At the date of these Financial Statements, the competent bodies of the European Union have not yet completed the homologation process required for the application and amendment of the principle.
On 29 March 2007 the IASB issued an updated version of IAS 23 “Financial charges”, establishing that the capitalization of financial charges stemming from the acquisition, construction or production of an asset (requiring a significant period of time before the asset is ready to use or be sold); with respect to the previous version such financial charges can no longer be recognized on a accrual basis in the income statement. Therefore, it is now mandatory to capitalize the financial charges directly attributable to the acquisition, construction or production of an asset whenever a long period of time is required in order to make it available to the intended use or for sale. The principle shall be applied to the financial charges on capitalized assets starting 1 January 2009.
On 28 June 2007 the IFRIC has issued the interpretation IFRIC 13 “Customer Loyalty Programs” defining the recognition and valuation criteria for the customer loyalty programs offered by companies to their clients, which benefit from prizes, discounts, or free products through their purchases. In detail, the interpretation establishes the allocation of a portion of revenue earned on the sale to award credits and their measurement at fair value. The provisions of IFRIC 13 became effective on 1 January 2009.
Maire Tecnimont S.p.A is currently in the process of analyzing and assessing whether the adoption of the accounting standards and interpretations set forth above will have a significant impact on the financial statements.
33.5. Scope of consolidation
In addition to the Parent Company, Maire Tecnimont S.p.A, the scope of consolidation includes direct and indirect subsidiaries of Maire Tecnimont S.p.A. In particular, entities are consolidated when Maire Tecnimont S.p.A. exercises control over them, whether by virtue of direct or indirect share ownership of the majority of votes exercisable in the shareholders’ meeting, or by virtue of the exercise of a significant influence consisting of the power to determine the financial and management decisions of the company/entity, obtaining the related benefits also regardless of the existence of any share ownership. Entities are excluded from line-by-line consolidation if the inclusion thereof, in terms of operating dynamics (for example, companies not yet or no longer operating and companies for which the liquidation process appears nearly concluded), would be irrelevant to the accurate presentation of the Group’s earnings, cash flow, and financial position from both the qualitative and the quantitative perspective. Joint ventures, in which two or more parties start a business enterprise subject to joint control, are consolidated using the proportionate method. All subsidiaries are included in the scope of consolidation from the date on which the Group acquires control. Companies are excluded from the scope of consolidation from the date on which the Group transfers control.
The scope of consolidation has changed since 31 December 2007, due to the following:
• consolidation of the subsidiary Tecnimont ICB Pvt. Ltd. on a line-by-line basis subsequent to the acquisition of the local partner’s stake in January 2008; Maire Tecnimont now holds a 100% stake. Tecnimont ICB was previously consolidated on a proportionate basis (50%).
• Consolidation on a line-by-line basis of the MABE Brazil Consortia; this Consortia was established during the current fiscal year.
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• Consolidation of the subsidiary Noy Engineering S.r.L. on a line-by-line basis after its acquisition in July 2008.
• Line-by-line consolidation of the subsidiary Tecnimont ICB Qatar WLL, which the year earlier was classified as a holding in other companies.
As previously indicated, the following subsidiaries have not been consolidated given their current non-operating status or economic irrelevance, also given the irrelevance of these in providing a fair and accurate representation of the Group’s earnings, cash flows and financial position and useful purpose to the readers of the Financial Statements (as indicated in the “Framework for the Preparation and Presentation of Financial Statements” provided by IFRS):
• Maire Engineering India, Birillo 2007 S.c.a.r.l., Consorzio Stabile Maire Tecnimont S.c.a.r.l., Fiat Engineering Poland, Federico Due S.c.a.r.l., Svincolo Taccone S.c.a.r.l., Ravizza S.c.a.r.l., Parco Grande S.c.a.r.l..
With the purpose of preparing the Consolidated Financial Statements in accordance with IFRS, all consolidated companies have prepared a specific reporting package based on the IFRS principles adopted by the Group and illustrated below, restating and/or adjusting their accounting data.
The consolidation has been carried out based on the following standards and methods:
a) adoption of the line-by-line consolidation method, consisting of the full incorporation of assets, liabilities, costs and revenue , regardless of the percentage of ownership; b) adoption of the proportionate consolidation method, consisting of the incorporation of
assets, liabilities, costs and revenue according to the percentage of ownership;
c) elimination of the intra-group items arising from financial transactions among Group companies, including the elimination of any potential gains or losses not yet realized, arising from transactions between consolidated companies and recognizing the ensuing deferred tax implications;
d) elimination of infra-Group dividends and subsequent re-allocation to initial shareholders’ equity reserves;
e) elimination of the carrying value of Investments in companies included in the scope of consolidation along with the corresponding share of net equity, and the allocation of the positive and/or negative differences arising in relation to the various items affected (assets, liabilities and shareholders’ equity), defined in accordance to the time of acquisition of the investments and to the subsequent changes occurring;
f) the presentation of the shares of equity, reserves, and profits or losses attributable to minority shareholders in specific items of the income statement and shareholders’ equity;
g) the adoption of the method of translation at current exchange rates for foreign companies preparing their financial statements in an operating currency other than the Euro, involving the translation of all monetary assets and liabilities at year-end exchange rates and income statement items at the average exchange rate for the year. The balance arising from currency translation is recognized among the shareholders’ equity reserves.
The exchange rates applied for the conversion of the financial statements drafted in foreign currencies are those published by UIC (Italian Foreign Exchange Office) as reported in the table below:
Consolidated Financial Statements and Explanatory Notes
94
Exchange rates January- December ‘08 31 December 2008 January- December‘ 07 31 December 2007
Euro /U.S. Dollar 1.47076 1.3917 1.3704 1.472
Euro /Brazilian Real 2.67373 3.2436 2.663 2.61
Euro /Indian Rupee 63.7343 67.636 56.571 58.021
Euro /Nigerian Naira 174.716 193.249 172.159 174.37
Euro /New Chilean Peso 762.847 888.086 714.948 733.032
Euro /Russian Ruble 36.4207 41.283 35.0183 35.986
Euro /Saudi Arabian Rial 5.51705 5.22303 5.135 5.52
Euro /Polish Zloty 3.5121 4.1535 3.783 3.593
The scope of consolidation at 31 December 2008 was as follows: Companies consolidated using the line-by-line consolidation method:
Consolidated Companies Consolidation
method
HQ/Country Currency Share capital %
Group’s stake
Through:
Maire Tecnimont S.p.A. Line-by-line Italy (Rome) EUR 16,125,000 – Parent Company
Tecnimont S.p.A. Line-by-line Italy (Milan) EUR 52,000,000 100% Maire Tecnimont S.p.A. 100% Met Development S.p.A Line-by-line Italy EUR 13,300,000 100% Maire Tecnimont S.p.A 99%
Tecnimont S.p.A. 1%
Sofregaz S.A. Line-by-line France EUR 10,000,000 100% Tecnimont S.p.A. 100%
TPI Tecnimont Planung und Industrieanlagenbau Gmbh
Line-by-line Germany EUR 260,000 100% Tecnimont S.p.A. 100%
Tws S.A. Line-by-line Switzerland EUR 507,900 100% T.p.i. 100%
Tecnimont International S.A. Line-by-line Luxembourg EUR 200,000 99.67% Tecnimont S.p.A. 99.67%
Imm.Lux. S.A. Line-by-line Luxembourg EUR 780,000 100% Tecnimont
International
100%
Protecma S.r.l. Line-by-line Italy (Milan) EUR 3,000,000 100% Tecnimont S.p.A. 100%
Empresa Madrilena de Ingegnerìa y Construcciòn S.A.
Line-by-line Spain EUR 60,110 100% Tecnimont S.p.A. 100%
Tecnimont Poland Sp.Zo.o Line-by-line Poland Plz 50,000 100% Tecnimont S.p.A. 100%
Tecnimont Arabia Ltd. Line-by-line Saudi Arabia Rial 5,500,000 55.45% Tecnimont S.p.A. 55.45% Tecnimont do Brasil Ltda. Line-by-line Brazil Real 1,000,000 100% Tecnimont S.p.A. 99.99%
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Consolidated Companies Consolidation
method
HQ/Country Currency Share capital %
Group’s stake
Through:
Tecnimont Russia Line-by-line Russia RUR 18,000,000 74% Tecnimont S.p.A 74%
Icogas Tecnologica 2000 S.L. Line-by-line Spain EUR 3,005 100% Sofregaz S.A. 100%
Noy Engineering S.r.L Line-by-line Italy (Bergamo)
EUR 100,000 100% Tecnimont S.p.A 100%
Tecnimont ICB Pvt. Ltd. Line-by-line India Indian Rupees
13,886,700 100% Tecnimont S.p.A. 100%
Tecnimont ICB Qatar WLL. Line-by-line India Indian Rupees
49% Tecnimont ICB private Ltd India
49%
Maire Engineering do Brasil Ltda. Line-by-line Brazil Real 19,000,000 100% Tecnimont S.p.A. 78.8% Maire Engineering
France S.A.
21.2%
Tecnimont EIL Emirates (ex Lihatonbur Cons.)
Line-by-line Portugal EUR 500,000 70% Tecnimont S.p.A. 70%
Engineering and Design Tecnimont ICB Pvt. Ltd.
Line-by-line India Indian Rupees
100,000 100% Tecnimont ICB private Ltd India
100%
Tecnimont Chile Ltda. Line-by-line Chile Pesos 277,934,149 100% Maire Engineering do Brasil Ltda.
100%
Consorcio ME Ivai Line-by-line Brazil Real 0 65% Maire Engineering do
Brasil Ltda
65%
Maire Engineering Sapezal Line-by-line Brazil Real 1,500,000 100% Maire Engineering do Brasil Ltda
100%
Consorcio MABE Brazil Line-by-line Brazil Real 5,000 75% Maire Engineering do
Brasil Ltda
75%
Maire Engineering France S.A. Line-by-line France EUR 680,000 99.98% Tecnimont S.p.A. 99.98%
Transfima S.p.A. Line-by-line Italy EUR 1,020,000 51% Tecnimont S.p.A. 51%
Transfima G.E.I.E. Line-by-line Italy EUR 250,000 50.65% Tecnimont S.p.A. 43%
Transfima S.p.A. 7.65%
Japigia 2000 S.r.l. Line-by-line Italy EUR 98,000 95% Tecnimont S.p.A. 95%
Cefalù 20 S.c.a.r.l. Line-by-line Italy EUR 20,000,000 99.99% Tecnimont S.p.A. 99.99%
Corace S.c.a.r.l. Line-by-line Italy EUR 10,000 65% Tecnimont S.p.A. 65%
MGR Verduno 2005 S.p.A. Line-by-line Italy EUR 600,000 60% Tecnimont S.p.A. 60%
M.R. S.c.a.r.l. Line-by-line Italy EUR 10,000 60% Tecnimont S.p.A. 60%
ML 3000 S.c.a.r.l. Line-by-line Italy EUR 10,000 51% Tecnimont S.p.A. 51%
Coav S.c.a.r.l. Line-by-line Italy EUR 25,500 51% Tecnimont S.p.A. 51%
MST S.r.l. Line-by-line Italy EUR 400,000 100% Tecnimont S.p.A. 100%
Companies consolidated using the proportionate consolidation method:
Consolidated Companies Consolidation
Method
HQ/Country Currency Share capital %
Group’s Stake
Through:
JTS Contracting Company Ltd Proportionate Malta EUR 100,000 45%
Tecnimont S.p.A. 35% Sofregaz S.A. 10% Sep Hazira(*)
Proportionate France EUR - 45% Tecnimont S.p.A. 45%
Sep FOS(*) Proportionate France EUR - 50%
Tecnimont S.p.A. 49% Sofregaz S.A. 1%
S.T.T.S. S.n.c. Proportionate France EUR 1,000 40%
Tecnimont S.p.A. 25%
Sofregaz S.A. 15%
Guandong Contractor – S.n.c. Proportionate Spain EUR 1,000 40%
Icogas 15%
Empresa Madrilena 25%
Consorzio Piacenza 800 Proportionate Italy EUR 100,000 50% Tecnimont S.p.A. 50%
Consorzio Turbigo 800 Proportionate Italy EUR 100,000 50% Tecnimont S.p.A. 50%
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The most significant change was the purchase of the stake in the subsidiary Tecnimont ICB from the local Indian partner; Maire Tecnimont has gained control of the company reaching 100% of the share capital; more specifically, the acquisition cost has been recognized as increases in assets and liabilities, as envisaged by accounting principles, while the residual value has been recognized as goodwill. The following table illustrates the assessment of the fair value of assets, liabilities and contingent liabilities to which it can be allocated and the residual amount recognized as goodwill.
Assessment of Tecnimont ICB Pvt’s goodwill
(in Euro ‘000s)
Net assets acquired before the allocation (*) (A) 11,640
Adjustments for the valuation at fair value:
Backlog 885
Non-compete agreement (Escrow Agreement) 8,000
Software 2,161
Properties 7,656
Other tangible assets 756
Net deferred tax liabilities (6,110)
Total adjustments (B) 13,348
Net assets acquired after the allocation (*) (C) = (A)+(B) 24,988
Value of the Transaction 72,272
Non-compete agreement (Escrow Agreement) 8,000
Total deficit (D) 80,272
Goodwill (E) = (D) - (C) 55,284
(*) Net assets proportional to Maire Tecnimont S.p.A.’s shareholding.
33.6. Valuation criteria
The key valuation criteria adopted for the Consolidated Financial Statements are described below.