Measurement criteria

The major measurement criteria adopted for preparation of the consolidated financial statements are described below.

CURRENT ASSETS

Cash and cash equivalents

Cash and cash equivalents include cash on hand and immediately available bank deposits as well as cash investments with a term of under three months. If denominated in euros, these entries are recorded at nominal value, corresponding to fair value, and if in other currencies, they are recorded at the exchange rate in effect at the end of the period.

Trade and other receivables

Trade and other receivables are initially measured at fair value, and subsequently at amortised cost1 using the effective interest rate method. If there is objective evidence of impairment indicators, the assets are reduced so as to be equal to the discounted amount of cash flow obtainable in the future. There is objective evidence of impairment when, among other things, there are significant breaches of contract, major financial difficulties or the risk of the counterparty’s insolvency. Receivables are reported net of provisions for impairment losses. If, in subsequent periods, the asset’s impairment is confirmed, the provision for impairment losses is used to cover charges. If, on the other hand, the reasons for previous impairment losses no longer apply, the value of the assets is restored up to the amount which would have derived from the application of the amortised cost method if the impairment loss had not been carried out.

Recording and elimination of financial assets

Financial assets are recorded on the balance sheet when the company becomes a party to agreements related to such assets. Financial assets sold are eliminated from balance sheet assets when the right to receive cash flows is transferred together with all risks and benefits associated with ownership.

Inventories

Inventories, including compulsory inventories recorded under non-current assets in “Inventories - Compulsory inventories”, are recorded at the lower of purchase or production cost and the net realisation value represented by the amount the company expects to receive from their sale in the normal course of business. The cost configuration used is determined in accordance with the weighted average cost method. The sale and purchase of strategic gas do not involve the effective transfer of risks and benefits associated with ownership, and thus do not result in a change in inventories.

Current tax assets (liabilities)

Current tax assets (liabilities) are recorded at the amount expected to be recovered (paid) from (to) tax authorities applying current tax rates, or those essentially enacted on the reporting date.

Other current and non-current assets

Other current assets non-current assets are initially measured at fair value, and subsequently at the amortised cost previously described.

NON-CURRENT ASSETS

Property, plant and equipment

Property, plant and equipment are recognised at cost and recorded at the purchase or production cost including directly allocable ancillary costs needed to make the assets available for use. When a significant period of time is needed to make the asset ready for use, the purchase or production cost includes the financial expense which theoretically would have been saved during the period needed to make the asset ready for use, if the investment had not been made. If there are current obligations to dismantle and remove the assets and restore the sites, the book value includes the estimated (discounted) costs to be incurred at the time the structures are abandoned, recognised as a counter-entry to a specific provision. The accounting treatment for revisions in these cost estimates, the passage of time and the discount rate are indicated in “Provisions for risks and charges”.

Property, plant and equipment may not be revalued, even through the application of specific laws.

Starting at the time utilisation of the asset begins, or should have begun, property, plant and equipment are regularly depreciated on a straight-line basis over their useful life defined as an estimate of the period the asset will be used by the company. When the tangible asset consists of several major components, each with a different useful life, each component is depreciated separately. The amount to be depreciated is the book value reduced by the projected net sales value at the end of the asset’s useful life if this is significant and can be determined reasonably. Land is not depreciated, even if purchased in conjunction with a building; neither are property, plant and equipment held for sale (see “Non-current assets held for sale”.

Costs for improvements, upgrades and transformations of an incremental nature with respect to the property, plant and equipment are recognised under balance sheet assets.

The costs of replacing identifiable components of complex assets are allocated to balance sheet assets and depreciated over their useful life. The remaining book value of the component being replaced is allocated to the income statement. Ordinary maintenance and repair expenses are posted to the income statement in the period when they incurred.

When events occur leading to the assumption of an impairment of the property, plant and equipment, their recoverability is tested by comparing the book value with the related recoverable value, which is the fair value adjusted for disposal costs or the usage value, whichever is greater.

In the absence of a binding sales agreement, fair value is estimated on the basis of values resulting from an active market, recent transactions or on the basis of the best information available to reflect the amount the company could obtain from the sale of the asset.

Value of use is determined by discounting projected cash flows resulting from the use of the asset, and if they are significant and can be reasonably determined, it is adjusted for any disposal costs resulting from its sale at the end of its useful life. Cash flows are determined based on reasonable, documentable assumptions representing the best estimate of future economic conditions which will occur during the remaining useful life of the asset, with a greater emphasis on outside information. Discounting is done at a rate reflecting current market conditions for the time value of money and specific risks of the asset not reflected in the estimated cash flows.

The valuation is done for single assets, or for the smallest identifiable aggregate of assets which generates independent incoming cash flow resulting from ongoing use (so-called cash-generating units). If the reasons for impairment losses carried out no longer apply, the assets are revalued and the adjustment is posted to the income statement as a revaluation (recovery of value). The revaluation is applied to the lower of the recoverable value and book value before any impairment losses previously carried out, and reduced by depreciation provisions which would have been allocated if an impairment loss had not been recorded for the asset.

Compulsory inventories are included under non-current assets in the item “Inventories - Compulsory inventories.”

Leasing

Assets under finance leases, or under agreements which may not take the specific form of a finance lease, but call for the essential transfer of the benefits and risks of ownership, are recorded at the lower of fair value less fees payable by the lessee or the present value of minimum lease payments, under property, plant and equipment as a counter-entry to the financial debt to the lessor.

Assets are depreciated using the criteria and rates used for property, plant and equipment unless the lease term is less than the useful life represented by such rates, and there is no reasonable certainty of the transfer of ownership of the leased asset upon the natural maturity of the agreement. In this case, the depreciation period will be the term of the lease.

Intangible assets

Intangible assets are those assets without identifiable physical form which are controlled by the company and capable of producing future economic benefits, as well as goodwill when purchased for consideration. The ability to identify these assets rests in the ability to distinguish intangible assets purchased from goodwill. Normally this requirement is satisfied when: (i) the intangible assets are related to a legal or contractual right, or (ii) the asset is separable, i.e. it can be sold, transferred, leased or exchanged independently, or as an integral part of other assets. The company’s control consists of the power to utilise future economic benefits deriving from the asset and the ability to limit their access to others.

Intangible assets are recorded at cost, which is determined using the criteria indicated for property, plant and equipment. They may not be revalued, even through the application of specific laws.

Intangible assets with a finite useful life are regularly amortised over their useful life, meaning the estimate of the period during which the assets will be used by the company. The recoverability of their book value is tested by using the criteria indicated under “Property, plant and equipment.”

Goodwill and other intangible assets with an indefinite useful life are not amortised. The recoverability of their book value is tested at least annually, and in any case when events occur leading to an assumption of impairment. Goodwill is tested at the level of the smallest aggregate, on the basis of which the company’s management directly or indirectly assesses the return on investments including goodwill. When the book value of the cash-generating unit including its related goodwill is greater than the recoverable value, the difference is subject to an impairment loss which is applied first to goodwill up to its total amount, and any excess of the impairment loss over goodwill is allocated on a pro rata basis to the book value of assets making up the cash-generating unit. Impairment losses cannot be reversed.

Technical development costs are allocated to the balance sheet assets when: (i) the cost attributable to the intangible asset can be determined reliably; (ii) there is the intent, availability of financial resources and technical capability to make the asset available for use or sale; and (iii) it can be shown that the asset is capable of producing future economic benefits.

Intangible assets also include service concession agreements between the public and private sectors for the development, financing, management and maintenance of infrastructures under concession in which: (i) the grantor controls or regulates the services provided by the operator through the infrastructure and the related price to be applied; (ii) the grantor controls any significant remaining interest in the infrastructure at the end of the concession by owning or holding benefits, or in some other way.

Based on the terms of the agreements, the operator holds the right to use the infrastructure, which is controlled by the grantor, for the purposes of providing the public service2.

The value of storage concessions, which is determined as indicated by the Ministry of Production Activities in its decree of 3 November 2005, is allocated to the item “Concessions, licences, trademarks and similar rights”, and is not amortised.

Grants

Capital grants are recognised when there is reasonable certainty that the conditions imposed by the granting government agencies for their allocation will be met, and they are recognised as a reduction to the purchase price or production cost of their related assets. Operating grants are recognised in the income statement.

Equity investments

Investments in subsidiaries not included in the scope of consolidation, in subsidiaries controlled jointly with other shareholders and in associates are accounted for using the equity method. If there is objective evidence of impairment (see also “Current assets”), recoverability is tested by comparing the book value with the related recoverable value determined using the criteria indicated in “Property, plant and equipment”.

When there is no significant impact on the balance sheet, financial position and income statement, subsidiaries not included in the scope of consolidation, subsidiaries controlled jointly with other shareholders and associates are accounted for at cost adjusted for impairment. When the reasons for the impairment losses carried out no longer apply, equity investments accounted for at cost are revalued up to the amount of the impairment losses applied with the impact posted to the income statement under “Other income (expense) from equity investments”.

Other equity investments are measured at fair value with allocation of the impact to the shareholders’ equity reserve for “Other components of comprehensive income”; changes in fair value which are recognised in shareholders’ equity are posted to the income statement at the time of write-down or sale. When equity investments are not listed in a regulated market, and fair value cannot be reliably determined, such investments are accounted for at cost adjusted for impairment; impairment cannot be reversed3.

The risk resulting from any losses exceeding shareholders’ equity is recognised in a special provision to the extent the parent company is committed to fulfilling its legal or implied obligations to the subsidiary/associate, or, in any event, to covering its losses.

Non-current assets held for sale

Non-current assets (or assets related to disposal groups) whose book value will be recovered mainly through their sale rather than ongoing use are classified as held for sale. Non-current assets held for sale (or assets related to disposal groups) and directly related liabilities are recognised in the balance sheet separately from the company’s other assets and liabilities.

Non-current assets held for sale are not depreciated, and are accounted for at the lower of book value and the related fair value reduced by any sales costs.

Any difference between the book value and fair value reduced by sales costs is posted to the income statement as an impairment loss; any subsequent recoveries in value are recognised up to the amount of the previously recognised impairment losses, including those recognised prior to the asset being classified as held for sale.

FINANCIAL LIABILITIES, TRADE AND OTHER PAYABLES, OTHER LIABILITIES

Financial liabilities, trade and other payables and other liabilities are initially recorded at fair value increased by any transaction-related costs; they are subsequently recognised at amortised cost using the effective interest rate for discounting.

Recording and elimination of financial liabilities

Financial liabilities are recorded under balance sheet liabilities at the time the company becomes a party to agreements related to such liabilities. Financial liabilities sold are eliminated from balance sheet liabilities when the right to disburse cash flows is transferred together with all risks and benefits associated with ownership.

PROVISIONS FOR RISKS AND CHARGES

Provisions for risks and charges concern costs and charges of a certain nature which are certain or likely to be incurred, but whose amount or date of occurrence cannot be determined at the end of the year. Provisions are recognised when: (i) the existence of a current legal or implied obligation deriving from a past event is likely; (ii) it is likely that the fulfilment of the obligation will involve a cost; and (iii) the amount of the obligation can be reliably determined. Provisions are recorded at a value representing the best estimate of the amount that the company would reasonably pay to fulfil the obligation or to transfer it to third parties at the end of the reporting period. Provisions related to contracts with valuable consideration are recorded at the lower of the cost necessary to fulfil the obligation, less the expected economic benefits deriving from the contract, and the cost to terminate the contract.

When the financial impact of time is significant, and the payment dates of the obligations can be reliably estimated, the provision is discounted; the increase in the provision due to the passing of time is posted to the income statement under “Financial income (expense)”.

When the liability is related to property, plant and equipment (e.g. site dismantlement and restoration), the provision is recognised as a counter-entry to the related asset; posting to the income statement is accomplished through amortisation.

The costs that the company expects to incur to initiate restructuring programmes are recorded in the period in which the programme is formally defined, and the parties concerned have a valid expectation that the restructuring will take place.

Provisions are periodically updated to reflect changes in cost estimates, selling periods and the discount rate; revisions in provision estimates are allocated to the same item of the income statement where the provision was previously reported or, when the liability is related to property, plant and equipment (e.g. site dismantlement and restoration), as a counter-entry to the related asset.

The notes to the financial statements describe contingent liabilities represented by: (i) possible (but not probable) obligations resulting from past events, the existence of which will be confirmed only if one or more future uncertain events occur which are partially or fully outside the company’s control; and (ii) current obligations resulting from past events, the amount of which cannot be reliably estimated, or the fulfilment of which is not likely to involve costs.

EMPLOYEE BENEFITS

Post-employment benefits are defined according to schemes, even if not formalised, which depending on their attributes are divided into “defined-contribution schemes” and “defined-benefit schemes”. In the defined-contribution schemes the obligation of the firm is determined according to the contributions due, limited to the payment of contributions to the state, or to a portfolio or a legally distinct entity (so-called fund).

The liability related to defined-benefit schemes, net of any assets servicing the plan, is determined according to actuarial assumptions and is recognised for the year in accordance with the employment period necessary to obtain the benefits; the liability is measured by independent actuaries.

The actuarial profits and losses relating to the defined-benefit schemes derived from variations in the actuarial assumptions used or from modifications to the plan conditions are recognised pro rata in the income statement, for the remaining average working life of the employees participating in the scheme, if the net value measured at the end of the previous financial year is more than 10% of the value of the liabilities relating to the scheme or 10% of the fair value of the assets servicing it, whichever is greater (“corridor method”).

Obligations relating to long-term benefits are determined using actuarial assumptions; the effects resulting from the modification of actuarial assumptions or from a modification of the benefit specifications are recognised entirely in the income statement.

TREASURY SHARES

Treasury shares are recognised at cost and recorded as a reduction of shareholders’ equity. The economic effects resulting from any subsequent sales are recognised in shareholders’ equity.

REVENUES AND COSTS

Revenues from sales and services are recognised when there is an effective transfer of typical significant risks and advantages of ownership or when the service is completed.

In relation to the activities performed by Snam Rete Gas, the time of revenue recognition coincides with the provision of the service and when the loss risks are transferred to the purchaser.

Revenue provisions in relation to services partly provided are recognised as a matured amount, provided it is possible to reasonably determine the stage of completion and that there are no serious uncertainties surrounding the amount and the existence of the revenue and related costs; otherwise they are recognised within the limits of the recoverable costs incurred.

Property, plant and equipment, unlike assets used under concession, transferred from clients (or constructed using the liquidity transferred from clients) and used for their connection to a network for the administration of a supply are recognised at fair value as the counter-entry to revenues in the income statement. When the agreement includes the provision of multiple services (e.g. connection and supply of goods) it is verified according to the service provided against the client’s transferred asset, and the revenue is recognised at the time of the connection or the shorter between the duration of the supply and the useful life of the asset.

Revenues are recorded net of returns, discounts, rebates and premiums, as well as directly related taxes.

Exchanges between goods or services of a similar nature and value do not determine the recognition of revenues and costs as they are not representative of sales transactions.

Costs are recognised when they relate to goods and services sold or consumed during the year or through systematic distribution when the profit in future years cannot be identified.

Costs relating to emission allowances, determined on the basis of the average of existing prices on the main European stock exchanges at the close of the financial year, are recognised limited to the CO² emissions quota in excess of the assigned allowances; the costs related to the purchase of emission allowances are capitalised and recognised under intangible assets net of any negative outstanding balance between emissions released and assigned quotas. Income relating to emission allowances is recognised at the time of the transfer. In the case of transfer, where present, the emission allowances purchased are considered as having been sold first. Monetary credits assigned to replace the free emission quota allocation are recognised as a counter-entry to “Other income” in the income statement.

Fees related to operating leases are attributed to the income statement throughout the duration of the contract.

Costs for purchasing new information or discoveries, researching alternative products or processes, new techniques or models, designing and constructing prototypes, or costs incurred during other scientific research or technological development activities which do not satisfy the conditions for recognition in balance sheet assets are considered as current costs and attributed to the income statement for the year in which they were incurred.

Costs incurred during share capital increases are recorded as a reduction of shareholders’ equity, net of the related tax effect.

STOCK OPTIONS

Personnel expenses include, consistent with the substantial nature of the remuneration that they comprise, stock options assigned to executives. The cost is determined with reference to the fair value of the option assigned to the executive at the time of making the commitment and is not subject to any subsequent adjustment; the portion due for the year is determined pro rata temporis over the period to which the incentive refers (the so-called vesting period)4. The fair value is represented by the value of the option determined by applying appropriate valuation techniques which take account of the conditions of exercise of the option, the current share value, the expected volatility and the risk-free interest rate, and is recorded with offsetting in the item “Other reserves”.

FOREIGN-EXCHANGE DIFFERENCES

The assets and liabilities included in the balance sheet are represented in the currency of the main economic environment in which the company operates. The consolidated data are represented in euros, which is the working currency of the company and the group.

Revenues and costs relating to transactions in currencies other than the working currency are recognised at the exchange rate in effect on the day when the transaction was carried out.

Monetary assets and liabilities in currencies other than the working currency are converted into euros by applying the exchange rate in effect on the reporting date, with attribution of the impact to the income statement. Non-monetary assets and liabilities in currencies other than the working currency and valued at cost are recognised at the initially recorded exchange rate; when the measurement is made at fair value or recoverable or realisable value, the exchange rate used is the one in effect on the date of determination of the value.

DIVIDENDS RECEIVED

Dividends are recognised at the date of the resolution passed by the shareholders’ meeting, unless it is not reasonably certain that the shares will be sold before the ex-dividend date.

DISTRIBUTION OF DIVIDENDS

The distribution of dividends to the company’s shareholders entails the recording of a payable in the financial statements for the period in which the distribution was approved by the company’s shareholders or, in the case of interim dividends, by the board of directors.

INCOME TAXES

Current income taxes are calculated by estimating the taxable income. In particular, with regard to corporate income tax (IRES), since 2004 the company, jointly with Eni S.p.A., has exercised the option offered by the national tax consolidation scheme, which allows IRES to be determined on a taxable base corresponding to the algebraic sum of the positive and negative taxable amounts of the individual companies included in the consolidation scope.

The economic relations, as well as the reciprocal responsibilities and obligations, between Eni S.p.A. and the other group companies entering the consolidation scope are defined in the “Regulations on participation in the national tax consolidation scheme by companies of the Eni group”, under which: (i) subsidiaries with positive taxable income transfer to Eni the financial resources corresponding to the additional tax payable by Eni due to their participation in the national tax consolidation scheme; and (ii) those with negative taxable income receive a payment equal to the relevant tax saving made by Eni S.p.A. if and insofar as they have profitability prospects which would have made it possible, in the absence of the national tax consolidation scheme, to recognise deferred tax assets. Consequently, the relevant tax, net of payments made on account and withholdings applied, is recognised under the item “Trade and other payables”/”Trade and other receivables”.

Regional production tax (IRAP), net of payments made on account, is recognised under the item “Current income tax liabilities”/”Current income tax assets”.

Deferred and prepaid income taxes are calculated on the timing differences between the values of the assets and liabilities entered in the balance sheet and the corresponding values recognised for tax purposes. The recording of deferred tax assets is made when their recovery is regarded as probable.

Deferred tax assets and deferred tax liabilities are classified under non-current assets and liabilities and are offset at individual company level if they refer to taxes which can be offset. The balance of the offsetting, if it results in an asset, is recognised under the item “Deferred tax assets”; if it results in a liability, it is recognised under the item “Deferred tax liabilities”.

When the results of the operations are recorded directly under shareholders’ equity, the current taxes, deferred tax assets and deferred tax liabilities are also attributed to shareholders’ equity.

DERIVATIVES

Derivatives are assets and liabilities recognised at fair value. Derivatives are classified as hedging instruments when the relationship between the derivative and the hedged item is formally documented and the effectiveness of the hedge, verified periodically, is high. When hedging derivatives hedge the risk of changes in the fair value of the hedged instruments (“fair value hedge”; e.g. hedge of the risk of fluctuations in the fair value of fixed-rate assets/liabilities), the derivatives are recognised at fair value with attribution of the effects on the income statement; by the same token, the hedged instruments are adjusted to reflect the changes in fair value associated with the hedged risk.

When derivatives hedge the risk of changes in cash flows from the hedged instruments (“cash flow hedge”; e.g. hedge of changes in cash flows from assets/liabilities due to fluctuations in interest rates), the changes in the fair value of the derivatives are initially recognised in shareholders’ equity and subsequently attributed to the income statement in the same way as the economic effects produced by the hedged operation.

Satisfaction of the requirements defined by IAS 39 for hedge accounting is verified periodically.

Changes in the fair value of derivatives which do not satisfy the requirements to be classed as hedging instruments are recognised in the income statement.

SEGMENT INFORMATION

The information about business segments has been prepared in accordance with the provisions of IFRS 8 “Operating segments”, which requires the information to be presented in a manner consistent with the procedures adopted by the company’s management when taking operational decisions. Consequently, the identification of the operating segments and the information presented are defined on the basis of the internal reporting used by the company’s management for allocating resources to the different segments and for analysing the respective performances.

An operating segment is defined by IFRS 8 as a component of an entity: (i) that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity); (ii) whose operating results are regularly reviewed by the entity’s most senior decision makers for purposes of making decisions about resources to be allocated to the segment and assessing its performance; and (iii) for which separate financial information is available.

The declared operating segments are as follows: (i) natural gas transportation; (ii) liquefied natural gas (LNG) regasification; (iii) natural gas distribution; and (iv) natural gas storage. They relate to activities carried out predominantly by Snam Rete Gas, GNL Italia, Italgas and Stogit, respectively.

(1) According to the amortised cost method, the book value is adjusted to account for repayments of principal, any impairment losses and the amortisation of the difference between the repayment amount and initial recorded amount. Amortisation is carried out using the effective internal interest rate which represents the rate which would make the present value of projected cash flows and the amount recorded initially equal at the time of the initial recording.
(2) When the operator has the unconditional contractual right to receive cash or other financial assets from the grantor or entity identified by the grantor, the consideration received, or to be received, by the operator for infrastructure construction or improvements is recognised as a financial asset.
(3) An impairment loss recognised in an interim period cannot be reversed even if, on the basis of conditions in a subsequent interim period, the impairment loss would have been lower or not recognized.
(4) The period between the date of making the commitment and the date on which the option may be exercised.