Tiscali 2007 Annual Report Download - page 77

CONSOLIDATED FINANCIAL STATEMENTS AND EXPLANATORY NOTES AT 31 DECEMBER 2007
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Deferred tax assets and liabilities are offset when there is a
legally enforceable right to offset current tax assets against
current tax liabilities and when they relate to income taxes
levied by the same taxation authority, and the Group intends
to settle its current tax assets and liabilities on a net basis.
2.19 Earnings per share
The basic result per ordinary share is calculated by dividing
the operating result quota of the Group attributable to ordinary
shares by the weighted average of the ordinary shares in cir-
culation during the financial year.
For calculating the diluted result per ordinary share, the weight-
ed average of shares in circulation is changed by assuming
the subscription of all potential shares deriving, for instance,
from the conversion of bonds, from exercising rights on shares
with diluting effects, or from the potential diluting effect due
to the allocation of shares to the beneficiaries of already accrued
stock option plans.
3. Critical decisions in applying accounting stan-
dards and in the use of estimates
In the process of applying the accounting standards disclosed
in the previous section, Tiscali’s directors made some signif-
icant decisions in view of the recognition of amounts in the
consolidated financial statements. The directors’ decisions
are based on historical experience as well as on expectations
associated with the realisation of future events and consid-
ered reasonable under the circumstances.
3.1 Assumptions for the application of accounting strandards
Revenue recognition criteria
Revenues related to the activation of broadband services
(ADSL) are deferred as the underlying benefits affect the entire
duration of the customer contracts. The directors have deemed
it appropriate to differ the recognition of these revenues (con-
sistently with the corresponding activation costs, that have
been capitalised among intangible assets) for a period of twelve
months notwithstanding a significantly longer expected dura-
tion of the customer contract. The assumption adopted in
applying IAS 18 ‘Revenue recognition’ reflects a cautious inter-
pretation of this standard considering that the customer may
not renew his contract once the minimum period of twelve
months has elapsed.
3.2 Accounting estimates and relevant assumptions
Impairment of goodwill
Goodwill is tested for impairment annually or more frequent-
ly during the financial year, as disclosed in the preceding sec-
tion, under paragraph 2.3, ‘Business combinations and good-
will’. The ability of each ‘unit’, identifiable in this case with
the subsidiary, to generate cash flows such as to recover the
goodwill allocated to the unit, is determined on the basis of
the economic and financial data concerning the unit to which
the goodwill refers. The development of such data, as well as
the determination of an appropriate discount rate, requires a
significant use of estimates.
Income taxes
The determination of income tax, in particular with reference
to deferred taxes, involves the use of estimates and assump-
tions to a significant extent. Deferred tax assets, arising from
temporary differences and/or previous losses, are recognised
to the extent that it is probable that taxable profits will be avail-
able in the future against which deductible temporary differ-
ences and/or previous losses can be utilised. The provisions
are based on taxable income likely to be generated in light of
the approved business plans. Such assets and liabilities are
not recognised if the temporary differences derive from good-
will or from the initial recognition (other than in a business
combination) of other assets and liabilities in transactions that
affect neither the accounting result nor taxable income. The
book value of deferred tax assets is reviewed at each balance
sheet date and reduced to the extent that it is no longer like-
ly that sufficient taxable income will be available to allow all
or part of the asset to be recovered.
Provisions for risks and charges
Provisions for risks and charges relating to potential legal and
tax liabilities are established following estimates performed by
directors on the basis of judgements developed by the Group
legal and tax advisors, concerning the charges that are rea-
sonably deemed to be incurred in order to settle the obliga-
tion. If in relation to the final result of such judgements the
Group is called upon to fulfil an obligation for a sum other
than that estimated, the related effects are reflected in the
income statement.
Fair value calculation
Depending on the instrument or financial statements item to
be estimated, the directors identify the most suitable method,
by taking into consideration market objective data as much
as possible. In absence of market values, that is, quotations,
estimating techniques are used, with reference to the ones
which are most commonly used.
Accounting standards and interpretations applied in 2007
On 3 March 2006, the IFRIC issued interpretational document
IFRIC 9 –
Subsequent assessment of underlying derivatives
in order to specify that a company must assess whether under-
lying derivatives must be separated from the primary contract
and recognised as derivative instruments as of the moment
that the company becomes party to the contract. Subsequent-
ly, unless contractual conditions are modified to produce sig-
nificant effects on cash flows that would otherwise be required