This chapter presents the Group's reclassified consolidated income statement for the first half of 2014, together with its reclassified consolidated statement of financial position and the structure of its financial position at June 30, 2014. It also provides an overview of the main changes, at the consolidated level, in the income statement, compared with the corresponding period the previous year, and in the statement of financial position compared with the data presented at the end of the previous year.
Unless otherwise stated, amounts are in millions of euros and those shown in parentheses refer to the previous year.
The “Alternative performance indicators” paragraph in the “Other information” section provides a definition of the indicators in the statement of financial position and income statement used to analyze the Group’s operating performance and financial position.
Introductory remarks concerning the comparability of the income statement and statement of financial position data for the first half of 2014 with those for the previous year – new accounting standards in effect as of January 1, 2014
Generally speaking, some new international financial reporting standards went into effect this year, among which the following are specifically relevant for the purposes of the Half-year consolidated financial report of the Salini Impregilo Group:
- IFRS 10 - Consolidated financial statements
This standard replaces SIC 12 Consolidation - Special purpose entities and certain parts of IAS 27 - Consolidated and separate financial statements. The new standard identifies a single control model and defines, on a more structured basis, the requirements for determining whether or not control exists. This provision is particularly relevant with regard to situations that qualify as entailing “de facto control”, even if the essential conditions for determining the existence of control are basically the same as those contained in the standards previously in effect.
- IFRS 11 – Joint Arrangements
This standard replaces IAS 31 - Interests in joint ventures and SIC 13 - Jointly controlled entities - Non-monetary contributions by venturers. It defines the criteria for the identification of joint arrangements and how they should be accounted for based on the rights and obligations arising from the contract, regardless of its legal form. The new standard provides for different recognition methods, depending on whether the transaction is a Joint Operation or a Joint Venture, and eliminates the possibility to apply different accounting treatments to the same types of arrangements and, conversely, defines a single model based on the contractual rights and obligations.
- IAS 28 – Investments in Associates and Joint Ventures
This standard defines the accounting treatment of investments in associates and joint venture and is a rewording of the old IAS 28 in light of the new provisions introduced with IFRS 10 and IFRS 11.
the adoption of these standards, implemented retrospectively to allow a presentation of results homogeneous with the comparative information for previous periods, did not produce differences in the statement of financial position or the income statement insofar as the new IAS 28 and IFRS 10 are concerned. With regard to latter, the entities that qualified as “subsidiaries” in accordance with the requirements of the previous standards continued to qualify as such as of January 1, 2014.
On the other hand, differences did arise from the adoption of IFRS 11 with regard to the numerous Italian and foreign Special Purpose Vehicles (“SPVs”) in which the Group participates jointly with other partner companies and which are established for the sole purpose of carrying specific construction projects.
More specifically, these difference occurred with the SPVs that, in the 2013 consolidated financial statements, were recognized using the proportional consolidation option provided in the previously applicable IAS 31 and which - in accordance with IFRS 11 and based on currently developed best practices for the interpretation of international standards, could not be found to unequivocally qualify as joint operations. These entities, which in 2013 belonged exclusively to the former Impregilo Group, are essentially identified as SPVs which, in accordance with the laws in effect in the countries where they operate (i.e. the countries where the respective projects are being carried out), have their own autonomous, albeit limited in some instances, legal entity status and do not allow the immediate identification of a right (obligation) of an individual “participant” with respect to the assets (liabilities) held by the SPV. These SPVs, which in accordance with established industry practice and pursuant to the requirements of the contracts executed by the customer local administrations during the initial phase of the call for tenders operate in their own name but on behalf of the partners and serve the sole purpose of carrying out individual projects, in the preparation of this Half-Year consolidated financial report as at June 30, 2014, were treated on a preliminary basis as joint ventures, in accordance with IFRS 11 and, consequently, consolidated by the equity method. Moreover, considering that:
- these SPVs cannot engage in any type of activity different from the one strictly dictated by their owners and in their owners exclusive interest;
- their activity is aimed exclusively at fulfilling the obligations arising from the contract with the customer, contract usually deriving from the submission of the winning bid in response to a call for tenders by the partners in their capacity as partners possessing the necessary “technical qualification”;
- the partners are the only parties who are jointly and unlimitedly liable towards the customer for the performance of the contract by the SPV;
- the partners are the only parties who are unlimitedly, but not necessarily jointly, liable for the obligations undertaken by the SPV towards third parties within the framework of the activities carried out to perform the contract (e.g. suppliers, employees, local government, etc.); and
- at the end of the contract, the customer delivers to the partners the contractually stipulated technical references, a an attestation that the project was completed;
the title to the revenue generated by the performance of the work is considered directly attributable to the partners, pro-rated based on the interests that the partners declared to hold within the framework of the call for tender procedure and were acknowledged by the customer in the award process.
With regard to the corresponding recognition of the relevant expenses directly attributable thereto (i.e.: the total costs of production necessary for the fulfilment of the contractual obligations towards the customer, to the extent attributable to the partners), however, depending on the different legal structures provided for in individual foreign countries where it operates, it is reasonable to believe that different levels of responsibility of the partners may be introduced in respect of the obligations towards third parties undertaken by the SPVs in which it holds interest. However, by virtue of the provisions consistently laid down in the partner agreements entered into between the companies participating jointly in the tender - provisions which currently reflect market standards, regardless of the nationality of the participating companies - it is reasonable to assume that in considering their ownership of the contractual rights arising from relationships with customers, there is a similar material obligation to bear the related overall expenses, albeit in a non-direct form, regardless of the contractual 'form' with which these expenses will be formally transferred by the SPV to its partners. For those entities that are no longer subject to proportional consolidation, and consistent with the assumption that the revenues generated from the customer are recognized directly to the members/companies participating in the tender according to their equity investment, the Group, according to the respective equity investment, also has the direct obligation to sustain the relative overall costs which, from a different standpoint, are substantially equivalent - excluding the ownership of the contractual revenue recognized to the SPV- to the negative change of the shareholders' equity of the SPV between one period and another and according to the portion attributable to the group.
In view of these circumstances, consistently considered also within the framework of the previously applicable standards, the adoption of IFRS 11 for the treatment of the SPVs in which Salini Impregilo held an interest together with its strategic partners did not produce material differences in terms of the total revenue realized through the SPVs and of the Group’s shareholders’ equity. However, some limited difference did arise with regard to individual assets (liabilities) that in the proportional consolidation previously applied to them were recognized on a pro rata basis and taking into account the nature of each asset (liability) and, under IFRS 11, are instead recognized in accordance with the equity method. However, it is worth pointing out that, with regard to the above, an interpretative commentary has yet to be developed for the new standards, particularly with regard to the specific sector in which the Group operates.
The Company believes that the information provided represents the best operational interpretation of the substance of the Group’s operations, but the possibility cannot be excluded that in the future, possibly even the immediate future, different interpretations may be developed by other parties, including regulatory entities, which could have an impact on several alternative performance indicators adopted by the Group – such as capital expenditures or EBITDA. Finally, because of the very nature of these standards, these potential impacts are not expected to affect the Group's share of net profit and the shareholders' equity.
Introductory remarks concerning the comparability of the income statement and statement of financial position data for the first half of 2014 with those for the previous year – continuity with the consolidated financial statements of the Salini Group for 2013
The merger by incorporation of Salini S.p.A. (formerly the controlling company at December 31, 2013) into Impregilo S.p.A. (formerly the controlled company at December 31, 2013) became fully effective as of January 1, 2014. The company changed its name to Salini Impregilo S.p.A. as a result of this merger.
In accordance with the requirements of the international financial reporting standards adopted by the Group in continuity with previous years, the above-mentioned merger does not constitute a transaction likely to modify the amounts recognized in the Group’s financial statements, due to the fact that it qualifies as a “business combination of entities under common control", control of which Salini S.p.A. acquired over Impregilo S.p.A. with effect from April 1, 2013. With the exception of the information provided above regarding new international financial reporting standards, the mandatory adoption of which is statutorily required as of January 1, 2014, the statement of financial position, income statements and statement of cash flows of the Salini Impregilo Group at June 30, 2014 reflect going concern values compared with the consolidated financial statements of the Salini Group for the year ended December 31, 2013. These financial statements also reflect the restatement of the assets and liabilities of the Impregilo Group based on their respective fair value on the date control was acquired and the subsequent allocation of the difference between the above-mentioned fair value and the total consideration paid in 2013 by the then controlling company Salini S.p.A. to acquire said control, as part of a process commonly referred to as purchase price allocation (PPA). Lastly, please note that the differential was positive and, consequently, was recognized in the 2013 consolidated income statement as badwill. For more information about these issues, please see the detailed disclosure provided in the notes to the consolidated financial statements of the Salini Group for the year ended December 31, 2013.
Taking into account the developments described above, the data of the consolidated income statement for the first half of 2013 - provided below for comparative purposes - are those of the Salini Group and presented in the Half-year consolidated report of the Salini Group as at June 30, 2013 to reflect:
- the classification of the Todini Costruzioni Generali Group and the company Fisia Babcock Environment GmbH in accordance with IFRS 5;
- the retrospective recognition of the effects of the adoption of the new international financial reporting standards referred to in the previous paragraph of this section and
- the recognition as at April 1, 2013, of the effects of the purchase price allocation described above which, although temporarily assigned to the same date, were fully recognized only in the annual consolidated financial statements of the Salini Group as at December 31, 2013, in accordance with the provisions of IFRS 3.
These values, however, are not fully comparable with those presented by the Group resulting from the merger for the period reviewed in this Half-year consolidated financial report due to the fact that the contribution made by the Impregilo Group in the previous period was recognized, according to the line-by-line consolidation method, only as from April 1, 2013 (see Tab. 1).
Consequently, in order to allow a more homogeneous analysis of the operating performance of the Salini Impregilo Group in the first half of 2014 compared with the same period last year, it was decided appropriate to reclassify the consolidated income statement of the Salini Group for the first half of 2013 in a format, presented later in this chapter, that shows2:
- The consolidated income statement of the Salini Group for the first half of 2013, as shown in the Half-year consolidated report of the Salini Group as at June 30, published on August 5, 2013, and reclassified according to the logic described above;
- the consolidated income statement of the Impregilo Group for the first quarter of 2013 as shown in the Directors’ Report as at March 31, 2013, published on May 14, 2013, and reclassified according to the logic described above, and
- the elimination of the effects resulting from the measurement of the PPA and badwill.
Lastly, please note that, in the first quarter of 2014, consistent with the process of monetizing the Group’s non-core assets, launched in October 2012 and continued last year, the Salini Impregilo Group executed preliminary agreements for the sale to external parties of the entire interest held by Impregilo International Infrastructures N.V. in the German company Fisia Babcock Environment GmbH. These agreements were finalized in May 2014; therefore, in the period reviewed in this Half-year consolidated financial report, the financial position attributable to this company (at the time of sale) and the net profit resulting from the sale were reclassified in accordance with IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations".
2 Please note that this disclosure should not be construed as pro forma information pursuant to current applicable regulations and that the main differences compared with said regulations concern the retrospective adoption as of January 1, 2013 of: (i) Purchase Price Allocation procedures for the acquisition of Impregilo by Salini; and (ii) cost related to the above-mentioned acquisition included among financial expense.