Provisions
22. Provisions for other liabilities and charges
The movements during the year in provisions for other liabilities and charges are presented in the following table:
|
(in thousands of Euros) |
|
|
Beginning balance at 12/31/2006 |
145,119 |
|
Exchange differences |
6,155 |
|
Change in scope of consolidation |
320 |
|
Increase |
15,588 |
|
Utilization/Release |
(14,822) |
|
Reclassification |
(6,003) |
|
Other |
(26) |
|
Ending balance at 12/31/2007 |
146,331 |
|
(in thousands of Euros) |
|
|
Beginning balance at 12/31/2006 |
116,525 |
|
Exchange differences |
(630) |
|
Change in scope of consolidation |
2,492 |
|
Increase |
35,014 |
|
Utilization/Release |
(87,489) |
|
Reclassification |
6,003 |
|
Other |
(575) |
|
Ending balance at 12/31/2007 |
71,340 |
At December 31, 2007, the non-current portion mainly includes Euros 82,174 thousand relating to the accruals for the legal and tax disputes of the subsidiary Pirelli Pneus S.A. with headquarters in Brazil, Euros 27,479 thousand for the risks of a fiscal nature of the parent Pirelli & C. S.p.A. and Euros 14,887 thousand for contractual commitments undertaken for the performance of extraordinary maintenance work on buildings sold.
The current portion refers to accruals for contractual guarantees and product claims. The reduction from December 31, 2006 is mainly due to the price adjustment paid in 2007 (Euros 39,855 thousand) regarding the sale of Pirelli’s operations in the Energy and Telecom Cables and Systems sectors to Goldman Sachs in July 2005. Some claims were also settled which reduced the provision by another Euros 20,270 thousand.
23. Employee benefit obligations
Employee benefit obligations include:
|
(in thousands of Euros) |
||
|
12/31/2007 |
12/31/2006 |
|
|
Pension funds: |
||
|
- funded |
118,234 |
156,271 |
|
- unfunded |
88,050 |
99,887 |
|
Employees' leaving indemnity (Italian companies) |
74,559 |
96,824 |
|
Medical care plans |
21,839 |
28,362 |
|
Other benefits |
46,460 |
34,506 |
|
349,142 |
415,850 |
|
Pension funds
The composition of pension funds at December 31, 2007 is as follows:
|
(in thousands of Euros) |
||||||
|
12/31/2007 |
||||||
|
Germany |
Total unfunded pension funds |
USA |
UK |
Other countries |
Total funded pension funds |
|
|
Funded |
||||||
|
Present value of funded obligations |
- |
- |
123,593 |
899,691 |
2,519 |
1,025,803 |
|
Fair value of plan assets |
- |
- |
(103,933) |
(801,632) |
(2,004) |
(907,569) |
|
Unfunded |
||||||
|
Present value of unfunded obligations |
88,050 |
88,050 |
- |
- |
- |
- |
|
Net liability in the balance sheet of which: |
88,050 |
88,050 |
19,660 |
98,059 |
515 |
118,234 |
|
- Tyre |
87,269 |
87,269 |
19,660 |
65,278 |
515 |
85,453 |
|
- Real Estate |
781 |
781 |
- |
- |
- |
- |
|
- Other |
- |
- |
- |
32,781 |
- |
32,781 |
The composition of pension funds at December 31, 2006 was as follows:
|
(in thousands of Euros) |
||||||
|
12/31/2006 |
||||||
|
Germany |
Total |
USA |
UK |
Total funded pension funds |
||
|
Funded |
||||||
|
Present value of funded obligations |
- |
- |
146,708 |
947,160 |
1,093,868 |
|
|
Fair value of plan assets |
- |
- |
(113,136) |
(824,461) |
(937,597) |
|
|
Unfunded |
||||||
|
Present value of unfunded obligations |
99,887 |
99,887 |
- |
- |
- |
|
|
Net liability in the balance sheet of which: |
99,887 |
99,887 |
33,572 |
122,699 |
156,271 |
|
|
- Tyre |
99,887 |
99,887 |
33,572 |
62,071 |
95,643 |
|
|
- Other |
- |
- |
- |
60,628 |
60,628 |
|
The principal features of the pension plans in existence at December 31, 2007 are as follows:
- Tyres Germany: this is an unfunded defined benefit plan based on the most recent remuneration. It guarantees another pension besides the government pension. The plan was closed in October 1982; consequently, the participants in the plan are employees who were hired prior to that date.
- USA: this is a funded defined benefit plan based on the most recent remuneration. It guarantees another pension besides the government pension. The plan is under the administration of a trust. The plan was closed in 2001 and frozen in 2003 for those employees who changed over to a defined contribution scheme. None of the current participants in the plan are in service.
- UK: these are funded defined benefit plans based on the most recent remuneration.
They guarantee another pension besides the government pension. The plans are under the administration of a trust. The plans were closed in 2001; consequently, the participants in the plan are employees who were hired prior to that date.
The changes during the year in the present value of the liabilities for pension funds (funded and unfunded) are as follows:
|
(in thousands of Euros) |
||
|
12/31/2007 |
12/31/2006 |
|
|
Beginning balance |
1,193,755 |
1,199,282 |
|
Exchange differences |
(99,276) |
1,645 |
|
Change in scope of consolidation |
752 |
- |
|
Movements through the income statement |
63,598 |
60,963 |
|
Actuarial (gains) losses recognized in equity |
7,230 |
(13,413) |
|
Employee contributions |
1,620 |
1,774 |
|
Benefits paid |
(53,760) |
(56,451) |
|
Other |
(66) |
(45) |
|
Closing balance |
1,113,853 |
1,193,755 |
The changes during the year in the fair value of the pension plan assets are as follows:
|
(in thousands of Euros) |
||
|
12/31/2007 |
12/31/2006 |
|
|
Beginning balance |
(937,597) |
(857,857) |
|
Exchange differences |
85,947 |
(3,371) |
|
Movements through the income statement |
(67,042) |
(58,374) |
|
Actuarial (gains) losses recognized in equity |
(3,030) |
(33,029) |
|
Employer contributions |
(31,288) |
(32,906) |
|
Employee contributions |
(1,620) |
(1,774) |
|
Benefits paid |
47,004 |
49,679 |
|
Other |
57 |
35 |
|
Closing balance |
(907,569) |
(937,597) |
The assumptions made to compute the expected return of the pension fund assets are based on the expected returns of the underlying assets (shares, bonds and deposits). The expected return originates from the general average of the expected returns by the assets for every class of separately identified investments, with reference to an effective or objective composition of the assets.
The expected return of each class of investment originates from the market yields available at the balance sheet date. Specifically, the expected return of equity shares originates from a risk-free return rate with the addition of an adequate premium for the risk.
The composition of the funded pension plan assets is presented in the following table:
|
(in %) |
|||||
|
12/31/2007 |
12/31/2006 |
||||
|
UK |
USA |
Other |
UK |
USA |
|
|
Shares |
82% |
68% |
– |
82% |
68% |
|
Bonds |
14% |
29% |
– |
15% |
29% |
|
Deposits |
1% |
3% |
– |
1% |
3% |
|
Other |
3% |
– |
100% |
2% |
– |
|
100% |
100% |
100% |
100% |
100% |
|
The effective return of pension plan assets is as follows:
|
(in thousands of Euros) |
||||
|
USA |
UK |
Other countries |
Total |
|
|
Effective return 2006 |
10,931 |
80,175 |
– |
91,106 |
|
Effective return 2007 |
7,666 |
60,473 |
(251) |
67,888 |
The costs recognized in the income statement for pension funds are as follows:
|
(in thousands of Euros) |
||
|
12/31/2007 |
12/31/2006 |
|
|
Current service costs |
5,110 |
4,713 |
|
Interest cost |
58,488 |
56,250 |
|
Expected return on plan assets |
(67,042) |
(58,374) |
|
(3,444) |
2,589 |
|
The amounts recognized in the income statement are included in “Personnel costs” (Note 31).
The contributions expected to be paid for pension funds during 2008 amount to Euros 27,737 thousand.
Employees’ leaving indemnity
The changes during the year in employees’ leaving indemnity are as follows:
|
(in thousands of Euros) |
||
|
12/31/2007 |
12/31/2006 |
|
|
Beginning balance |
96,824 |
100,099 |
|
Change in the scope of consolidation |
(5,491) |
2,497 |
|
Movements through the income statement (excluding curtailment) |
8,270 |
14,979 |
|
Curtailment |
(5,186) |
– |
|
Actuarial (gains) losses recognized in equity |
(5,358) |
(4,122) |
|
Payments / advances |
(14,467) |
(16,711) |
|
Other |
(33) |
82 |
|
Closing balance |
74,559 |
96,824 |
|
of which: |
||
|
- Tyre |
38,912 |
46,738 |
|
- Broadband |
1,128 |
1,204 |
|
- Real Estate |
21,283 |
19,452 |
|
- Other |
13,236 |
29,430 |
The Italian Finance Bill 2007 and the relative decrees implementing it introduced changes regarding employees’ leaving indemnity which include allowing the employee to choose the destination of his/her indemnity accruing from January 1, 2007. During the first half of 2007, the employees had to choose whether to direct the future flows of the indemnity to pre-chosen pension schemes or to keep them with the company (in which case, the company will pay the employees’ leaving indemnity contributions to a treasury account set up at INPS).
The employees’ leaving indemnity accruing from January 1, 2007 has been considered as a defined contribution plan in the financial statements at December 31, 2007 regardless of whether the option chosen was the supplementary pension scheme or the treasury fund with INPS. The indemnity accrued up to December 31, 2006 will remain a defined benefit plan and will consequently be subjected to periodical actuarial calculations.
IAS 19 states that when the terms of a defined benefit plan are amended such that a material element of the future service by current employees will no longer qualify for benefits, the company must recognize any changes in the present value of the obligations caused by this event (curtailment) when it arises in the income statement.
The curtailment can thus be defined as the difference between the liability for employees’ leaving indemnity calculated before the change in the law, that is, considering the component relating to future accruals, and that resulting after the event, which excludes the component relating to future accruals.
The economic effect of the curtailment on the financial statements at December 31, 2007 is a gain of Euros 5,186 thousand and has been calculated through a full evaluation of the provision for employees’ leaving indemnity.
Movements through the income statement are recorded in “Personnel costs” (Note 31).
Medical care plans
The composition of medical care plans is as follows:
|
(in thousands of Euros) |
|
|
USA |
|
|
Liability in the balance sheet at December 31, 2007 |
21,839 |
|
Liability in the balance sheet at December 31, 2006 |
28,362 |
The medical care plan in existence in the Tyre subsidiary in the United States covers white-collars and blue-collars, in service and retired.
The plan is structured according to “pre-medicare” and “post-medicare”, with the latter referring to participants over the age of 65.
Contributions are paid in both by the employer and the employee.
The changes during the year in the liabilities recognized in the financial statements for medical care plans are the following:
|
(in thousands of Euros) |
||
|
12/31/2007 |
12/31/2006 |
|
|
Beginning balance |
28,362 |
33,386 |
|
Exchange differences |
(3,081) |
(3,552) |
|
Movements through the income statement |
1,373 |
1,535 |
|
Actuarial (gains) losses recognized in equity |
(1,355) |
(995) |
|
Benefits paid |
(1,863) |
(1,906) |
|
Other |
(1,597) |
(106) |
|
Closing balance |
21,839 |
28,362 |
The effect of a one percentage point increase or decrease in the estimated rates for the costs of medical care is as follows:
|
(in thousands of Euros) |
||||
|
1% increase |
1% decrease |
|||
|
12/31/2007 |
12/31/2006 |
12/31/2007 |
12/31/2006 |
|
|
- Effect on current service cost and interest cost |
55 |
65 |
(52) |
(63) |
|
- Effect on liabilities recognized in the balance sheet |
849 |
1,126 |
(805) |
(1,068) |
The costs recognized in the income statement relating to medical care plans are as follows:
|
(in thousands of Euros) |
||
|
12/31/2007 |
12/31/2006 |
|
|
Current service costs |
7 |
8 |
|
Interest cost |
1,366 |
1,527 |
|
1,373 |
1,535 |
|
The amounts recognized in the income statement are included in “Personnel costs” (Note 31).
Other information
Net actuarial gains referring to 2007 recognized directly in equity amount to Euros 2,589 thousand (net gains of Euros 51,081 thousand in 2006).
The cumulative amount at December 31, 2007, equal to a net loss of Euros 64,326 thousand (net loss of Euros 65,286 thousand at December 31, 2006), is made up as follows:
|
(in thousands of Euros) |
||||||
|
Italy |
Germany |
USA |
UK |
Other |
Total |
|
|
Pension funds |
- |
5,916 |
(10,607) |
(72,315) |
(515) |
(77,521) |
|
Medical care plans |
- |
- |
(894) |
- |
- |
(894) |
|
Employees' leaving indemnity |
14,089 |
- |
- |
- |
- |
14,089 |
|
Total actuarial gains (losses) |
14,089 |
5,916 |
(11,501) |
(72,315) |
(515) |
(64,326) |
The breakdown of the cumulative amount at December 31, 2006 by country is as follows:
|
(in thousands of Euros) |
|||||
|
Italy |
Germany |
USA |
UK |
Total |
|
|
Pension funds |
- |
(4,845) |
(11,749) |
(56,706) |
(73,300) |
|
Medical care plans |
- |
- |
(1,912) |
- |
(1,912) |
|
Employees' leaving indemnity |
9,926 |
- |
- |
- |
9,926 |
|
Total actuarial gains (losses) |
9,926 |
(4,845) |
(13,661) |
(56,706) |
(65,286) |
The main actuarial assumptions used at December 31, 2007 and also to determine the estimated
cost for the year 2008 are as follows:
|
actuarial assumptions - 2007 |
|||||
|
Italy |
Germany |
Netherlands |
UK |
USA |
|
|
Discount rate |
5.50% |
5.50% |
5.50% |
5.60% |
6.0% |
|
Inflation rate |
2.0% |
2.0% |
2.0% |
3.15% |
- |
|
Expected return on plan assets |
- |
- |
- |
7.78% |
7.67% |
|
Expected remuneration increase rate |
- |
2.50% |
2.0% |
3.15% |
- |
|
Medical care cost trend rate - initial |
- |
- |
- |
- |
9.0% |
|
Medical care cost trend rate - final |
- |
- |
- |
- |
4.5% |
The main actuarial assumptions used at December 31, 2006 and also to determine the estimated
cost for the year 2007 are as follows:
|
actuarial assumptions - 2006 |
||||
|
Italy |
Germany |
UK |
USA |
|
|
Discount rate |
4.50% |
4.50% |
5.10% |
5.75% |
|
Inflation rate |
2.0% |
2.0% |
2.80% |
- |
|
Expected return on plan assets |
- |
- |
7.31% |
7.5% |
|
Expected remuneration increase rate |
2% - 4.30% |
2.50% |
2.80% |
- |
|
Medical care cost trend rate - initial |
- |
- |
- |
9.0% |
|
Medical care cost trend rate - final |
- |
- |
- |
4.5% |
The adjustments based on historical experience made to defined benefit plans are the following:
|
(in thousands of Euros) | |||
|
12/31/2007 |
12/31/2006 |
12/31/2005 |
|
|
Adjustments to plan liabilities - (gains) losses |
16,097 |
(7,527) |
46,038 |
|
Adjustments to plan assets - (gains) losses |
(744) |
(32,733) |
(75,756) |
The adjustments to liabilities represent the change in the actuarial liability that is not generated
by changes in the actuarial assumptions. These typically include changes in the demographic and remuneration structure. Experience adjustments do not include changes in the plan regulations (“past service cost”).
The adjustments to assets represent the difference between the effective return of the assets and the expected return at the start of the year.