General information
The parent company EEMS Italia S.p.A. is an Italian company whose shares are listed on the Mercato Telematico Azionario – Segmento STAR managed by Borsa Italiana.
The main geographical sectors of activity in which the EEMS Group operates are described in the section dealing with Segment Reporting.
Compliance with IFRS
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (subsequently referred to also as ‘‘IFRS’’) adopted by the European Union and in accordance with the regulations giving effect to article 9 of Legislative Decree n° 38/2005.
The consolidated financial statements were authorised for publication on 13 March 2009.
The accounting standards applied are the following:
IAS 8 Accounting policies, changes in accounting estimates and errors IAS 10 Events after the reporting period
IAS 12 Income taxes
IAS 16 Property, plant and equipment
IAS 17 Leases
IAS 18 Revenue
IAS 12 Income taxes IAS 19 Employee benefits
IAS 21 Changes in foreign exchange rates IAS 23 Borrowing costs
IAS 24 Related party disclosures
IAS 27 Consolidated and separate financial statements IAS 32 Financial instruments presentation and disclosure IAS 33 Earnings per share
IAS 36 Impairment of assets
IAS 37 Provisions, contingent liabilities and contingent assets IAS 38 Intangible assets
IAS 39 Financial instruments recognition and measurement IFRIC 11 Group and Treasury Share Transactions
The following standards have not been applied in the consolidated financial statements since the relative conditions are not present:
IFRS 1 First-time adoption of international financial reporting standards IFRS 4 Insurance contracts
IFRS 5 Non-current assets held for sale and discontinued operations IFRS 6 Exploration for and evaluation of mineral resources
IAS 11 Construction contracts IAS 14 Segment reporting IAS 20 Government grants IAS 26 Retirement benefit plans IAS 28 Investments in associates
IAS 29 Financial reporting in hyperinflationary economies
IAS 30 Disclosures in financial statements of banks and similar financial institutions IAS 31 Interests in joint ventures
IAS 34 Interim financial reporting IAS 40 Investment property IAS 41 Agriculture
The Company has adopted in advance IFRS 8 – Operating segments, replacing IAS 14.
The new IFRSs and IFRICs adopted by the EU and in force as from 1 January 2009 are reported hereunder, with brief descriptions. The adoption of these revised standards and interpretations has had no effect on the consolidated financial statements.
IFRIC 14 – IAS 19 – Assets for defined employee benefit plans and minimum coverage requirements
Amendment to IAS 39 – Financial instruments recognition and measurement and to IFRS 7 – Financial instruments – disclosures which allows the reclassification, in particular circumstances, of certain financial assets other than derivatives from the “'fair value through profit or loss” category.
These amendments also allow the transfer of loans and receivables from the “held for sale” category to the “held to maturity” category if the entity is capable of holding such instruments for a determined future period. The amendment applies as from 1 July 2008. Its adoption however has had no effect on the present consolidated financial statements since the Company has made none of the reclassifications permitted by it.
IFRSs and IFRICs to be adopted after 31 December 2008
The International Accounting Standards Board and IFRIC issued during the year further standards and interpretations which will go into effect in periods subsequent to the date of the present consolidated financial statements (in the case of IFRIC 12 mentioned above, depending on EU adoption). EEMS has not adopted any of these standards and interpretations in advance. The main effects expected on their application are described below.
IAS 23 – Borrowing costs
In March 2007 an amended version of IAS 23 – Borrowing costs was issued which will become effective for years starting on 1 January 2009 or thereafter. The standard was amended to require the capitalisation of borrowing costs when such costs directly relate to a qualifying asset. A qualifying asset is one that takes a substantial period of time to get ready for use or sale. In accordance with the transitory provisions for this standard, the Group will apply it to future situations. Accordingly, borrowing costs will be capitalised on qualifying assets starting from dates subsequent to 1 January
2009. No change will be made for borrowing costs incurred up to that date and which have been charged off in the statement of income.
IFRIC 12 – Service concession arrangements
Interpretation IFRIC 12 was issued in November 2006 and will be effective for annual periods beginning subsequent to the year of approval by the EU. This interpretation applies to operators who provide services under concession and establishes the accounting treatment for obligations taken on and rights received under a concession agreement. The Company is not an operator in this sector and accordingly this interpretation will not affect its financial statements.
In addition to IFRIC 12, there are other standards and interpretations (or amendments thereto) where the endorsement process is still under way and whose effects, although they have not yet been evaluated in detail, would not appear to have an effect for the Group.
IFRIC 13 – Customer loyalty programmes
Interpretation IFRIC 13 was issued in June 2007 and will be effective for annual periods beginning on or after 1 July 2008. This interpretation requires that award credits to customers be accounted for as a separate component of the sale transaction in which they were granted and accordingly a portion of the fair value of the proceeds received be allocated to the awards and amortised over the periods in which the credits/awards are collected. The Company does not expect that this interpretation will have an effect on its financial statements in that at present there are no fidelity arrangements in place.
IFRIC 14 – IAS 19 – Defined benefit assets, minimum funding requirements and interaction
Interpretation IFRIC 14 was issued in July 2007 and will be effective for annual periods beginning on or after 1 July 2008. The interpretation provides general guidance on how to assess the limit in IAS 19 – Employee Benefits on the amount of the surplus that can be recognised as an asset. EEMS does not expect that this interpretation will have an impact on the Group’s financial position or results in that the only defined benefit plan is in deficit (staff termination pay accrued as at 31 December 2006).
IFRS 2 – Share-based payments – Vesting conditions and cancellations
This amendment to IFRS 2 – Vesting conditions and cancellations was published in January 2008 and will be effective as from the first year following 1 January 2009. The standard narrows the definition of vesting conditions to one condition which includes an explicit or constructive obligation to furnish a service. Any other condition is a non-vesting condition and must be taken into consideration when determining the fair value of the instrument representing the capital assigned.
Where the award does not vest as a consequence of the fact that it does not rank as a non-vesting condition which is under the control of the entity or the counterparty, it must be accounted for as a cancellation.
The Company has not engaged in transactions with share-based payments based on non-vesting conditions and, in consequence, no significant effects are expected from the recording of option-based payment agreements.
IFRS 3R – Business combinations and IAS 27/R – Consolidated and separate financial statements The two revised standards were ratified and adopted in January 2008 and are applicable in the first annual period subsequent to 1 July 2009. IFRS 3R introduces a number of changes regarding the accounting for business combinations which will affect the amount of goodwill to be recorded, results for the year in which the acquisition takes place and results for subsequent years. IAS 27R requires that a change in the share held in a subsidiary be accounted for as a capital transaction. Consequently, this change will have no effect on goodwill and will not give rise to a gain or a loss. In addition, the revised standards introduce changes in accounting for a loss incurred by a subsidiary as well as for the loss of
control over the subsidiary. The changes introduced by IFRS 3R and IAS 27R must be applied prospectively and will have an effect on future acquisitions and transactions with minority shareholders.
IAS 1 Revised – Presentation of financial statements
Revised standard IAS 1 – Presentation of financial statements was ratified and adopted in September 2007 and will be effective in the first annual period following 1 January 2009. The standard separates the changes which have occurred in shareholders' equity pertaining to shareholders and non-shareholders. The statement of changes in shareholders' equity will include details only of transactions with shareholders whereas all changes relating to changes with non-shareholders will be presented on a single line. In addition, the standard introduces the “statement of comprehensive income”: this statement contains all cost and revenue items in the period taken to the income statement and, in addition, any other recognised revenue or cost item. The “statement of comprehensive income” may be presented as a single statement or as two related statements. EEMS is still evaluating whether to prepare one or two statements.
Amendments to IAS 32 and IAS 1 – Financial instruments held for sale
The amendments to IAS 32 and IAS 1 were ratified and adopted in February and will be effective in the first annual period following 1 January 2009. The amendment to IAS 32 requires that certain financial instruments held for sale and obligations arising on liquidation should be classified as capital instruments under certain conditions. The amendment to IAS 1 requires that in the notes to the financial statements certain information should be provided on sales options classified as equity. EEMS does not expect that these changes will affect its financial statements.
The EEMS Group has adopted International Accounting Standards and International Financial Reporting Standards (“IFRS”) as from financial year 2005, with the transition date to IFRS at 1 January 2004.
Basis of presentation
The consolidated financial statements comprise the consolidated balance sheet, the consolidated income statement, the consolidated statement of cash flows and the consolidated statement of changes in equity, which have all been drawn up in accordance with IAS 1, and the notes to the consolidated financial statements which have been prepared in accordance with the IFRSs adopted by the European Union and the regulations issued to give effect to Legislative Decree n° 38/2005.
Classification of expenses by nature has been followed for the consolidated income statement, the
“current/non-current” classification has been adopted for the consolidated balance sheet, and the consolidated statement of cash flows has been presented using the indirect method.
The consolidated financial statements have been presented in euros and all amounts have been rounded off in thousands of euros unless otherwise indicated.
To facilitate the understanding of these financial statements at 31 December 2008, note should be taken of the following:
• the Company’s activities are not subject to appreciable seasonal or cyclical effects during the course of the year;
• there have been no operations which have significantly affected the assets or liabilities in the consolidated balance sheet, consolidated shareholders' equity, or consolidated cash flows, other than those described in the notes to the consolidated financial statements; in particular, the effects of the issue or refund of debt or equity securities are described in Notes 21 and 22;
• the estimates made are not based on assumptions which differ from those already used in drawing up the consolidated financial statements at 31 December 2007;
• no dividends were paid to shareholders in 2008;
• in 2008 no business combinations took place; there was however the reorganisation of the Rieti plant.
Consolidation principles and procedures
The consolidation includes the financial statements of the parent company EEMS Italia S.p.A.
(hereinafter referred to simply as EEMS or the Company or the parent company) and subsidiaries at 31 December 2008 over which control is directly or indirectly exercised through a majority vote or where the Company has the power to determine, including through agreements, their financial and operational policies in order to benefit therefrom.
Subsidiaries are fully consolidated on a line-by-line basis as from the date on which the Group has acquired control up to the date on which such control is transferred outside the Group.
The financial statements of subsidiaries used in the consolidation are adjusted where necessary to conform with the accounting standards of the parent company.
In the preparation of the consolidated financial statements the assets, liabilities, revenues and expenses of the consolidated companies have been fully consolidated on a line-by-line basis and the minority interests in shareholders’ equity and results for the year are disclosed separately in the consolidated balance sheet and consolidated income statement.
The book values of each of the subsidiaries is eliminated against the corresponding portion of equity held in it adjusted to take account of the fair value of its assets and liabilities. The difference arising, if positive, is recorded as goodwill and as such is accounted for in accordance with IFRS 3; if negative, it is charged off to profit and loss.
On consolidation, balances and transactions between consolidated companies are eliminated;
specifically, year-end receivables and payables, costs and revenues, and financial charges and income.
Gains and losses between consolidated subsidiaries are also eliminated.
There has been no change in the consolidation area at 31 December 2008 from the preceding year.
A list of companies included in the consolidation area is presented in Note 35; this list constitutes an integral part of these notes to the consolidated financial statements.
Translation of financial statements of subsidiaries drawn up in foreign currencies.
The consolidated financial statements are presented in euros, which is the functional currency of the parent company which it uses in drawing up its financial statements. Financial statements used for the translation are the subsidiary’s functional currencies.
The functional currency adopted by the subsidiaries EEMS Asia Pte Ltd, EEMS Test Pte Ltd, EEMS Suzhou Co. Ltd, EEMS Technology Co. Ltd and EEMS China Pte Ltd is the US dollar; for Solsonica S.p.A it is the euro. It should be recalled that EEMS Singapore Pte Ltd is not operative.
The rules applied for the translation of financial statements expressed in foreign currencies are the following:
• assets and liabilities are translated using exchange rates at the balance sheet date;
• equity components, except for the results for the year, are translated at historical exchange rates;
• operational and other costs and revenues are translated at the average exchange rate for each month in the year.
Differences arising on translation are taken to the Translation reserve carried under equity for the portion relating to the Group and to Share capital and Reserves pertaining to minority interests for that pertaining to minority interests.
Exchange differences are taken to profit and loss at the time the subsidiary is sold.
For the consolidated statement of cash flows, average exchange rates are used to translate cash flows of foreign subsidiaries.
Goodwill and fair value adjustments arising on the acquisition of a foreign company are recognised in the same currency in which the assets and liabilities of the acquired company are expressed and are translated at year-end exchange rates.
The rates of exchange are those officially published by the European Central Bank.
The choice of the euro as the functional currency, considering that the factors to be taken into consideration do not lead to an obvious decision in this respect, is the result of an evaluation made by management on the basis of IAS 21.12.
Discretionary evaluation and significant accounting estimates
The preparation of financial statements requires the Directors to make discretionary evaluations, estimates and assumptions which can affect the amount of revenues, costs, assets and liabilities, and disclosure of contingent liabilities at the balance sheet date. However, the uncertainty about such assumptions and estimates could lead to outcomes which will require in the future significant adjustment to the book value of such assets and/or liabilities. It should be noted that the Directors have used such discretion in evaluating the existence of conditions for the application of the going-concern basis as well as in taking decisions on the accounting for the effects of multi-year materials supply arrangements with a take-or-pay clause and the payment of cash advances. For advances which are made to the supplier along the line, these are recorded at present value and intangible assets are amortised considering the multi-year right to the procurement of raw materials.
Estimates and assumptions used
Information is given hereunder on key assumptions regarding the future and other important sources of uncertainty in estimates at the balance sheet date which could result in significant adjustments to the book values of assets and liabilities in coming years. The results which in fact will emerge could differ from such estimates. Estimates and assumptions are reviewed periodically and the effects of every change are immediately reflected in profit and loss.
Impairment to the value of non-financial assets
The Group verifies, at each balance sheet date, whether there are any indications of impairment to the value of all non-financial assets. Goodwill and other intangible assets with an indefinite useful life are checked annually for impairment, and also during the year if any such indications arise. Other non-financial assets are checked annually for impairment, when there are indications that book value might not be recovered. When calculations are prepared regarding value in use, the directors must estimate the expected cash flows from the asset or units generating the flows and select an appropriate discount rate to calculate the present value of such cash flows. Further details of key assumptions are indicated in Note 15.
Payments based on shares
The Group defines the cost of each transaction with employees, to be settled with equity instruments, referring it to the fair value of the instruments at the dates on which they are granted. The estimate of
fair value entails the determination of the most appropriate valuation model for the granting of equity instruments which, accordingly, depends on the terms and conditions on the basis of which such instruments are granted. This also entails the identification of the input data for the valuation model, which include assumptions on the expected life of options, volatility and share returns. The assumptions and models used are presented in Note 21.
Deferred taxation
Deferred tax assets are recognised on all tax losses brought forward, to the extent to which it is probable that there will be sufficient future taxable income against which such tax losses can be offset. This entails the making of a significant discretionary evaluation on the part of the directors to determine the amount of deferred tax assets which can be booked. They must estimate the time when the future tax profits will probably arise and make a planning strategy for future taxes. Further details are indicated in Note 13.
Other aspects
The following financial statement elements are affected by estimates and assumptions made by management:
• inventory obsolescence;
• depreciation and amortisation;
• employee benefits;
• valuations of other assets.