Pirelli

4. Financial risk management policies

Financial risk management is an integral part of the management of the Group’s operations. Risk management is carried out centrally using policies defined by the General Management. Such policies define the categories of risk and specify the procedures and operating limits for each type of transaction and/or instrument. In accordance with these policies, the Group uses derivative contracts in relation to underlying financial assets or liabilities or future transactions. Financial risk management is centralized at the Sector Treasuries which have the task of evaluating the risks and putting into place the relative hedges under the coordination of Group Treasury. The Sector Treasuries operate directly in the market on behalf of the Operating Units and, where they cannot operate directly because of external restrictions, they coordinate the activities of Local Treasury Units.

TYPES OF FINANCIAL RISKS

Foreign exchange risk

The Group operates internationally and is exposed to foreign exchange risk. This risk is managed by the Sector Treasuries and coordinated by Group Treasury.

The Operating Units are responsible for gathering all the information inherent to the positions subject to foreign exchange risk which are managed by forward contracts negotiated with the Sector Treasuries. The positions subject to exchange risk are mainly represented by sales and purchases invoices.

The Sector Treasuries are responsible for assessing and managing the net position for every currency, in accordance with policies and pre-set limits, by negotiating derivative contracts on the market, generally forward contracts.

As a result, a change in exchange rates will not generate any significant effect on the income statement.

Forward contracts between the Operating Units and the Sector Treasuries as well as those among the Sector Treasuries and the market are not designated as hedging instruments as defined by IAS 39 although they are in place for the purpose of managing risks.

Currency translation risk

The Group holds controlling investments in companies which prepare their financial statements in currencies other than the euro, which is the presentation currency of the Group. This exposes the Group to risk from currency translations since fluctuations in the exchange rates of certain foreign currencies against the presentation currency (euro) can cause changes in the amount of consolidated equity.

The principal exposures to currency translation risk are monitored but it is not the Group’s policy to hedge this exposure.

About 61 percent (about 73 percent at December 31, 2007) of total consolidated equity at December 31, 2008 is expressed in Euro. The most important currencies for the Group other than the Euro are the Brazilian real (14 percent; 11 percent at December 31, 2007) and the Turkish lira (8 percent; 6 percent at December 31, 2007).

The effect on total consolidated equity resulting from a hypothetical increase or decrease in the value of the above currencies against the Euro – all other conditions being equal, is as follows:

(in thousands of euros)
	10% increase in value		10% decrease in value
	12/31/2008	12/31/2007	12/31/2008	12/31/2007
Brazilian real	36,633	45,744	(29,973)	(37,427)
Turkish lira	20,578	27,333	(16,836)	(22,364)
Total effect on consolidated equity	57,211	73,077	(46,809)	(59,791)

Interest rate risk

The Group’s policy is to tend to maintain a correct balance between fixed-rate debt and floating-rate debt with the aim being fixed-rate debt at about 60 percent of total financial debt.

The Group manages the risk of an increase in floating-rate debt interest rates by compensation with floating-rate receivables and by the use of derivative contracts. The designation of such derivatives as hedging instruments under IAS 39 is decided case by case and authorized by the General Management.

The effects on the results for the year and directly on total equity resulting from an increase or decrease of 0.50 percent in the level of interest rates of all the currencies to which the Group is exposed – all other conditions being equal, are the following:

(in thousands of euros)
	+0.50% increase		-0.50% decrease
	12/31/2008	12/31/2007	12/31/2008	12/31/2007
Effect on the result for the year:
- companies consolidated line-by-line	(3,850)	39	2,634	1,276
- companies accounted for using the equity method	(1,484)	7,052	3,045	670
Total effect on the result for the year	(5,334)	7,091	5,679	1,946
Direct effect on equity:
- companies consolidated line-by-line	1,195	836	(1,970)	(838)
- companies accounted for using the equity method	8,472	8,924	(8,749)	(9,169)
Total direct effect on equity	9,667	9,760	(10,719)	(10,007)

The impact on the result for the year includes the effect on:

• financial income and expenses of floating-rate receivables and payables;
• liquidated income and expenses of interest rate derivatives;
• change in fair value of interest rate derivatives.

The direct impact on equity is connected with the change in fair value of cash flow hedge derivatives.

Price risk associated with financial assets

The Group is exposed to price risk to the extent of the volatility of financial assets such as listed and unlisted equity shares and bonds, listed real estate investment funds and unlisted closed-end real estate investment funds for an amount equal to about 9 percent of total consolidated assets at December 31, 2008 (12 percent at December 31, 2007); the change in fair value of these financial assets is recognized in equity or in the income statement in accordance with IAS 39.

Listed equity shares and listed real estate investment funds, whose change in fair value is recognized in equity, represent 59 percent of total financial assets subject to price risk (77 percent at December 31, 2007). A change of 1 percent in these listed securities, all other conditions being equal, would cause a change of Euros 3,641 thousand (Euros 8,233 thousand at December 31, 2007) in the equity of the Group.

Financial assets, whose change in fair value is recognized through profit or loss, refer to unlisted closed-end real estate investment funds, whose fair value is arrived by reference to a basket of similarly listed securities. A change in the reference index relating to listed closed-end real estate funds of 1 percent, all other conditions being equal, would cause an impact on the result for the year of Euros 296 thousand (Euros 319 thousand at December 31, 2007).

Credit risk

Credit risk represents the Group’s exposure to potential losses due to the non-fulfillment of obligations undertaken by commercial and financial counterparts.

The Group does have significant concentrations of credit risk.

In order to limit this risk with commercial counterparts, the Group has put into place procedures to assess the potential and financial creditworthiness of the customers in order to monitor flows of estimated collections and for recovery actions, if any.

The aim of these procedures is to define the customer credit limits which, if exceeded, will activate the rule causing supplies to be blocked.

In some cases the client is asked to furnish guarantees; these will mainly be bank guarantees provided by high-credit standing banks or personal guarantees. Mortgages are requested less frequently.

Another tool used to manage commercial credit risk are insurance policies taken out to forestall the risk of non-payment through a meticulous selection of the customer portfolio made together with the insurance company, which undertakes to guarantee compensation in the case of insolvency.

As for financial counterparts, for the management of temporary excess resources or for the negotiation of derivatives, the Group only uses high-credit worthy counterparts.

Receivables for shareholders’ loans are evaluated together with the interest invested in the capital of the investment holding, using an analysis of cash flows generated by the relative underlying real estate projects.

The carrying amount of junior notes and non-performing loans is adjusted each time there is a change in the estimate of discounted cash flows expected and, in the case of impairment, is indirectly reduced through recognition of a specific provision account. In some cases, the customers are asked to furnish guarantees; these are mainly bank guarantees provided by high-credit standing banks, personal guarantees or mortgages.

Impairment losses on receivables are calculated on the basis of the risk of non-fulfillment by the counterpart determined by considering the information available on the solvency of the counterpart and historical experience. The carrying amount of receivables is indirectly reduced through recognition of a provision account.

Single significant positions, for which there is an objective condition of partial or total uncollectibility are written down individually. The amount of the impairment loss takes into account the estimate of future recoverable flows and the relative date of collection, recovery costs and expenses and the fair value of the guarantees, if any.

The positions which are not written down individually are included in groups with similar characteristics from the standpoint of credit risk and written down on a collective basis according to a percentage that increases as the overdue period increases. The collective impairment procedure also applies to receivables not yet due.

The writedown percentages are determined on the basis of historical experience and statistical data.

Liquidity risk

Liquidity risk represents the risk that available financial resources will not be sufficient to meet financial and commercial obligations within the prescribed time and due dates. The main instruments used by the Group to manage liquidity risk are three-year and annual financial plans and treasury plans that enable the Group to fully and correctly recognize and measure incoming and outgoing monetary flows. Variances between the plans and the actual figures are constantly analyzed.

Prudent liquidity risk management implies maintaining sufficient cash and/or short-term securities that can be readily converted into cash, the availability of funding through an adequate amount of committed credit facilities and/or the ability to close out market positions. Due to the dynamic nature of the businesses in which it operates, the Group aims to maintain flexibility in funding by using committed credit lines.

In order to optimize the management of financial resources and thus the liquidity risk, the Group has implemented a centralized system for managing collection and payment flows while respecting the different local currency and tax laws. The negotiation and management of banking relations is conducted centrally so that short-term and medium-term financial requirements are assured of coverage at the lowest cost possible. Even the funding of medium/long-term resources on the capital market is optimized by using centralized management.

At December 31, 2008, in addition to liquidity and securities held for trading, equal to Euros 369,705 thousand, the Group has unused committed credit facilities of Euros 785,000 thousand (Euros 2,672,000 thousand at December 31, 2007), with the following expiration dates:

(in thousands of euros)
2010	10.000
2011	136.000
2012	639.000
	785.000

The maturities of financial liabilities at December 31, 2008 can be summarized as follows:

(in thousands of euros)
	within 1 year	between 1 and 2 years	between 2 and 5 years	beyond 5 years	Total
Trade payables	1,108,573	-	-	-	1,108,573
Other payables	482,401	29,706	15,006	3,760	530,873
Derivative financial instruments	110,473	2,139	-	-	112,612
Borrowings from banks and other financial institutions	695,561	312,427	1,057,320	6,000	2,071,308
	2,397,008	344,272	1,072,326	9,760	3,823,366

The maturities of financial liabilities at December 31, 2007 can be summarized as follows:

(in thousands of euros)
	within 1 year	between 1 and 2 years	between 2 and 5 years	beyond 5 years	Total
Trade payables	1,323,588	-	-	-	1,323,588
Other payables	1,394,673	2,058	17,504	3,738	1,417,973
Derivative financial instruments	72,513	262	6,520	-	79,295
Borrowings from banks and other financial institutions	754,661	289,526	465,488	150,282	1,659,957
	3,545,435	291,846	489,512	154,020	4,480,813

Additional information: categories of financial assets and liabilities

The carrying amounts for every category of financial assets and liabilities identified in IAS 39 are reported as follows:

(in thousands of euros)
	Note	Carrying amount at December 31, 2008	Carrying amount at December 31, 2007
FINANCIAL ASSETS
Financial assets at fair value through profit or loss
- designated at the time of initial recognition
Other financial assets - non-current	11	29,599	31,910
- held for trading
Securities held for trading	17	115,800	114,039
Derivative financial instruments - non-current	27	3,161	3,849
Derivative financial instruments - current	27	92,108	56,116
Loans and receivables
Other receivables - non-current	14	723,004	672,894
Trade receivables - current	13	787,951	1,098,927
Other receivables - current	14	239,956	241,475
Cash and cash equivalents	18	253,905	2,057,682
Available-for-sale financial assets
Other financial assets - non-current	11	476,300	926,362
Hedging financial instruments
Derivative financial instruments - current	27	1,934	2,210
Total financial assets		2,723,718	5,205,464
FINANCIAL LIABILITIES
Financial liabilities at fair value through profit or loss
- held for trading
Derivative financial instruments - non-current	27	2,139	6,782
Derivative financial instruments - current	27	105,217	72,513
Financial liabilities measured at amortized cost
Borrowings from bank and other financial institutions - non-current	24	1,375,747	905,296
Other payables - non-current	26	48,472	23,300
Borrowings from bank and other financial institutions - current	24	695,561	754,661
Trade payables - current	25	1,108,573	1,323,588
Other payables - current	26	482,401	1,394,673
Hedging financial instruments
Derivative financial instruments -current	27	5,256	-
Total financial liabilities		3,823,366	4,480,813

5. Capital management policies

The objective of the Group is to maximize the return on net invested capital, maintaining the ability to operate over time and guaranteeing adequate returns for the shareholders and benefits for the other stakeholders, with a sustainable financial structure.

In order to achieve these objectives, in addition to pursuing satisfactory economic results and generating cash flows, the Group can take action on the dividend policy and the configuration of the Company’s capital.

The main indicators used by the Group to manage capital are the following:

1. Ratio between operating profit, including earnings (losses) from investments and average net invested capital: the indicator represents the capacity of the company’s results to remunerate net invested capital, this being understood as the sum of fixed assets and net working capital. The earnings (losses) of investments is included in the calculation as it is the most important measure representing the performance of the Real Estate sector. The objective of the Group is that this ratio should be higher than the average cost of capital (WACC);
2. Gearing: this is calculated as the ratio of net financial position and equity. It is an indicator of the sustainability of the debt to equity ratio, which takes into account the market situation and the trend of the cost of capital and debt at different times;
3. R.O.E (Return on equity): this is calculated as the ratio between the result for the year and average equity. It is an indicator representing the capacity of the Group to remunerate its shareholders. The objective is that the indicator should assume a value that is significantly higher than the rate of return on a risk-free investment, correlated to the nature of the businesses managed.

The amounts for the years 2008, 2007 and 2006 are as follows:

		2008	2007	2006
1	Ratio between operating profit, including earnings (losses) from investments and average net invested capital	(7.89%)	8.92%	15.93%
2	Gearing ratio	0.43	n/a *	0.42
3	R.O.E. (Return on Equity)	(13.35%)	7.61%	(20.37%)
* Not applicable as there is a positive net finacial position

6. Estimates and assumptions

The preparation of the consolidated financial statements requires management to make estimates and assumptions which, in some circumstances, are based on difficult and subjective judgments and estimates derived from historical experience and assumptions which, each time, are believed to be reasonable and realistic under the circumstances. Actual results could therefore differ from those estimates. Estimates and assumptions are periodically reviewed and the effect of each change made to them is reflected in the income statement in the period in which the estimate review is carried out if the review only has an effect on that period, or also in successive periods if the review has an effect on both the current and future periods.

With this in mind, it should be noted that the situation triggered by the current economic and financial crisis has prompted assumptions to be made about a future featuring a high degree of uncertainty. Therefore, it is not to be excluded that, next year, results could be different from estimates. As a result, even material adjustments to the carrying amounts of assets and liabilities might be required which today clearly cannot be either estimated or foreseen. Such estimates affect the reported amounts of some assets and liabilities, costs and revenues, as well as the disclosure of contingent assets and liabilities at the balance sheet date.

The estimates and assumptions will generally refer to the measurement of the recoverable amounts of intangible assets, the definition of the useful lives of property, plant and equipment, the recoverability of receivables and the recognition and measurement of provisions. The estimates and assumptions are based upon data which reflects the current state of available knowledge.

ACCOUNTING POLICIES OF PARTICULAR IMPORTANCE REQUIRING A HIGHER DEGREE
OF JUDGMENT

A brief description is provided below of the accounting policies which require a higher degree of subjective assumptions and judgments by management in making estimates and for which a change in the conditions underlying the assumptions could have a significant impact on the consolidated financial statements or for which there is the risk of material adjustment to the carrying amount of assets and liabilities in the year subsequent to the balance sheet date.

Goodwill

In accordance with the accounting policies applied in the preparation of the financial statements, goodwill is tested annually in order to assess whether there is an impairment that should be recorded in the income statement. In particular, the test involves the allocation of goodwill to cash-generating units and the determination of the relative recoverable amount, understood as being the higher of fair value and the value in use.

If the value in use is lower than the carrying amount of the cash-generating units, an impairment on the goodwill allocated to them should be recognized. The allocation of goodwill to cash-generating units and the determination of their value in use involves estimates which depend on subjective valuations as well as on factors which could change over time with consequent and possibly material effects compared to the assessments made by management.

Impairment of property, plant and equipment and intangible assets

In accordance with the accounting policies applied, property, plant and equipment and intangible assets are tested to ascertain if there is an impairment, which should be recognized, when there are indications that would imply difficulties in recovering the net carrying amount through the use of the asset. The verification of the existence of these indications requires management to make subjective judgments based on available internal or external information and historical experience. Moreover, when it has been determined that there could be a potential impairment, that impairment must be determined by reference to suitable valuation techniques. The proper identification of elements indicating the existence of a potential impairment and the estimates used to determine it depend on subjective judgments and factors which can vary over time and influence the assessments and estimates made by management.

In that context, for purposes of preparing the consolidated financial statements at December 31, 2008, and most particularly in conducting the impairment test, the various sectors of the Group took into account the estimated trends for 2009. The assumptions and results are consistent with those announced to the financial community upon presenation of the three-year 2009-2011 Industrial Plan. Based on the plan data as modified, there was no need to recognize an impairment loss.

Pension plans and other post-employment benefits

The companies of the Group have pension plans and medicare plans for its employees in various countries.

The main defined benefits plans of the Group are in the United States, the United Kingdom and Italy.

Management uses different actuarial assumptions to calculate the liability and the expected return on plan assets. The actuarial assumptions of financial nature refer to the discount rate, the expected return on plan assets, the rate of future compensation increases and the trend of medicare costs.

The actuarial assumptions of demographic nature mainly refer to mortality, disability and resignation rates.

With particular regard to the discount rates, in 2008, the rate curves showed high volatility as a consequence of the financial crisis and the relative effects on the return of high-quality corporate securities.

The Group identified discount rates which it deemed balanced, in view of the market context.

Deferred income taxes

The recognition of deferred tax assets is made on the basis of expectations of future income. The measurement of future income for purposes of recognizing deferred income taxes depends on factors which can vary over time and determine significant effects on the measurement of deferred tax assets.

In the determination of deferred taxes, budget results and plans consistent with those used for impairment testing and described in the previous paragraph in relation to the recoverable amount of non-current assets have been taken into account. It is also believed that the deferred taxes are congruous and cover the risk of a further worsening of the plan assumptions, considering that the net deferred tax assets recognized refer to temporary differences and tax losses which, to a significant degree, may be recovered over a very long period of time, therefore compatible with a scenario that shows that the crisis and economic recovery would extend beyond the time frame implicit in the above plans.

Provisions for other liabilities and charges

Accruals are made for legal and fiscal liabilities and charges that will probably require an outflow of resources. The amount of the provisions recorded in the financial statements relating to such liabilities and charges represents the best estimate at that time made by management for legal and tax actions covering various types of cases which are under the jurisdiction of different countries. This estimate involves assumptions which depend on factors which can change over time and which could therefore have material effects on the current estimates made by management in the preparation of the consolidated financial statements.

7. Segment information

For the Pirelli & C. Group, the business segment constitutes the primary segment whereas the geographical segment represents the secondary segment.

PRIMARY REPORTING FORMAT – BUSINESS SEGMENT

At December 31, 2008, continuing operations of the group are divided into the following segments:

• Tyre
• Real Estate
• Broadband Access
• Other Business

The remaining part comprises financial companies (including the Parent) and other service companies. None of these constitutes a reportable segment.

Segment results for the year ending December 31, 2008 are as follows:

(in thousands of euros)
	Tyre	Real Estate	Broadband Access	Other Businesses	Other	Total 2008
Sales to third parties	4,099,717	364,358	124,555	70,930	615	4,660,175
Sales to the Group	481	740	-	632	(1,853)	-
Total sales	4,100,198	365,098	124,555	71,562	(1,238)	4,660,175
Depreciation of property, plant and equipment/amortization of intangible assets	(190,452)	(9,415)	(896)	(1,063)	(6,854)	(208,680)
Impairment losses of property, plant and equipment/intangible assets	(9,815)	(60)	-	-	-	(9,875)
Operating profit (loss)	150,736	(71,237)	3,871	(18,372)	(21,743)	43,255
Share of earnings (losses) of companies accounted for by the equity method	481	(177,019)	-	(909)	1,770	(175,677)
Financial income (expenses)						(26,115)
Impairment losses on investments						(275,262)
Dividends						31,268
Gains (losses) from changes in fair value of financial assets						(796)
Loss before income taxes						(403,327)
Income taxes						(72,620)
Loss from continuing operations						(475,947)
Income (loss) from discontinued operations	-	74,628	(10,935)	-	(272)	63,421
Loss for the year						(412,526)

Segment results for the year ending December 31, 2007 were as follows:

(in thousands of euros)
	Tyre	Real Estate	Broadband Access	Other Businesses	Other	Total 2007
Sales to third parties	4,160,899	1,724,024	112,410	68,410	9,854	6,075,597
Sales to the Group	819	351	-	3,028	(4,198)	-
Total sales	4,161,718	1,724,375	112,410	71,438	5,656	6,075,597
Depreciation of property, plant and equipment/amortization of intangible assets	(190,465)	(7,646)	(1,048)	(883)	(8,870)	(208,912)
Impairment losses of property, plant and equipment/intangible assets	(811)	(3,823)	-	-	-	(4,634)
Operating profit (loss)	358,090	33,120	852	(8,497)	(19,565)	364,000
Share of earnings (losses) of companies accounted for by the equity method	159	114,977	-	-	1,407	116,543
Financial income (expenses)						(81,887)
Impairment losses on investments						(34,137)
Dividends						34,459
Gains (losses) from changes in fair value of financial assets						(20,097)
Income before income taxes						378,881
Income taxes						(123,028)
Income from continuing operations						255,853
Income (loss) from discontinued operations		49,455	(14,788)		33,070	67,737
Income for the year						323,590

Sales between business segments are carried out at market value.

Segment assets, liabilities and capital expenditures at December 31, 2008 are as follows:

(in thousands of euros)
	Tyre	Real Estate	Broadband Access	Other Businesses	Other	Total 12/31/2008
Segment assets	3,727,998	568,827	57,895	64,199	124,909	4,543,828
Investments in associates and joint ventures	911	357,868	-	6,493	150,028	515,300
Total allocated assets	3,728,909	926,695	57,895	70,692	274,937	5,059,128
Unallocated assets						1,874,090
Total assets						6,933,218
Segment liabilities	1,628,707	355,252	58,864	26,640	158,450	2,227,913
Unallocated liabilities						2,330,943
Total liabilities						4,558,856
Capital expenditures - property, plant and equipment	285,415	6,101	1,892	15,837	1,479	310,724
Capital expenditures - intangible assets	459,777	13,702	164	75	2,986	476,704

Segment assets, liabilities and capital expenditures at December 31, 2007 were as follows:

(in thousands of euros)
	Tyre	Real Estate	Broadband Access	Other Businesses	Other	Total 12/31/2007
Segment assets	3,256,011	905,832	55,803	43,520	107,839	4,369,005
Investments in associates and joint ventures	718	480,341	-	2,410	50,725	534,194
Total allocated assets	3,256,729	1,386,173	55,803	45,930	158,564	4,903,199
Unallocated assets						4,050,041
Total assets						8,953,240
Segment liabilities	1,564,238	518,999	61,686	24,152	213,613	2,382,688
Unallocated liabilities						2,766,481
Total liabilities						5,149,169
Capital expenditures - property, plant and equipment	262,378	6,469	4,093	9,709	4,060	286,709
Capital expenditures - intangible assets	7,089	168,093	308	980	1,966	178,436

Segment assets mainly consist of property, plant and equipment, intangible assets, assets under finance leases, inventories, trade receivables and other receivables. They exclude financial receivables, cash and cash equivalents, other financial assets, securities held for trading and current and deferred tax assets.

Segment liabilities mainly include trade payables and other payables, advances from customers, provisions for other liabilities and charges and employee benefit obligations. They exclude financial payables and current and deferred tax liabilities.

Capital expenditures mainly refer to the purchase of plant and machinery.

SECONDARY REPORTING FORMAT – GEOGRAPHICAL SEGMENT

Sales by geographical area, allocated on the basis of the country in which the customer resides, are as follows:

(in millions of Euro)
	2008		2007 (*)
Europe:
- Italy	810.4	17.39%	829.4	13.65%
- Other European countries (*)	1,586.1	34.03%	3,077.9	50.66%
North America	287.5	6.17%	329.5	5.42%
Central and South America	1,323.8	28.41%	1,187.7	19.55%
Oceania, Africa and Asia	652.4	14.00%	651.1	10.72%
	4,660.2	100.00%	6,075.6	100.00%
* In 2007, this line included the effect of the deconsolidation of DGAG activities for an amount of Euros 1,295.6 million.

Assets by geographical area, allocated on the basis of the country in which the assets are located, are as follows:

(in thousands of euros)
	12/31/2008		12/31/2007
Europe
- Italy	2,438,070	35.16%	2,253,776	25.17%
- Other European countries	1,170,704	16.89%	1,216,412	13.59%
North America	142,676	2.06%	124,665	1.39%
Central and South America	788,841	11.38%	816,790	9.12%
Oceania, Africa and Asia	518,837	7.48%	491,556	5.49%
Total allocated assets	5,059,128	72.97%	4,903,199	54.76%
Unallocated assets	1,874,090	27.03%	4,050,041	45.24%
	6,933,218	100.00%	8,953,240	100.00%

Capital expenditures by geographical area, allocated on the basis of the country in which the factories are located, are as follows.

(in thousands of euros)
	12/31/2008		12/31/2007
Europe
- Italy	45,960	14.79%	43,530	15.18%
- Other European countries	121,585	39.13%	134,910	47.05%
North America	4,205	1.35%	2,746	0.97%
Central and South America	68,163	21.94%	40,607	14.16%
Oceania, Africa and Asia	70,811	22.79%	64,916	22.64%
	310,724	100.00%	286,709	100.00%

8. Property, plant and equipment

At December 31, 2008, the composition and movements in property, plant and equipment are as follows:

(in thousands of euros)
	12/31/2008			12/31/2007
	Gross carrying amount	Accumulated depreciation	Net carrying amount	Gross carrying amount	Accumulated depreciation	Net carrying amount
Land	83,456	-	83,456	83,511	-	83,511
Buildings	625,712	(296,474)	329,238	658,310	(301,584)	356,726
Plant and machinery	2,549,392	(1,537,876)	1,011,516	2,652,755	(1,624,730)	1,028,025
Industrial and commercial equipment	525,374	(410,590)	114,784	574,675	(448,876)	125,799
Other property, plant and equipment	226,136	(167,084)	59,052	236,540	(180,116)	56,424
	4,010,070	(2,412,024)	1,598,046	4,205,791	(2,555,306)	1,650,485

MOVEMENTS IN GROSS CARRYING AMOUNT (in thousands of euros)
	12/31/2007	Discontinued operations	Exchange differences	Increase	Decrease	Reclass.	Other	12/31/2008
Land	83,511	-	(7,077)	8,910	(4,496)	2,608	-	83,456
Buildings	658,310	(7,679)	(42,084)	26,014	(11,975)	3,119	7	625,712
Plant and machinery	2,652,755	(28,166)	(237,116)	205,862	(29,232)	(12,706)	(2,005)	2,549,392
Industrial and commercial equipment	574,675	(25,151)	(54,071)	37,938	(17,501)	9,180	304	525,374
Other property, plant and equipment	236,540	(12,031)	(16,265)	32,000	(13,135)	(2,201)	1,228	226,136
	4.205.791	(73.027)	(356.613)	310.724	(76.339)	-	(466)	4.010.070

MOVEMENTS IN ACCUMULATED DEPRECIATION (in thousands of euros)
	12/31/2007	Discontinued operations	Exchange difference	Reclass.	Decrease	Depreciation	Other	12/31/2008
Land	(301,584)	4,324	20,123	-	2,497	(21,041)	(793)	(296,474)
Plant and machinery	(1,624,730)	10,952	170,495	7,430	19,798	(122,152)	332	(1,537,876)
Industrial and commercial equipment	(448,876)	18,233	46,490	37	16,236	(41,187)	(1,523)	(410,590)
Other property, plant and equipment	(180,116)	9,235	13,925	(7,467)	11,345	(14,362)	356	(167,084)
	(2,555,306)	42,744	251,033	-	49,875	(198,742)	(1,628)	(2,412,024)

MOVEMENTS IN NET CARRYING AMOUNT (in thousands of euros)
	31/12/2007	Attività cedute	Diff. da conv.	Incr.	Decr.	Riclass.	Amm.ti	Altro	31/12/2008
Land	83,511	-	(7,077)	8,910	(4,496)	2,608	-	-	83,456
Buildings	356,726	(3,355)	(21,961)	26,014	(9,478)	3,119	(21,041)	(786)	329,238
Plant and machinery	1,028,025	(17,214)	(66,621)	205,862	(9,434)	(5,276)	(122,152)	(1,673)	1,011,517
Industrial and commercial equipment	125,799	(6,918)	(7,581)	37,938	(1,265)	9,217	(41,187)	(1,219)	114,784
Other property, plant and equipment	56,424	(2,796)	(2,340)	32,000	(1,791)	(9,668)	(14,362)	1,584	59,051
	1,650,485	(30,283)	(105,580)	310,724	(26,464)	-	(198,742)	(2,095)	1,598,046

At December 31, 2007, the movements in property, plant and equipment were as follows:

MOVEMENTS IN GROSS CARRYING AMOUNT (in thousands of euros)
	12/31/2006	Exchange differences	Increase	Decrease	Reclass.	Other	12/31/2007
Land	83,186	1,294	412	(1,544)	177	(14)	83,511
Buildings	636,102	1,989	18,208	(2,775)	4,528	258	658,310
Plant and machinery	2,449,874	36,890	198,458	(27,182)	(6,013)	728	2,652,755
Industrial and commercial equipment	530,916	9,413	32,568	(8,231)	11,202	(1,193)	574,675
Other property, plant and equipment	238,643	(685)	37,063	(23,203)	(9,894)	(5,384)	236,540
	3,938,721	48,901	286,709	(62,935)	-	(5,605)	4,205,791

MOVEMENTS IN ACCUMULATED DEPRECIATION (in thousands of euros)
	12/31/2006	Exchange difference	Reclass.	Decrease	Depreciation	Other	12/31/2007
Buildings	(279,163)	(2,964)	145	2,443	(21,753)	(292)	(301,584)
Plant and machinery	(1,498,088)	(24,864)	980	19,080	(122,206)	368	(1,624,730)
Industrial and commercial equipment	(405,039)	(7,706)	1,743	5,572	(43,377)	(69)	(448,876)
Other property, plant and equipment	(181,842)	574	(2,868)	15,682	(16,209)	4,547	(180,116)
	(2,364,132)	(34,960)	-	42,777	(203,545)	4,554	(2,555,306)

MOVEMENTS IN NET CARRYING AMOUNT (in thousands of euros)
	12/31/2007	Exchange differences	Increase	Decrease	Reclass.	Depreciation	Other	12/31/2008
Land	83,186	1,294	412	(1,544)	177	-	(14)	83,511
Buildings	356,939	(975)	18,208	(332)	4,673	(21,753)	(34)	356,726
Plant and machinery	951,786	12,026	198,458	(8,102)	(5,033)	(122,206)	1,096	1,028,025
Industrial and commercial equipment	125,877	1,707	32,568	(2,659)	12,945	(43,377)	(1,262)	125,799
Other property, plant and equipment	56,801	(111)	37,063	(7,521)	(12,762)	(16,209)	(837)	56,424
	1,574,589	13,941	286,708	(20,158)	-	(203,545)	(1,051)	1,650,485

Increases during the year 2008 mainly refer to additions in the Tyre sector, particularly the new operating units in Romania, China and Brazil.

The ratio of additions in 2008 to depreciation is 1.56.

Assets under construction at December 31, 2008 amount to Euros 115,454 thousand (Euros 72,828 thousand at December 31, 2007).

Impairment losses in 2008, included in the column “decrease” in the above table, amount to Euros 9,815 thousand (Euros 811 thousand in 2007) and are recognized in the income statement under “Amortization, depreciation and impairments” (Note 32).

Discontinued operations refer to the deconsolidation of the companies Integra FM B.V. group (formerly Pirelli RE Integrated Facility Management B.V.) and PGT Photonics S.p.A., following the sale of the stakes held to third parties.

Restrictions on the ownership of assets are as follow:

• the subsidiary Pirelli Tyres Alexandria Co. is using plant and machinery as collateral for an equivalent amount of Euros 10,844 thousand (Euros 11,679 thousand at December 31, 2007);
• the subsidiary Pirelli Pneus S.A. is using machinery and land as collateral for a total of Euros 50,248 thousand (Euros 78,958 thousand at December 31, 2007).

There were no borrowing costs capitalized to property, plant and equipment.

8.1. FINANCE LEASES

Land, buildings, plant, machinery and other assets purchased by the Group using finance leases are included in the respective categories of property, plant and equipment.

Details are as follows:

(in thousands of euros)
	12/31/2008			12/31/2007
	Capitalized cost	Accumulated depreciation	Net carrying amount	Capitalized cost	Accumulated depreciation	Net carrying amount
Land leased	11,187	-	11,187	11,187	-	11,187
Buildings leased	61,842	(13,832)	48,010	63,469	(12,559)	50,910
Other property, plant and equipment leased	17,389	(7,623)	9,766	984	(574)	410
Plant and machinery leased	86	(86)	-	1,791	(846)	945
	90,504	(21,541)	68,963	77,431	(13,979)	63,452

Details of the most important contracts regarding land and buildings leased are as follows:

• Pirelli & C. S.p.A. has a lease contract with a syndicate of banks (DEUTSCHE BANK LEASING S.p.A. - now SG LEASING S.p.A. - Franfinance Leasing Italia; SOGELEASE ITALIA S.p.A. – now SG LEASING S.p.A. - Franfinance Leasing Italia; LOCAT S.p.A.) on the building which houses the structures and the R&D activities of the Tyre sector.

The contract, signed in May 2000, has a term of 13 years and a purchase option at expiration.

The net book amount of the building is Euros 40,244 thousand (Euros 41,904 thousand at December 31, 2007) and that of the land is Euros 10,184 thousand (unchanged at December 31, 2007);

• the subsidiary Pirelli Deutschland GmbH has a lease contract with the company DAL-Florenta on the distribution warehouse located in Breuberg. The contract is divided into two terms: the first is for 15 years from January 1, 1995 to December 31, 2009 and the second is for another 7.5 years. The contract has a purchase option;
• the subsidiary Pneumobil GmbH has five lease contracts with the company DAL-Florenta on the buildings of five points of sale in Germany. The terms of the contracts are between 20 and 25 years and all of the contracts expire by 2010.

The net carrying amounts of the buildings of the German companies total Euros 6,785 thousand (Euros 7,250 thousand at December 31, 2007) and that of the related land is Euros 1,003 thousand (unchanged compared to December 31, 2007).

Other assets leased mainly include an airplane under a leaseback arrangement between the subsidiary Perseo S.r.l. and Intesa Leasing S.p.A.. The contract began in April 2005 and has a term of 7 years with a purchase option at expiration. The net carrying amount is Euros 9,520 thousand.

Finance lease payables are included in financial payables (Note 24).

The minimum lease payments (that is, the payments made by the lessee over the residual term of the lease) are detailed as follows:

(in thousands of euros)
	12/31/2008	12/31/2007
Due within 1 year	12,447	5,171
Due between 1 and 5 years	34,117	24,540
Due beyond 5 years	-	12,911
	46,564	42,622
Future financial expenses	(5,465)	(6,970)
Leases payable (note 24)	41,099	35,652

The following table presents the finance lease payable by expiration date:

(in thousands of euros)
	12/31/2008	12/31/2007
Due within 1 year	10,759	3,381
Due between 1 and 5 years	30,340	19,711
Due beyond 5 years	-	12,560
Leases payable (note 24)	41,099	35,652