Accounting principles
The accounting principles described here below have been applied during the preparation of these consolidated financial statements in a comparative manner for both financial years presented and on the going concern assumption.
Consolidated financial information are prepared in accordance with the IFRS issued by the International Accounting Standards Board (IASB) and approved by the European Commission as at 31st December 2008. The application of the amended accounting principles or interpretations issued by IFRIC and applicable to the financial statements at 31st December 2008 did not have any significant impact on results.
These consolidated financial statements are presented in Euro. The majority of the economies in which the Group operates are within the Euro area, and for this reason the Group has chosen to adopt the Euro as official currency.
These consolidated financial statements are prepared in accordance with “cost” criteria with the exception of financial assets available-for-sale and some financial assets and liabilities, including derivative instruments, for which the “fair value” criteria was adopted.
The preparation of the financial statements in accordance with IFRS accounting principles requires the management to make estimates and assumptions that may affect the amounts reported in the financial statements and explanatory notes. Actual results may differ from these estimates. The areas of the financial statements that are most affected by such estimates and assumptions are listed in section “Use of estimates”.
Basic earnings per share are calculated by dividing the profit or loss of the Group by the weighted average number of ordinary shares in circulation during the year.
DilutedDiluted earnings per share are calculated by dividing the profit or loss of the Group by the weighted average number of ordinary shares in circulation during the year. In order to calculate the diluted earnings per share, the weighted average number of shares in circulation is adjusted in respect of the dilutive potential ordinary share (stock options and convertible bonds), while the profit or loss of the Group is adjusted to take into account the effects, net of income taxes, of the conversion.
Safilo Group presents the income statement by function (so-called “cost of sales”). This is considered to be more representative with respect to presentation by type of expenses, as it conforms more closely to the internal reporting and business management methods and is in line with international practice in the eyewear sector.
For the balance sheet, a distinction is made in the assets and liabilities between current and non-current as described in paragraphs 51 and following of IAS 1. The indirect method for the financial report and the cash flow statement was used, therefore the net profit of the period is adjusted by the effects of non-monetary operations, changes in the working capital and financial flows deriving from the investing and financing activities.
The Group records provisions for risks and charges when:
- has a legal or implicit obligation to third parties;
- it is probable that it will be necessary to use resources of the Group to settle the obligation;
- a reliable estimate of the amount can be made.
Changes in estimates are recorded in the income statement of the period in which the changes occur.
Foreign currency transactions are converted into the functional currency using the actual exchange rates at the date of the transaction. Gains and losses on exchange rates resulting from the close of such transactions and from the translation of the monetary assets and liabilities in foreign currencies at the exchange rates at end of the year are accounted for in the income statement.
The rules for the conversion of financial statements of companies expressed in currencies different from the Euro are the following:
- assets and liabilities are converted using the actual exchange rates at the balance sheet date;
- costs, revenues, income and charges are converted at the average exchange rate of the period;
- the “conversion reserve” includes foreign exchange differences generated from the conversion of the opening shareholders’ equity and the movements during the year at a rate different from that at the end of the year;
- the goodwill and fair value adjustments related to the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the exchange rate at the end of the period.
Tangible fixed assets are assessed at purchase or production cost, net of accumulated depreciation and of any possible loss in value. The cost includes all charges directly incurred in bringing assets to their current location and condition. Costs incurred after purchase of assets are recorded only if they increase the future economic benefits of the asset they refer to. Interest charges relating to the construction of property, plant and equipment are charged directly to the income statement.
Charges incurred for the maintenance and repairs of an ordinary and/or cyclical nature are directly charged to the statement of operations of the period in which the costs are incurred. The capitalisation of costs relating to the expansion, modernisation or improvement of proprietary structural assets or of those used by third parties, is made only when they satisfy the requirements to be separately classified as an asset or part of an asset. The book value is adjusted for depreciation on a systematic basis, over its useful life.
Capitalised costs for leasehold improvements are attributed to the category of the assets they refer to and are depreciated over the shorter of either the remaining duration of the rental contract or the remaining useful lifetime of the assets improved.
When circumstances indicate that there may be a permanent impairment in value, an estimate is made of the recoverable amount of the asset, and any loss is recorded in the income statement. When the reasons for the write-down no longer exist, the book value of the asset is restated through the income statement, up to the value at which the asset would be recorded if no write-down had taken place and depreciation had been recorded.
Assets held through financial leasing contracts, where the majority of the risks and benefits related to the ownership of an asset have been transferred to the Group, are recognised as assets of the Group at their fair value or, if lower, at the current value of the minimum lease payments. The corresponding liability due to the lessor is recorded on the financial statements under financial debts. The assets are depreciated by applying the criteria and rates indicated below.
The leased assets where the lessor bears the majority of the risks and benefits related to an asset are recorded as operating leases. The costs relating to operating leases are recorded on a straight-line basis in the income statement over the duration of the lease contract.
Depreciation is calculated on a straight-line basis over the estimated useful lifetime of the asset, in accordance with the following depreciation rates:
| Category | Useful lifetime in years |
|---|---|
| Buildings | 20-33 |
| Plant, machinery and equipment | 5-15 |
| Furniture, office equipment and vehicles | 4-8 |
Land is not depreciated.
When the asset to be depreciated is composed of separately identifiable elements whose useful lifetime differs significantly from that of the other parts of the asset, the depreciation is made separately for each part of the asset, with the application of the “component approach” principle.
The remaining value of the assets and their useful lifetime are reviewed at the end of each financial year. The capital gains or losses from the sale of the fixed assets are posted to the income statement and valued as the difference between the sale proceeds and the net book value.
The preparation of the consolidated financial statements requires the Directors to apply accounting standards and methods that, in some circumstances, are based on difficult and subjective valuations and estimates based on past experience and assumptions which are from time to time considered reasonable and realistic according to the relative circumstances. The application of these estimates and assumptions affect the amounts posted in the financial statements, such as the balance sheet, the income statement, the cash flow statement and the notes thereto. Actual results of the balances on the financial statements, resulting from the above-mentioned estimates and assumptions, may differ from those reported on the financial statements due to the uncertainty which characterises the assumptions and the conditions on which the estimates are based.
Intangible fixed assets consist of clearly identifiable non-monetary assets, without any physical substance and capable of generating future economic benefits. These assets are assessed at purchase and/or production cost, including the costs of bringing the asset to its current use, net of accumulated depreciation and of any possible loss in value. Amortisation begins when the asset is available for use and is recorded on a systematic basis over the course of its useful lifetime.
When circumstances indicate that there may be a permanent impairment in value, an estimate is made of the recoverable amount of the asset, and any loss is recorded on the income statement. When the reasons for the write-down no longer exist, the book value of the asset is restated through the income statement, up to the value at which the asset would be recorded if no write-down had taken place and depreciation had been recorded.
The amounts paid for the control of real estate located in prestigious areas (key money) are indicated under “intangible fixed assets”, when such assets satisfy the requirements of IAS 38. These assets are depreciated on the basis of the duration of the leasing contract.
GoodwillGoodwill represents the excess of the purchase cost compared to the fair value of the share of equity in the subsidiary or associated company, or of the business unit acquired, at the purchase date. The goodwill deriving from the purchase of subsidiaries is recorded under the intangible assets on the balance sheet, while that deriving from the purchase of associated companies is included in the investments in associated companies. Goodwill is not amortised, but is subject to an impairment test on an annual basis to verify if any loss in value occurred.
Goodwill and fair value adjustments generated from the acquisition of a foreign company are recorded in the relative foreign currencies and are converted at the exchange rate at the end of the period.
TrademarksTrademarks are recorded at cost. They have a definite useful lifetime and are recorded at cost net of any accumulated amortisation. Amortisation is calculated on a straight-line basis allocating the cost of trademarks over the relative useful lifetime.
SoftwareAll software licenses purchased are capitalised on the basis of the costs incurred for their acquisition and in bringing them to their current condition. Amortisation is calculated on a straight-line basis over their estimated useful lifetime (from 3 to 5 years).
The costs associated with the development and maintenance of software programs are posted to the income statement of the period in which they were incurred. The costs directly associated with the production of unique and identifiable software products controlled by the Group are recorded as intangible fixed assets on the balance sheet only if the following conditions are respected: the costs can be reliably calculated, the Group has the technical and financial resources to complete the products and intends to conclude such activities, the technical feasibility of the products is guaranteed and the use of the products will generate probable future economic benefits for more than one year.
Direct costs include costs relating to employees developing the software as well as any appropriate share of general costs.
Segment information by sector (retail/wholesale) and by geographic area is presented according to the indications of IAS 14 – Segment Information.
As from the financial year 2008, the Group’s retail structure now having been consolidated, the management has decided to present the information on the sector of activity in which the Group operates as primary segment and the geographic information as secondary segment.
The criteria used to identify these segments are based on the modalities by which the management directs the Group and attributes managerial responsibilities.
The geographic information is defined on the basis of the location of the head offices of the companies belonging to the Group, and the sales indicated for this segmentation are determined by origin of invoicing rather than the target market.
Inventories are measured at the lower of either the purchase or production cost or the net realisable value. The cost of raw materials and purchased finished products is calculated using the “weighted average cost” method. The cost of semi-finished products and internally produced finished products includes raw material, direct labour costs and the indirect costs allocated based on normal production capacity.
The net realisable value is determined on the basis of the estimated selling price under normal market conditions, net of direct sales costs.
Against the value of stock as determined above, provisions are made in order to take account of obsolete or slow moving stock.
Trade receivablesTrade receivables are initially classified on the financial statements at their current value and subsequently recalculated with the “amortised cost” method, net of any write-downs for loss in value. A provision for doubtful accounts is allocated when there is evidence that the Group will not succeed in collecting the original amount due. The provisions allocated for doubtful accounts are recorded in the income statement.
The Group also transfers trade receivables to factoring companies. Since such receivables represent legally sold credit, they do not comply with all the conditions of paragraphs 17 and following of IAS 39. They are removed from the balance sheet, but are maintained on the financial statement with a contra entry as a financial debt towards the factoring company.
Revenues include the fair value of the sale of goods and services, less VAT, returns and discounts. In particular, the Group recognises the revenues from the sale of goods sold at the shipment date, when all the risks and rewards relating to the ownership of the goods have been transferred to the client, or on delivery to the client, in accordance with the sales terms agreed. If the sale includes the right for the client to return unsold goods, the revenue is recognised on the date of shipment to the client, net of a provision which represents the best estimate of the products to be returned by the client and which the Group will no longer be able to place on the market. This provision is based on specific historical data and on the specific knowledge of the clients; historically there have not been significant differences between the estimates made and the products actually returned.
Cash and cash equivalents include cash, bank deposits on demand and other highly liquid short-term investments available at three months from purchase. The items included in the net cash and cash equivalents are measured at fair value and the relative changes are recorded in the income statement. Bank overdrafts are posted under current liabilities.
The Group recognises royalty income and expenses in accordance with the accruals principle and in compliance with the substance of the contracts agreed.
Assets with an indefinite useful lifetime are not subject to amortisation but undergo an impairment test at least on an annual basis to control whether their book value has been reduced.
Assets subject to amortisation undergo impairment tests when events or circumstances arise that indicate that the book value cannot be recovered. In both cases any loss in value is posted for the share of book value exceeding the recoverable value. This value is the higher of either the fair value of the asset net of the costs for sale or its value for use. If the value for use of an asset cannot be established individually, the recoverable value of the unit that generates cash flows (so-called "cash generating units” or CGU) to which the asset belongs must be established. Assets are regrouped at the lowest level for which there are independent cash flows and the Group will then calculate the current value of the estimated future cash flows for the CGU, gross of taxes, applying a before tax discount rate, that reflects the current market evaluations of the long term value of the cash and specific risks with the asset.
When a loss on an asset, other than goodwill, no longer exists or is reduced, the book value of the asset or cash-generating unit is increased to the new estimated recoverable value, which cannot exceed the value that would have been established if there had been no loss due to reduction in value.
A reversal of loss in value is calculated according to the revaluation model and recorded in the income statement in accordance with the provisions of IAS 16.
The Group recognises different forms of defined benefit plans and contribution plans, in line with the local conditions and practices in the countries in which it carries out its activities.
The premiums paid for defined contribution plans are recorded in the income statement for the part matured in the year.
The defined benefit plans are based on the working life of the employees and on the remuneration received by the employee during a predetermined period of employment.
The obligation of the company to finance the defined benefit plans and the annual cost recognised in the income statement are determined by independent consultants using the “projected unit credit” method. The related costs are recorded in the income statement on the basis of the estimated employment period of employees. The Group does not suspend actuarial gains or losses further to applying the “projected unit credit” method, but records them in an equity reserve in the period in which they arise.
The employee severance fund of Italian companies (“TFR”) has always been considered to be a defined benefit plan however, following the changes to the discipline that governs the employment severance fund introduced by Italian law no. 296 of 27th December 2006 (“Financial Law 2007”) and subsequent Decrees and Regulations issued in the first months of 2007, Safilo Group, on the basis of the generally agreed interpretations, has decided that:
- with reference to the amounts of employee benefit liability matured from 1st January 2007, whether transferred to selected pension funds or transferred to the treasury account set-up with Italian Social Security Institute (INPS), represents a “defined contribution plan”;
- with reference to the amounts of employee benefit liability matured as of 31st December 2006, the employee benefit liability represents a “defined benefit plan” requiring actuarial valuations that exclude future increases in salaries.
The Group recognises additional benefits to some employees and consultants through "equity settled" type stock options. In accordance with IFRS 2 - Share-based payments, the current value of the stock options determined at the vesting date through the application of the "Black & Scholes" method is recognised in the income statement under personnel costs in constant quotas over the period between the vesting date of the stock options and the maturity date, counterbalanced by an equity reserve.
The effects of the vesting conditions not related to the market are not taken into consideration in the fair value of the vested options, but are relevant to the valuation of the number of options which are expected to be exercised.
At the balance sheet date the Group revises its estimates on the number of options which are expected to be exercised. The impact of the revision of the original estimates is recognised in the income statement over the maturity period and directly in equity reserves.
At the time of exercising the stock option, the amounts received from the employee, net of the costs directly attributable to the transaction, are credited to share capital for an amount equal to the nominal value of the shares issued and to the share premium reserve for the remaining part.
The fair value of the financial instruments traded on an active market is based on the listed price at the balance sheet date.
The fair value of the financial instruments not traded on an active market is calculated in accordance with valuation techniques, by applying models and techniques that are widely used in financial sectors and in particular:
- the fair value of the interest rate swaps is calculated on the basis of the current value of future cash flows;
- the fair value of the forward currency hedging contracts is determined on the basis of the current value of the differences between the contracted forward exchange rate and the spot market rate at the balance sheet date;
- the fair value of stock options is calculated using the Black & Scholes model.
Income taxes include all taxes calculated on the assessable profits of the companies of the Group. Income taxes are recorded in the income statement, with the exception of those relating to balances directly credited or debited to equity, in which case the fiscal effect is recognised directly to equity.
The deferred taxes are calculated on fiscal losses that can be carried forward and all the timing differences between the assessable income of an asset or liability and the relative book value. The deferred tax assets are recognised only for those amounts for which it is probable there will be future assessable income allowing for the recovery of the amounts.
The current deferred tax assets and liabilities are compensated when the income tax is applied by the same fiscal authority and when there is a legal right of compensation. The deferred tax assets and liabilities are determined with the fiscal rates that are expected to be applied, in accordance with the regulations of the countries in which the Group operates, in the years in which the temporary differences will be realised or extinguished.
The classification of financial instruments depends on the purpose for which the financial instrument was acquired. The management determines the classification of its financial instruments on the initial recognition in the financial statements. The purchase and sale of financial instruments are recognised at the transaction date or at the date when the Group undertakes the commitment to purchase or sell the asset. All financial instruments are initially recognised at fair value.
Financial assetsFinancial assets are classified according to the following categories:
- financial assets at fair value through the income statement
- loans and receivables
- investments held to maturity
- financial assets available-for-sale
Financial assets are removed from the balance sheet when the right to receive cash flows from the instrument ceases and the Group has transferred all risks and benefits relating to the instrument.
LoansLoans are initially recorded at fair value less any transaction costs. After initial recognition, they are assessed at amortised cost; all differences between the amount financed (net of initial transaction costs) and the nominal value are recognised in the income statement over the duration of the loan using the “effective interest” method. If there is a significant variation in the expected cash flow that can be reliably estimated by the management, the value of the loans is recalculated to reflect the expected change in the cash flow. The value of the loans is recalculated on the basis of the current value of the new expected cash flow and the internal rate of return.
Loans are classified under current liabilities unless the company has an unconditional right to defer the payment for at least twelve months after the balance sheet date, and are removed from the balance sheet when they expire and the Group has transferred all risks and obligations relating to the instrument.
Derivative instrumentsIn accordance with the provisions of IAS 39 as approved by the European Commission, the derivative financial instruments used by the Group with the intention of hedging in order to reduce the foreign currency and interest rate risks, can be recorded according to the "hedge accounting" methodology only when:
- a formal designation and documentation relating to the hedge exists at the beginning of the hedge,
- it is presumed that the hedge is highly effective,
- the effectiveness can be reliably measured and the hedge is highly effective over the different financial periods for which it was designated.
All derivative financial instruments are measured at fair value, in accordance with IAS 39. When the financial instruments possess the characteristics required to be recorded according to the hedge accounting, the following accounting procedures are applied:
- Fair value hedge – if a derivative financial instrument is designated as a hedge for the exposure of changes in the current value of an asset or liability on the financial statements attributable to a specific risk that can determine effects on the income statement, the profit or loss after the initial valuation of the fair value of the hedge instruments is recognised in the income statement. The profit or loss on the hedged item, related to the hedged risk, changes the book value of that item and is recognised on the income statement. In the financial periods described herein there were no fair value hedges.
- Cash flow hedge – if a derivative financial instrument is designated as a hedge for the exposure of changes in the cash flows of an asset or liability recorded on the financial statements or of an operation considered highly probable and which may have effects on the income statement, the effective portion of the profits or losses of the financial instrument is recognised in an equity reserve. The cumulative profits or losses are reversed from equity and recorded in the income statement in the same period as the operation that is hedged. The profits or losses associated with a hedge or with that part of the hedge that has become ineffective, are immediately recorded in the income statement. If a hedge instrument or a relation of a hedge is closed, but the hedged operation has not yet been realised, the cumulative profits and losses, up to that moment recorded in equity, are recognised in the income statement when the relative operation is realised. If the operation hedged is no longer considered probable, the profits or losses not yet realised in equity are recognised immediately in the income statement.
If hedge accounting cannot be applied, the profits or losses deriving from the fair value of the derivative financial instruments are immediately recognised in the income statement.
