Pirelli

9. Intangible assets

The composition and movements in intangible assets are as follows:

“Discontinued operations” refer almost entirely to the deconsolidation of Integra FM B.V. group (formerly Pirelli RE Integrated Facility Management B.V.).

The increase in “Goodwill” mainly refers to:

• the purchase of the 38.9 percent minority interest in Pirelli Tyre S.p.A. through the acquisition of Speed S.p.A. (Euros 450,920 thousand, corresponding to the difference between the price paid and the net assets acquired);
• the purchase of the shares of the subsidiary Pirelli & C. Real Estate S.p.A. for Euros 22,064 thousand (equal to 2.8 percent of the total), resulting in further goodwill of Euros 2,407 thousand, equal to the difference between the price paid and accounting net assets;
• the inclusion in Pirelli Real Estate Group’s scope of consolidation of certain companies in the BauBeCon Group following the acquisition of stakes by Pirelli RE Netherlands B.V. and Pirelli & C. Real Estate Deutschland GmbH (Euros 4,466 thousand).

Accounting for this last business combination led to the recognition of assets and liabilities acquired at fair value, and also residual goodwill, as better detailed in the following table:

In September 2008, the Pirelli & C. Real Estate group sold 94.9 percent of the share capital of BauBeCon Sanierungstrager GmbH. Following the sale, goodwill was reduced by Euros 2,624 thousand (this reduction is shown in the column “decrease”); therefore, at December 31, 2008, the residual goodwill relating to this business combination amounts to Euros 1,842 thousand.

At December 31, 2008, the breakdown of goodwill according to business segment and cash-generating unit (or groups of cash-generating units) to which it was allocated for purposes of assessing impairment and the configuration of the recoverable amount are shown in the following table:

The impairment test consists of estimating the recoverable amount of the cash-generating units and comparing it with the net carrying amount of the relative assets including goodwill.

The value in use corresponds to the present value of future cash flows which are expected to be associated with the cash-generating units, using a discount rate which reflects the risks specific to the individual cash-generating units at the measurement date.

Management uses many assumptions in applying this method, including the estimate of future increases in sales, operating cash flows, the growth rate of the end amounts and the weighted average cost of capital (discount rate). More to the point, the cash flows approved by management used in determining the value of use cover a period of three years.

For the Real Estate sector, the flows relating to the fourth and fifth year are extrapolated from the flows of the third year without applying growth assumptions.

Furthermore, consideration has been given to the cash flows generated from the sale of the cash-generating unit at the end of the explicit period (assumed to be equal to the present value of the return in perpetuity of cash flows generated in the last year of projection); for industrial operations, this flow has been extrapolated by applying a 2 percent growth factor to the flow of the last year (2 percent in 2007).

The discount rates, net of taxes, applied to the cash flow projections are as follows:

As far as the Real Estate sector is concerned, the Group has indiscriminately allocated Euros 32.9 million being the difference between the purchase on the market over time of minority interests in listed securities and the relative net assets. This higher value recognized is supported by considering the recoverable amount of the sector as a whole.

On the basis of the results of the tests performed, there is no impairment.

A sensitivity analysis was also carried out: in all cases the value in use remains higher than the carrying amounts even assuming a change in the key parameters, such as:

• a change in the weighted average cost of capital by 50 basis point (hundredths of a percentage point) or
• for industrial operations, a change in the growth rate by 1 percentage point.

The impairment losses in 2008 on intangible assets other than goodwill, included in the column decrease in the table, amount to Euros 60 thousand (Euros 3,823 thousand in 2007). They are recognized in the income statement under “Amortization, depreciation and impairments” (Note 32).

10. Investments in associates and joint ventures

Investments in associates and joint ventures total Euros 515,300 thousand compared to Euros 534,194 thousand at December 31, 2007.

Movements during the year are as follows:

The following table details the movements in investments in associates:

Spazio Investment N.V. is listed on the Alternative Investment Market of the London Stock Exchange; the market price at December 31, 2008 is Euros 6 and is equivalent to a total investment value of Euros 30.4 million.

RCS Mediagroup S.p.A. is listed on the Milan Stock Exchange. The market price at December 31, 2008 is Euros 0.9772 and is equivalent to a total investment value of Euros 38.2 million.

The following table details the movements in investments in joint ventures:

The column discontinued operations refers to the companies deconsolidated in 2008 following the sale of Integra FM B.V. (formerly Pirelli Real Estate Facility Management B.V.).

As regards the column share of earnings, reference should be made to Note 38 “Share of earnings (losses) of associates and joint ventures”.

Reclassification and other largely refers to the investment in RCS Mediagroup S.p.A. which was reclassified at December 31, 2008 to the line item “Investments in associates and joint ventures” from the line item “Other financial assets”.

The investment (equal to 5.3 percent of voting capital) forms part of the shareholders’ agreement which aims to ensure the stability of the shareholder base and guide the management of the operations of the RCS Mediagroup S.p.A. in a single direction (the companies in the shareholders’ agreement have contributed 63.5 percent of share capital). The reason for the reclassification lies in the fundamental strengthening of the single orientation within the shareholders’ agreement and the intensification of other forms of exercising the rights of governance

The reclassification led to a writeback of the average purchase cost, equal to Euros 3.38 per share, which resulted in an increase in equity, the offsetting entry to the accumulated losses recognized in a specific equity reserve which at December 31, 2007 were equal to Euros 15,419 thousand and at June 30, 2008 to Euros 74,594 thousand.

At December 31, 2008, the investment was tested for impairment and was adjusted to its value in use (Euros 1.70 per share), determined, with the assistance of a independent appraiser, using a discounted cash flow model which takes into account the generalized decline in the profitability of the sector within the context of the negative trend of the financial markets, with a consequent impairment loss recognized in income equal to Euros 65,721 thousand.

The impairment losses also include Euros 8,700 thousand relating to CyOptics Inc..

Movements in provisions for other liabilities and charges are due to the equity method valuation of some companies in the Real Estate group. The movements also include the accrual to cover the losses in excess of the carrying amount.

Key data relating to associates and joint ventures (at 100 percent) at December 31, 2008 refer to those in the Real Estate sector are indicated as follows:

Lastly, the investments in associates and joint ventures are pledged for an amount of Euros 96,879 thousand.

11. Other financial assets

Other financial assets amount to Euros 505,899 thousand compared to Euros 958,272 thousand at December 31, 2007.

The movements during the year are as follows:

Financial assets, whose change in fair value is recognized in the income statement under “Gains (losses) from changes in fair value of financial assets” (Euros 29,599 thousand compared to Euros 31,910 thousand in 2007) refer to shares corresponding to 13.32 percent of the Cloe Fondo Uffici – a reserved unlisted closed-end real estate investment fund, held by Pirelli Real Estate Netherlands B.V..

The classification of such shares in this line item reflects the purpose of the acquisition of the shares, which called for the shares to become part of a common investment platform for buildings intended for office use.

At December 31, 2008, financial assets, whose change in fair value is recognized in equity, are as follows:

The increase refers mainly to Pirelli & C. S.p.A.’s subscription to Alitalia S.p.A. shares (Euros 20,000 thousand), the purchase of RCS Mediagroup S.p.A. shares (Euros 3,966 thousand) and also the purchase of Equinox shares (Euros 2,146 thousand) on the part of Pirelli Finance (Luxembourg) S.A..

In addition to the increase, there was the decrease that refers mainly to the total sale of the investment in Intek S.p.A. held by Pirelli & C. S.p.A. (Euros 4,008 thousand), the sale of Telecom Italia S.p.A. ordinary shares held by Pirelli Finance (Luxembourg) S.A. (Euros 10,630 thousand) and the sale of shares of the closed real estate investment funds of the Real Estate group (Euros 14,635 thousand).

Impairments are largely in reference to the adjustment made to the 1.32 percent stake held in Telecom Italia S.p.A. (Euros 173,004 thousand) and to the Avanex shares (Euros 24,335 thousand).

Net losses transferred to the income statement refer to the net effect of gains, previously recognized in equity, relating to investments in Intek S.p.A. (Euros 1,152 thousand) and in Berenice Fondo Uffici (Euros 3,399 thousand), transferred to the income statement following the sale of these investments, and losses previously recognized in equity, relating to the investment in Avanex Co (Euros 6,545 thousand), transferred to the income statement as a result of the impairment.

The negative changes in fair value of Euros 138,015 thousand (Euros 136,408 thousand recognized in equity and Euros 1,607 thousand in the income statement) mainly regard the shares of Mediobanca S.p.A. (negative for Euros 102,011 thousand), Fin Priv S.r.l. (negative for Euros 13,289 thousand) and shares of the closed-end real estate funds of the Real Estate group (negative for Euros 17,163 thousand).

For listed securities and closed-end real estate investment funds, the fair value corresponds to the stock market price at December 31, 2008.

For unlisted securities and closed-end real estate investment funds, the fair value has been estimated using appropriate estimation techniques.

Reclassification (Euros 132,171 thousand) refers to the investment in RCS Mediagroup S.p.A., reclassified from “Other financial assets” to “Investments in associates” as described in the note and comment on the line item “Investments in associates and joint ventures”. The reclassification generated a reversal of the cumulative negative fair value changes recognized in equity up to December 31, 2007 (Euros 15,419 thousand).

12. Deferred tax assets and liabilities

The composition of deferred tax assets and liabilities is as follows:

Since deferred tax assets and liabilities are offset in the financial statements when the income taxes are levied by the same tax authority and where there is a legally enforceable right of offset, the composition of the gross amounts is presented below:

The tax effect of the temporary differences and tax loss carryforwards which make up deferred tax assets and liabilities at December 31, 2008 and 2007 is as follows:

At December 31, 2008, deferred tax assets relating to temporary differences that have not been recognized amount to Euros 75,213 thousand (Euros 44,958 at December 31, 2007), and those relating to tax losses equal Euros 503,791 thousand (Euros 483,044 thousand at December 31, 2007): such amounts refer to situations in which recoverability is not considered probable.

Unused tax loss carryforwards, by expiration date, for which no deferred tax assets have been recognized, are as follows:

The tax effect of gains and losses recognized directly in equity is a positive Euros 11,281 thousand (negative Euros 2,856 thousand at December 31, 2007) and is shown in the statement of recognized income and expenses. Such movements are mainly due to the tax effect on actuarial gains/losses regarding employee benefits and the change in the fair value of available-for-sale financial assets.

13. Trade receivables

Trade receivables can be analyzed as follows:

Receivables on construction contracts, relating to the Real Estate sector, represent the excess of costs incurred and profit recognized using the percentage of completion method, equal to Euros 9,967 thousand at December 31, 2008 (Euros 9,780 thousand at December 31, 2007), over advances received against progress billings on contracts in progress, equal to Euros 3,790 thousand at December 31, 2008 (Euros 451 thousand at December 31, 2007).

Total gross trade receivables of Euros 847,940 thousand (Euros 1,152,799 thousand at December 31, 2007), Euros 164,149 thousand are past due (Euros 260,145 thousand at December 31, 2007).

Writedowns for past due and current receivables are recognized according to the Group’s policies described in the paragraph on credit risk under “Financial risk management policies”.

Receivables that are impaired include both significant single positions written down individually and positions with similar characteristics by group of credit risk written down on a collective basis.

The movements in the provision for impairment of trade receivables are as follows:

The accrual to the provision for writedowns of trade receivables is charged to the income statement in “Other expenses” (Note 33).

The carrying amounts of trade receivables are deemed to approximate fair value.