Post-employment benefits (TFR)

Applying IAS 19 ‘employee benefits’ and up to 31 December 2006, the so-called ‘TFR’ post-employment benefit was classified as a defined benefit plan. This benefit had to be recognised in the financial statements for an amount calculated using the projected unit credit method actuarial technique.

Following the coming into force of the Financial Law 2007, which brought the reform regarding supplementary pension plans - as per Lgs. Decree no. 252 of 5 December 2005 - forward to 1 January 2007, the employee was given a choice as to whether to allocate the post-employment benefit maturing as from 1 January 2007 to alternative pension funds or to maintain these amounts in the company. In the latter case, the funds are transferred by the company to a specific fund managed by Social Security.

This reform has led to changes in terms of the accounting of such fund, both in terms of the amounts accumulated up to 31 December 2006 and in terms of that accumulating as from 1 January 2007. Specifically:

  • Amounts accumulating as from 1 January 2007 constitute a defined contribution plan, both where the employee has chosen to allocate these funds to a supplementary fund and where he/she has decided to allocate them to a treasury fund managed by Social Security. The amounts accumulated must be calculated according to contributions due and not actuarially;

  • Amounts accumulated up to 31 December 2006 continue to be considered as a defined benefit plan and as such are calculated using actuarial techniques. However, in comparison to calculation methods applied before 31 December 2006, methods used following 31 December 2006 do not involve proportionally attributing the benefit to the length of service, as the employee’s service is considered performed in its entirety due to the accounting modification to amounts maturing as from 1 January 2007.

Stock Options

As remuneration for employee performance, employees are given shares representing the parent company share capital that consist of assigning rights to subscribe paid increases in capital.

Based on the difficulty of reliably measuring the fair value of an employee’s performance as a counter-entry of the instruments representing the parent company capital, reference is made to the fair value of the instruments, measured at the grant date.

The fair value of payments settled with the issue of shares is broken down into constant rates over their vesting period and entered in the income statement with a balancing entry in the capital reserves.

Treasury shares

In accordance with the norms in force in Italy, in order to buy back treasury shares, it is necessary to obtain authorisation from the shareholders and also to set up correspondent capital reserves. Treasury shares in the portfolio are deducted from equity at the cost calculated using the FIFO method. Differences between the purchase price and the selling price deriving from trading activities effected during the accounting period on these shares are entered in the capital reserves.

Recognition of revenue

Income from management and guarantee services on the receivables purchased through factoring activities are recognised under commission income according to their duration. Components considered in amortised cost with the aim of calculating the effective interest rate are excluded and are recognised under interest income.

Dividends

Dividends are recognised in the income statement in the year in which the resolution for their distribution is passed.

Repurchase agreements

Securities received as a result of transactions that contractually foresee the compulsory ensuing sale of these, together with securities delivered as a result of transactions that contractually foresee the compulsory repurchase of these, are not recognised and/or derecognised.

Consequently, in cases of securities purchased under an agreement to resell these, the amount paid is recognised as due from customers or banks, or as a financial asset held for trading; in cases of securities sold under an agreement to repurchase these, the liability is entered under due to banks or customers, or among the financial liabilities held for trading. Income from these commitments, made up of the coupons matured on the securities and of the difference between the spot price and the forward price of these, is recognised under interest income in the income statement.

The two types of transactions are offset if, and only if, they have been carried out with the same counterpart and if such offsetting is contractually foreseen.

Amortised cost

The amortised cost of a financial asset or liability is its amount upon initial recognition, minus any repayments of principal, plus or minus the cumulative amortisation calculated using the effective interest method of the difference between the initial value and that at expiry, and minus any reduction due to impairment losses or uncollectability.

The effective interest method is a method of allocating the interest income or interest expense over the duration of the financial asset or liability. The effective interest rate is the rate that actually discounts expected future payments or collections throughout the life of the financial instrument to the net carrying amount at initial recognition. It includes all the expenses and basis points paid or received between the parties to a contract that are an integral part of such rate, the transaction costs and all other premiums or discounts.

Commissions considered an integral part of the effective interest rate are the initial commissions received for selling or buying a financial asset not classified as measured at fair value, for example, that received as remuneration for the assessment of the debtor’s financial situation, for the assessment and the registration of sureties and, in general, for carrying out the transaction.

Transaction costs, in turn, include expenses, commissions paid to agents (including employees that act as sales agents), advisors, brokers and dealers, levies by regulatory bodies and securities exchanges, and transfer taxes and duties. Transaction costs do not include the cost of financing or internal administration or management costs.

Methods for measuring fair value

Fair value is how much an asset (or liability) can be exchanged for in a free transaction between willing and independent parties.

The fair value of a financial liability that is collectible (e.g. an on demand deposit) cannot be worth less than the amount collectible on demand, discounted as from the first date on which request for payment could be made.

The fair value of a financial instrument at first calculation is normally the transaction price, i.e. the consideration paid or cashed. However, if part of the consideration paid or cashed is for other elements of the financial instrument, then the fair value of the instrument is measured using a measurement technique.

The existence of official quotations on an active market is the best proof of fair value and, where they exist, such quotations are used to measure the financial asset or liability. A financial instrument is considered as quoted on an active market if the quoted prices are promptly and regularly available on a list, their prices represent real market transactions and they are regularly and normally traded. If a financial instrument in its entirety is not officially quoted on an active market but the parts it is made up of are, the fair value is calculated based on the market quotation of the parts that compose it. If the market of a financial instrument is not active, fair value is calculated using a measurement technique that is based as much as possible on market factors and as little as possible on specific internal factors. If a market for a financial instrument is not active, an entity establishes fair value by using a measurement technique that makes maximum use of market inputs and includes recent arm's length market transactions, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models.

The fair value of a financial instrument is founded on the following factors, where significant: the time value of money - that is interest at the basic rate without risk; credit risk; the currency risk; the prices of goods; prices of equity instruments; the size of future changes in the price of a financial instrument - that is its volatility; the risk of advanced repayment or redemption and the servicing costs of a financial asset or liability.