Described below are the accounting principles that demand greater judgement on the part of the directors in making estimates. For these principles a change in the principles underlying the assumptions made could have a significant impact on Consolidated Financial statements:
risk provisions and estimates of final costs of long-term contracts: the Group operates in business segments with especially complex contractual frameworks, which are entered in the accounts via the percentage of completion method. the operating margins in the Income statement are a function both of the progress on a particular contract and of the operating margins that are expected to be recognised once the whole project is complete. therefore, the correct assessment of work in progress and the operating margins expected from unfinished work requires a correct estimate on the part of management of the final costs and the estimated increases, as well as of the delays, cost overruns, and penalties that may reduce the expected operating margins. to provide a sounder basis for management estimates, the Group has equipped itself with procedures for managing and analysing contract risks, which aim to identify, monitor, and quantify the risks relating to the carrying out of these contracts. the figures entered in the accounts are management’s best estimate at the time, made with the help of the above-mentioned procedures. moreover, the Group operates in segments and markets where many problems are resolved only after a significant time-lag, especially in cases where the customer is a public body,
Consolidated Accounts
notes
which obliges management to forecast the results of such disputes. the main potential loss situations classified as “probable” or “possible” (no provision is recognised for the latter) are discussed below.
Goodwill: in accordance with the accounting standards adopted for the consolidated accounts, directors test goodwill annually, to establish whether there are any impairments to be entered in the Income statement. most importantly, this test includes the allocation of goodwill to cash generating units, and the subsequent determination of the relative fair value. If fair value is lower than the book value of the cash generating units, the value of goodwill allocated is brought into line with the recoverable value. the allocation of goodwill to cash generating units and the determination of the fair value of such CGus involves making estimates that depend on factors that may change over time and which could therefore produce a significantly different outcome from that expected by directors at the time the Consolidated Financial statements are drawn up.
Impairment of assets: Group assets are tested for impairment at least annually if their lives are indefinite, or more often if there are indications of impairment. similarly, impairment tests are conducted on all the assets showing signs of impairment, even if the amortisation already commenced.
Impairment tests are generally conducted using the discounted cash flow method: however, this method is highly sensitive to the assumptions contained in the estimate of future cash flows and interest rates applied.
For these valuations, the Group uses plans that have been approved by corporate bodies and financial parameters that are in line with those resulting from the current performance of reference markets.
Hedging long-term contracts against foreign exchange risk: in order to hedge exposure to changes in flows of receipts and payments associated with long-term construction contracts denominated in currencies other than the functional currency, the Group enters into specific hedges for the expected individual cash flows in respect of the contracts. the hedges are entered into at the moment the contracts are finalised. exchange-rate risk is normally hedged with plain vanilla instruments (forward contracts).
In all cases where hedges prove to be ineffective, changes in the Fair value of such instruments are taken immediately to the Income statement as financial items, while the underlying is valued as if it were exposed to exchange rate variations. the effects of this recognition policy are reported in the section “Finance income and costs”. Hedges in the former case are reported as Cash Flow Hedges, considering as ineffective the part relating to the premium or discount in the case of forwards or the time value in the case of options, which is recognised under financial items.
3.1.2.2 Effects of changes in accounting policies adopted
the amendments to Ias 1 and the introduction of IFrs 8 only entail different disclosures. In particular, Ias 1 revised requires that entities present in the statement of changes in equity exclusively the changes deriving from transactions with owners. the Group opted for presenting movements from transactions with non-owners in two separate statements, i.e. the “Income statement” and the “statement of comprehensive income”.
IFrs 8 affects, on the one hand, segment information to provide, and, on the other, requires that this information is consistent with that adopted by management for operating decisions.
more specifically, the amendments to Ias 23 eliminated the option of recognising in the Income statement finance costs attributable to the acquisition, construction or production of a certain asset taking a substantial period of time to get ready for its intended use or sale (qualifying assets). the Group exercised the right to apply the new standard prospectively starting from 1 January 2009, without significant effects in the period.
the other changes to the accounting standards and interpretations applicable since 1 January 2009 had no effect on these Consolidated Financial statements.
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3.2 segment information
With regard to the indicators used by the management to assess the Group’s financial performance, please refer to paragraph 2.5 of the report on operations.
the Group operates in two different segments: signalling, for inter-city and urban railways, through the Signalling Business Unit and transport systems through the Transportation Solutions Business Unit. For more detailed analysis of the main programmes, outlook, and management indicators for each unit, see the report on operations by segment.
the results of the business units in the 2009 financial year, compared with those for the same period of the previous year, are as follows: