Analysis of the income statement and statement of financial position of the Salini Impregilo Group

This chapter presents the Group’s consolidated income statement for the first quarter of the 2014, together with its reclassified consolidated statement of financial position and the structure of its financial position at March 31, 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 quarter of 2014 with those for the previous year – new accounting standards in effect as of January 1, 2014

As a general remark, it is worth mentioning that, starting with the current year, some new international accounting standards went into effect, among which the following are specifically relevant  for the purposes of the Interim report on operations of the Salini Impregilo Group:

  • IFRS 10 – Consolidated Financial Statements
    This standard replaces SIC 12 Consolidation - Special purpose entities (SPE) 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,” despite the fact that the essential conditions for determining the existence of control did not substantially change compared with the requirements of the standards in effect previously.
  • IFRS 11 – Joint Arrangements
    This standard replaces IAS 31 - Interests in joint ventures and SIC 13 - Jointly controlled entities - Non-monetary contributions by venturers. The standard defines criteria to identify and classify joint arrangements 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 financial statements, were recognized using the proportional consolidation option provided in the previously applicable IAS 31 and which, 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 old Impregilo Group, are essentially identified as SPVs that, 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 partners 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 Interim report on operations for the first quarter of 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 reference, as an attestation that the project was completed;

both the title to the revenue generated by the performance of the work included in the project and the liability for the coverage of all costs required to perform the work are deemed to be 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.

In view of these circumstance, 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, at this point an established interpretative commentary has not yet been 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 interpretation may be developed by other parties, including regulatory entities, which could have a potentially material impact on the Group’s data. Because of the very nature of these standards, these potential impacts would not affect the net profit and the shareholders’ equity attributable to the owners of the parent.

Introductory remarks concerning the comparability of the income statement and statement of financial position data for the first quarter of 2014 with those for the previous year – continuity with the consolidated financial statement of the Salini Group for the 2013 reporting year

Please also note that 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, with the company resulting from the merger changing its name to Salini Impregilo S.p.A. In accordance with the requirements of the international accounting standards adopted by the Group in continuity with previous years, the abovementioned 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.” With the exception of the information provided above regarding some new accounting 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 March 31, 2014 reflect continuity of measurement criteria compared with the consolidated financial statements of the Salini Group for the year ended December 31, 2013. These financial statements also reflect the remeasurement 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 abovementioned fair value and the total consideration paid by the then controlling company Salini S.p.A. to acquire said control. 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.

Therefore, taking into account the developments described above, the data of the consolidated income statement for the first quarter of 2013, provided in this Interim report on operations for comparative purposes, are those of the Salini Group for the period immediately before the acquisition of control of Impregilo and presented in the Consolidated interim report  on operations of the Salini Group at March 31, 2013. However, these data are not substantially not comparable with those reported by the Group resulting from the merger for the period reviewed in this Interim report  on operations, also in view of the fact that the contribution provided by the Impregilo Group in the previous year was recognized, in accordance with the line-by-line consolidation method, only after the end of the first quarter of 2013.

Consequently, in order to allow a more homogeneous analysis of the operating performance of the Salini Impregilo Group in the first quarter of 2014 in comparison with the corresponding period a year earlier, it was decided to proceed with a reclassification of the consolidated income statement of the Salini Group for the first quarter of 2013 in a format, presented later in this chapter, that shows:1

  1. the consolidated income statement of the Salini Group for the first quarter of 2013, based on the information provided in the Interim report  on operations published on June 24, 2013 and reclassified to take into account the recognition of the Todini Costruzioni Generali Group in accordance with IFRS 5 and the effects of the adoption of IFRS 11 described above;
  2. the consolidated income statement of the Impregilo Group for the same period, as shown in the Interim report  on operations published on May 14, 2013 and reclassified to take into account the effects of the adoption of IFRS 11 described above and the effects of IFRS 5 with regard to Fisia Babcock; and
  3. the elimination of the effects deriving from the valuation of the significant equity interest held by Salini in Impregilo prior to the acquisition of control and recognized by the equity method.

Lastly, please note that, in the first quarter of 2014, consistent with the process of monetizing the Group’s non-core assets, launched in 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 G.m.b.H. These agreements were finalized in May 2014 and, consequently, in the period covered by this Interim report  on operations, the net assets attributable to this company at March 31, 2014 and the related income statement result for the first quarter of 2014 were reclassified in accordance with IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations,” while the effects of the sale on the income statement and statements of financial position will be recognized in the subsequent quarter.

1 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 Salini by Impregilo; and (ii) cost related to the abovementioned acquisition included among financial expense.