Short-term employee benefits are recorded in the income statement in the period in which the employment takes place.
Post-retirement benefits
The 2007 Budget Law (Law 296/2006) and related implementation regulations introduced, from January 1, 2007, substantial changes in norms regarding Employee Termination Indem-
nities (TFR), among which the choice left to workers as to the destination of individual indem- nities accruing from such date. In particular, according to the choice made by the worker, indemnities accrued from January 1, 2007 will have to be paid out by the company to the pen- sion fund of choice or managed by the company itself (in which case the latter will have to deposit the related amounts in a treasury account set-up with INPS – the national Social Secu- rity Fund – while benefits accrued by the pension fund will be paid out by the employer with the possible subsequent settlement of balances). These normative changes resulted in the follo- wing changes in the accounting treatment of employee termination indemnities:
Accounting treatment prior to reform
According to international accounting principles, employee termination indemnities were included among defined benefit plans, for which it was not sufficient to determine the value of these indemnities in accordance with the method provided for by the Italian Civil Code, but it was necessary to estimate the overall liability for each employee up to the termination of his or her employment with the company. International accounting principles required also to discount such liability to its present value using an appropriate rate of interest.
The following were used in the calculation:
1) projected growth rates of pay increases through which, based on the current pay of each employee, future pay progression estimates were made for each employee (projections based on past average pay growth, inflation, likeliness of career advancements, bonuses, etc.) 2) demographic indexes based on which projections on the timing of future liability payments were made (age of employees, contribution seniority, likeliness of continuation of employ- ment/termination of work with the company, etc.)
The value of future employee termination indemnities was therefore determined through the use of an actuary, considering projected future pay progression, subsequently discounting such value to its present value.
Such calculation was carried out at the end of each quarter, and differences emerging from pre- vious calculations were recorded in the income statement according to their nature:
1) service cost: discounted value of accruals (personnel costs);
2) interest cost: financial effect of the discounting of the provision (financial charges);
3) actuarial gain/loss: changes in the value of employee termination indemnities due to adju- stments to the actuarial assumptions (personnel costs);
Accounting treatment after the reform
According to the mentioned reform introduced by the 2006 Budget Law, employee termination indemnities accrued up to December 31, 2006 will continue to fall under “defined benefit plans”, while indemnities accruing after such date are treated as “defined contribution plan”. In calculating employee termination indemnities accrued up to December 31, 2006, however, contrary to the past, actuaries regarding future pay increases are no longer used and only demographic actuaries are applied. The current value of the provision thus determined is the- refore lower than the related amount calculated using pre-reform rules, as, according to the new calculation method, the service costis no longer calculated, and only the interest costand the actuarial gain(loss) are included. In application of the above changes, the company resta- ted the value of employee termination indemnities at December 31, 2006, and recorded the dif- ference emerged over its value calculated under the previously applied method (so-called cur- tailment) in the income statement.
Employee termination indemnities accrued after December 31, 2006 and paid out to other enti- ties by companies with more than 50 employees are treated by the same as “defined contribu- tion plans”, as in this case all obligations of the company are fulfilled with the periodical pay- ment of indemnities to other entities. The related discounted-back accruals are also in this case no longer recorded in the income statement (service costs), but only actual funds paid out to outside pension funds chosen by individual employees or those paid out to INPS (national social security fund), calculated pursuant to article 2120 of the Italian Civil Code, are recor- ded among personnel costs.
Defined benefit plans
Employee termination indemnities (limited to the share accrued up to December 31, 2006) and Fixed indemnity for managers of newspapers are determined by independent actuaries to esti- mate the amount of the future benefits that the employees have accrued at the balance sheet date. Considering that changes introduced in norms regulating Employee Termination Indem- nities involved the recording of actuarial gains and losses (previously not recorded as part of debt) directly in the income statement, the method formerly used, i.e. the “corridor approach”, was abandoned in favor of the direct recording in the income statement of all actuarial effects. Defined contribution plans
The Group participates in defined contribution plans contributing to mandatory, contractual or voluntary public or private pension plans. As already mentioned, Employee Termination Indemnities paid out, according to workers’ choices, to the different pension plans or to the separate treasury service offered by INPS, are included in the above category. The payment of contributions extinguishes the obligation of the Group towards its employees. Contributions constitute therefore costs for the period in which they are due.
Benefits based on financial instruments
The Group recognizes additional benefits to certain top managers through plans based on financial instruments.
In particular plans adopted by the Group provide for the awarding of stock options or the attri- bution of rights to beneficiaries of extraordinary bonuses contingent on the achievement of the stock market price by the shares (phantom stock options).
Stock Options
The cost of such operations involving shares, recorded in the income statement among person- nel costs, is calculated based on the fair value of options at the time at which they are assigned. The cost is recorded in the period included between the date at which the options are assigned and that at which they become exercisable, and is recorded also under Shareholders’ Equity. The fair value of the options thus determined is not updated or reviewed at the end of each accounting periods.
When options are exercised before or at expiration, the respective value recorded under Share- holders’ Equity is reclassified under the “Share premium reserve”. Whenever options expire unexercised, on the contrary, the related amount is reclassified under “Retained earnings (loss carry-forwards)”.
In the transition to IFRS, the Group took advantage of a specific waiver and has not applied the above principles to stock option plans assigned before November 7, 2002.
Phantom stock options
The cost of such operations, recorded in the income statement among personnel costs, is cal- culated based on the fair value of options at the time at which they are assigned. The cost is recorded in the period included between the date at which the rights are assigned and that at which they become exercisable, and is recorded also under the related liability item (i.e. Sun- dry personnel provisions).
Until the liability is cancelled, the fair value is recalculated at each accounting date and at the date of the actual outlay, recording all changes in the income statement.