Tiscali 2007 Annual Report Download - page 75

estimated at the amortised cost, if they have a fixed expiry, by
using the effective interest method. When financial assets have
no fixed expiry, they are estimated at the acquisition cost.
Receivables with expiry over one year, unprofitable receivables,
and receivables maturing interests at lower rates with respect
to the market, are updated by using market rates.
Estimates are regularly carried out with the aim of making sure
whether there is objective evidence that a financial asset or a
group of assets have been subject to market value reduction.
If there is objective evidence, the value loss must be record-
ed as cost in the income statement of the period.
Apart from derivative financial instruments, the financial assets
are shown at amortised cost by using the effective interest
method. The financial liabilities hedged by derivative instru-
ments are estimated in accordance with the standards fixed
for hedge accounting, applicable at fair value hedge: the prof-
its and the losses deriving from the following estimates at fair
value, due to changes in relevant hedged risks, are recorded
in the income statement, and are compensated through the
effective portion of the loss or the profit coming from subse-
quent estimates of the hedging instrument at fair value.
Convertible bonds
Convertible bonds are financial instruments made up of a lia-
bility component and a shareholders’ equity component. At
the date of issue, the fair value of the liability component is
estimated by using the current interest rate in the market, for
similar non-convertible bonds. The difference between the net
amount obtained from the issue and the fair value assigned to
the liability component (representing the implicit option of con-
verting bonds into shares of the Group) is included in the share-
holders’ equity as capital reserve. Issue costs are subdivided
into the liability component and the shareholders’ equity com-
ponent, on the basis of their respective book values at the date
of issue. The part relating to the shareholders’ equity is direct-
ly meant for reducing the same.
The interest expenses relating to the liability component are
calculated by using the current interest rate in the market for
similar non-convertible bonds.
The difference between that amount and the really paid inter-
est is recorded as increase in the book value of convertible
bonds.
2.12 Derivative instruments
Periodically the Group uses derivative financial instruments
mainly to hedge its financial risks associated with interest rate
fluctuations on long/medium term debt. In accordance with
treasury management policies the Group does not use deriv-
ative financial instruments for declared trading purposes
Derivative instruments are recorded and subsequently stated
at fair value. For hedges, the Group adopts the rules estab-
lished by IAS 39 on ‘Hedge accounting’, as follows:
Cash flow hedge
These are derivatives to hedge exposure to fluctuations in future
cash flows arising in particular from risks relating to changing
interest rates on loans. Changes in the fair value of the ’effec-
tive’ portion of the hedge are booked to equity while the inef-
fective portion is booked to the income statement. Hedge
effectiveness, i.e. its ability to adequately offset fluctuations
caused by the hedged risk, is periodically tested, in particular
analysing correlation between the ‘fair value’ or the cash flows
of the hedged item and those of the hedging instrument.
Fair value hedge
Hedging instruments fall within this classification when used
to hedge changes in the fair value of an asset or liability that
are attributable to a specific risk. Changes of value related both
to the hedged item, in relation to changes caused by the under-
lying risk, and to the hedging instrument are booked to the
income statement. Any difference, representing the partial inef-
fectiveness of the hedge, therefore corresponds to the net eco-
nomic effect.
With regard to financial instruments that do not qualify for
hedge accounting, changes arising from the fair value assess-
ment of the derivative are booked to the income statement.
2.13 Liabilities for pension obligations and staff severance
indemnities
Defined benefit schemes (as classified by IAS 19), in particu-
lar the Staff Severance indemnities relating to employees of
the parent company and the subsidiaries with registered offices
in Italy, are based on valuations performed at the end of each
financial year by independent actuaries. The liability recog-
nised in the balance sheet is the current value of the obliga-
tion payable on retirement and accrued by employees at the
balance sheet date. It should be specified that no assets are
held in support of the above scheme. The Group has not adopt-
ed the ‘corridor approach’, therefore actuarial gains and loss-
es are entirely recognised in the period in which they arise and
are directly recorded in the income statement.
Payments made in relation to outsourced pension schemes
and defined contributions schemes are booked to the income
statement in the period in which they are due. The Group does
not recognise post-employment benefit schemes, therefore
periodic contributions do not involve further liabilities or obli-
gations to be recognised as such in the financial statements.
As from 1 January 2007, the 2007 Finance Act and relevant
implementing decrees introduced remarkable changes in the
staff severance indemnity regulation, including the worker’s
choice in relation to assigning one’s indemnity to supplemen-
tary pension funds or to the “Treasury Fund” managed by the
social security.
Therefore, as a consequence, pursuant to IAS 19, the obliga-
tion with respect to social security, and contribution to supple-
CONSOLIDATED FINANCIAL STATEMENTS AND EXPLANATORY NOTES AT 31 DECEMBER 2007
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