EX-99.3 10 a2234823zex-99_3.htm EX-99.3

Exhibit 99.3

 

REGULATION S-X RULE 3-09

 

CONSOLIDATED FINANCIAL STATEMENTS OF

 

VIP-CKH Luxembourg S.à r.l

 

FOR THE YEARS ENDED

 

DECEMBER 31, 2017 AND 2016

 

FINANCIAL STATEMENTS AND NOTES THERETO

 

 

1, Route d’Esch

L-1470 Luxembourg

R.C.S. Luxembourg: B 77 457

Share Capital: EUR 50,000

 



 

CONTENTS

 

REPORT OF INDEPENDENT AUDITORS

 

4

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 

6

CONSOLIDATED INCOME STATEMENT

 

7

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

8

CONSOLIDATED STATEMENT OF CASH FLOW

 

9

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

10

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE VIP-CKH LUXEMBOURG S.À R.L AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2017 AND 2016

 

11

1

INTRODUCTION

 

11

2

GENERAL ACCOUNTING POLICIES

 

13

3

ACQUISITIONS AND DISPOSALS

 

39

4

TANGIBLE ASSETS

 

39

5

INTANGIBLE ASSETS

 

41

6

FINANCIAL ASSETS

 

45

7

INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD

 

45

8

DEFERRED TAX ASSETS AND LIABILITIES

 

45

9

INVENTORIES

 

47

10

TRADE RECEIVABLES

 

48

11

CURRENT INCOME TAX ASSETS

 

49

12

OTHER RECEIVABLES

 

49

13

CASH AND CASH EQUIVALENTS

 

50

14

ASSETS HELD FOR SALE - LIABILITIES ASSOCIATES TO ASSETS HELD FOR SALE

 

51

15

SHAREHOLDERS’ EQUITY

 

51

16

FINANCIAL LIABILITIES

 

53

17

DERIVATIVE FINANCIAL INSTRUMENTS

 

56

18

EMPLOYEE BENEFITS

 

58

19

PROVISIONS

 

59

20

OTHER LIABILITIES

 

61

21

TRADE PAYABLES

 

61

22

OTHER PAYABLES

 

62

23

INCOME TAX PAYABLES

 

63

24

REVENUE AND SEGMENT REPORTING

 

63

25

OTHER REVENUE

 

64

26

PURCHASES AND SERVICES

 

65

 

2



 

27

OTHER OPERATING COSTS

 

65

28

PERSONNEL EXPENSES

 

66

29

RESTRUCTURING COSTS

 

67

30

DEPRECIATION AND AMORTIZATION

 

67

31

REVERSAL OF IMPAIRMENT LOSSES / (IMPAIRMENT LOSSES) ON NON-CURRENT ASSETS

 

67

32

FINANCE INCOME

 

68

33

FINANCE EXPENSE

 

68

34

FOREIGN EXCHANGE GAINS / (LOSSES), NET

 

69

35

INCOME TAXES

 

69

36

RELATED PARTIES TRANSACTIONS

 

70

37

NET DEBT

 

73

38

OTHER INFORMATION

 

74

39

SUBSEQUENT EVENTS

 

78

 

3



 

Report of Independent Auditors

 

To the Management of VIP-CKH Luxembourg S.à.r.l:

 

We have audited the accompanying consolidated financial statements of VIP-CKH Luxembourg S.à.r.l. and its subsidiaries, which comprise the consolidated statement of financial position as of December 31, 2017 and the related consolidated statement of income, comprehensive income, changes in equity and cash flows for the year then ended.

 

Management’s Responsibility for the consolidated financial statements

 

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditors’ Responsibility

 

Our responsibility is to express an opinion on the consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those

 

4



 

risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of VIP-CKH Luxembourg S.à.r.l. and its subsidiaries as of December 31, 2017 and the results of their operations and their cash flows for the year then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

/s/ PricewaterhouseCoopers SpA

 

 

Milan, Italy

March 13, 2018

 

5



 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 

 

 

 

 

At December 31,

 

At December 31,

 

(millions of euro) 

 

Note

 

2017

 

2016 (unaudited)

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Tangible assets

 

4

 

3,529

 

5,618

 

Intangible assets

 

5

 

9,742

 

10,001

 

Financial assets

 

6

 

9

 

1,467

 

Investments accounted for using the equity method

 

7

 

 

77

 

Deferred tax assets

 

8

 

 

125

 

Trade receivables

 

10

 

247

 

244

 

Other receivables

 

12

 

406

 

36

 

Total non-current assets

 

 

 

13,933

 

17,568

 

 

 

 

 

 

 

 

 

Assets held for sale

 

14

 

241

 

50

 

Financial assets

 

6

 

4

 

3

 

Inventories

 

9

 

127

 

72

 

Trade receivables

 

10

 

1,251

 

1,284

 

Of which from related parties

 

36

 

4

 

3

 

Current income tax assets

 

11

 

30

 

27

 

Other receivables

 

12

 

300

 

236

 

Of which from related parties

 

36

 

 

7

 

Cash and cash equivalents

 

13

 

619

 

633

 

Total current assets

 

 

 

2,572

 

2,305

 

TOTAL ASSETS

 

 

 

16,505

 

19,873

 

 

 

 

 

 

 

 

 

Equity and Liabilities

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

Issued capital

 

 

 

 

 

Share premium reserve

 

 

 

15,413

 

15,413

 

Other reserves

 

 

 

(2,580

)

(2,286

)

Retained earnings

 

 

 

(12,993

)

(11,562

)

Loss for the year

 

 

 

(2,678

)

(1,785

)

Deficit attributable to the Group

 

 

 

(2,838

)

(220

)

Non-controlling interests

 

 

 

 

 

Total deficit

 

15

 

(2,838

)

(220

)

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Deferred tax liabilities

 

8

 

174

 

368

 

Financial liabilities

 

16

 

10,264

 

10,993

 

Employee benefits

 

18

 

67

 

79

 

Provisions

 

19

 

195

 

140

 

Other liabilities

 

20

 

418

 

238

 

Other payables

 

22

 

 

1

 

Total non-current liabilities

 

 

 

11,118

 

11,819

 

 

 

 

 

 

 

 

 

Financial liabilities

 

16

 

5,163

 

5,290

 

Of which from related parties

 

36

 

5,114

 

5,114

 

Trade payables

 

21

 

2,341

 

2,271

 

Of which from related parties

 

36

 

24

 

43

 

Other payables

 

22

 

687

 

656

 

Income tax payables

 

23

 

21

 

57

 

Liabilities associated to assets held for sale

 

14

 

13

 

 

Total current liabilities

 

 

 

8,225

 

8,274

 

Total liabilities

 

 

 

19,343

 

20,093

 

TOTAL DEFICIT AND LIABILITIES

 

 

 

16,505

 

19,873

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6



 

CONSOLIDATED INCOME STATEMENT

 

 

 

 

 

 

 

2016

 

 

 

 

 

2017

 

12 months

 

(millions of euro)

 

Note

 

12 months

 

(unaudited) (*)

 

 

 

 

 

 

 

 

 

Revenue from services

 

24

 

5,263

 

2,256

 

Of which from related parties

 

36

 

12

 

3

 

Revenue from sales

 

24

 

760

 

549

 

Other revenue

 

25

 

159

 

88

 

Total revenue

 

 

 

6,182

 

2,893

 

 

 

 

 

 

 

 

 

Services

 

26

 

(2,596

)

(1,245

)

Of which from related parties

 

36

 

(122

)

(44

)

Purchases

 

26

 

(699

)

(506

)

Other operating costs

 

27

 

(303

)

(149

)

Personnel expenses

 

28

 

(376

)

(217

)

Restructuring costs

 

29

 

(271

)

(60

)

Depreciation and amortization

 

30

 

(3,333

)

(653

)

Impairment losses on non-current assets

 

31

 

(24

)

(1,685

)

Losses on disposal of non-current assets

 

 

 

(2

)

(1

)

Operating Loss

 

 

 

(1,422

)

(1,623

)

 

 

 

 

 

 

 

 

Finance income

 

32

 

18

 

19

 

Finance expense

 

33

 

(1,366

)

(227

)

Of which from related parties

 

36

 

 

(134

)

Foreign exchange gains/(losses), net

 

34

 

7

 

(1

)

Loss before tax

 

 

 

(2,763

)

(1,832

)

 

 

 

 

 

 

 

 

Income taxes

 

35

 

85

 

47

 

 

 

 

 

 

 

 

 

Loss for the year

 

 

 

(2,678

)

(1,785

)

 

 

 

 

 

 

 

 

Non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss for the year attributable to the Group

 

 

 

(2,678

)

(1,785

)

 


(*) The consolidated income statements for the year ended December 31, 2017 are not immediately comparable with those of the same period of the previous year. The consolidated income statements for the year ended December 31, 2016 only reflect the full year’s consolidated results of predecessor 3 Italia Group and approximately two months consolidated results of predecessor WIND Group.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7



 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

 

 

 

 

2016

 

 

 

2017

 

12 months

 

(millions of euro)

 

12 months

 

(unaudited) (*)

 

 

 

 

 

 

 

Loss for the year

 

(2,678

)

(1,785

)

Other comprehensive income/(loss) that will be subsequently recycled to profit or loss

 

 

 

 

 

Gains/(losses) net of tax on cash flow hedging instruments

 

60

 

(41

)

Total Other comprehensive income/(loss) that will be subsequently recycled to profit or loss

 

60

 

(41

)

 

 

 

 

 

 

Total comprehensive loss for the year

 

(2,618

)

(1,826

)

 

 

 

 

 

 

Total comprehensive loss attributable to:

 

 

 

 

 

Owners of the Parent

 

(2,618

)

(1,826

)

Non-controlling interests

 

 

 

 


(*) The consolidated income statements for the year ended December 31, 2017 are not immediately comparable with those of the same period of the previous year. The consolidated income statements for the year ended December 31, 2016 only reflect the full year’s consolidated results of predecessor 3 Italia Group and approximately two months consolidated results of predecessor WIND Group.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

8


 

CONSOLIDATED STATEMENT OF CASH FLOW

 

 

 

 

 

 

 

2016

 

 

 

 

 

2017

 

12 months

 

(millions of euro) 

 

Note

 

12 months

 

(unaudited)(*)

 

 

 

 

 

 

 

 

 

Cash flows from / (used in) operating activities

 

 

 

 

 

 

 

Loss for the year

 

 

 

(2,678

)

(1,785

)

Income taxes

 

35

 

(85

)

(47

)

Finance costs — net

 

32, 33

 

1,357

 

208

 

Losses on disposals of non-current assets

 

 

 

 

1

 

Gains on subsidiary disposal

 

 

 

(11

)

 

Loss before taxes, interest, gains/losses on disposal of assets

 

 

 

(1,417

)

(1,623

)

 

 

 

 

 

 

 

 

Adjustments to reconcile the loss for the year with the cash flows from/(used in) operating activities

 

 

 

 

 

 

 

Depreciation, amortization and (reversal of impairment losses)/impairment losses on non-current assets

 

30, 31

 

3,357

 

2,338

 

Net changes in provisions and employee benefits

 

 

 

19

 

11

 

Impairment of trade receivables

 

 

 

196

 

91

 

Impairment of inventory

 

 

 

3

 

3

 

Change in inventories

 

 

 

(58

)

23

 

Net change in current assets/liabilities

 

 

 

(814

)

67

 

Taxes paid

 

 

 

(52

)

(46

)

Interest received

 

 

 

575

 

 

Interest paid

 

 

 

(959

)

(9

)

Net cash flows from operating activities

 

 

 

850

 

855

 

 

 

 

 

 

 

 

 

Cash flows from/(used in) investing activities

 

 

 

 

 

 

 

Acquisition of tangible assets

 

4

 

(750

)

(322

)

Acquisition of intangible assets

 

5

 

(507

)

(292

)

Disposal of tangible and intangible assets

 

4, 5

 

82

 

 

Disposal of financial assets

 

6

 

88

 

 

Purchase of non-controlling interest

 

 

 

 

(45

)

Net cash flows used in investing activities

 

 

 

(1,087

)

(659

)

 

 

 

 

 

 

 

 

Cash flows from / (used in) financing activities

 

 

 

 

 

 

 

Bank loans:

 

 

 

 

 

 

 

Receipts

 

16

 

2,970

 

 

Repayments

 

16

 

(712

)

(49

)

Loans from shareholders:

 

 

 

 

 

 

 

Receipts

 

 

 

 

287

 

Repayments

 

 

 

 

(186

)

Bonds issued

 

16

 

7,291

 

 

Bonds repaid (included related costs)

 

16

 

(9,326

)

 

Net cash flows from financing activities

 

 

 

223

 

52

 

 

 

 

 

 

 

 

 

Net cash flows for the year

 

 

 

(14

)

248

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at the beginning of the year

 

13

 

633

 

89

 

Cash and cash equivalents from incorporation of WIND

 

13

 

 

296

 

Cash and cash equivalents at the end of the year

 

13

 

619

 

633

 

 


(*) The consolidated income statements for the year ended December 31, 2017 are not immediately comparable with those of the same period of the previous year. The consolidated income statements for the year ended December 31, 2016 only reflect the full year’s consolidated results of predecessor 3 Italia Group and approximately two months consolidated results of predecessor WIND Group.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

9



 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

 

 

 

 

Equity attributable to the Group

 

 

 

 

 

 

 

(millions of euro)

 

 

 

Issued
capital

 

Share
premium
account

 

Other
reserves

 

Fair value
reserve

 

Retained
earnings/
(losses carried
forward

 

Equity
attributable
to the Group

 

Non-
controlling
interests

 

Total
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2016 (unaudited)

 

 

 

2,759

 

 

395

 

4,121

 

(11,481

)

(4,206

)

31

 

(4,175

)

Total comprehensive loss for the year

 

 

 

 

 

(41

)

 

(1,785

)

(1,826

)

 

(1,826

)

- Loss for the year

 

Note 15

 

 

 

 

 

(1,785

)

(1,785

)

 

(1,785

)

- Cash flow hedges

 

Note 15

 

 

 

(41

)

 

 

(41

)

 

(41

)

Purchase of Non-Controlling Interest

 

 

 

 

 

(9

)

 

 

(9

)

(31

)

(40

)

Recycling of the fair value reserve

 

 

 

 

 

 

(16

)

 

(16

)

 

(16

)

Settlement of shareholder loan 

 

Note 15

 

 

 

 

(4,105

)

 

(4,105

)

 

(4,105

)

Incorporation of WIND

 

 

 

 

 

(2,631

)

 

(81

)

(2,712

)

 

(2,712

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Extraordinary General Meeting:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- Contribution in kind of a receivable

 

Note 15

 

 

10,057

 

 

 

 

10.057

 

 

10,057

 

- Reduction in share capital

 

Note 15

 

(2,759

)

2,759

 

 

 

 

 

 

 

- Contribution in cash

 

Note 15

 

 

40

 

 

 

 

40

 

 

40

 

- Contribution in kind of a receivable

 

Note 15

 

 

2,557

 

 

 

 

2,557

 

 

2,557

 

Balances at December 31, 2016 (unaudited)

 

 

 

 

15,413

 

(2,286

)

 

(13,347

)

(220

)

 

(220

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive loss for the year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- Loss for the year

 

Note 15

 

 

 

 

 

(2,678

)

(2,678

)

 

(2,678

)

- Cash flow hedges

 

Note 15

 

 

 

60

 

 

 

60

 

 

60

 

Other movements 

 

Note 15

 

 

 

(354

)

 

354

 

 

 

 

Balances at December 31, 2017

 

 

 

 

15,413

 

(2,580

)

 

(15,671

)

(2,838

)

 

(2,838

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

10



 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF THE VIP-CKH LUXEMBOURG  S.à r.l AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2017 AND 2016

 

1                                         INTRODUCTION

 

VIP-CKH Luxembourg Group (hereafter “the Group”) operates in Italy mainly in fixed and mobile telecommunication sector under the brands 3, Wind, Wind Tre Business and Infostrada. The Group is strongly oriented to mobile data transmission offer as well as to broadband and wireless internet access services. The Group also accompany its offer with a wide range of content, applications and media.

 

VIP-CKH Luxembourg Sàrl (hereafter VIP-CKH or the Company or the Joint Venture) is a limited liability company having its registered office in 1, Route d’Esch, Luxembourg.

 

VIP-CKH is a 50/50 joint venture owned indirectly by CK Hutchison Holdings Limited (hereafter referred to as CK Hutchison) and VEON Ltd (hereafter referred to as VEON) to jointly own and operate the telecommunications businesses in Italy. CK Hutchison is a company incorporated in the Cayman Islands with limited liability and registered on the Register of Companies of the Cayman Islands (No. MC-294571), the shares of which are listed on the Main Board of the Stock Exchange of Hong Kong Limited and its principal place of business is located at 12th Floor, Cheung Kong Center, 2 Queen’s Road Central, Hong Kong. VEON is incorporated under Bermuda law, domiciled in Claude Debussylaan 88, 1082 MD Amsterdam, Netherlands and listed on NASDAQ and Euronext Amsterdam.

 

During 2016, CK Hutchison and VEON completed the transactions which led to the unification of the operating activities of WIND and H3G telecommunication operator in the Italian Market.

 

The transaction, started by the two shareholders VIP Group and CK Hutchison Group in August 2015, obtained the European Commission and the Italian Ministry for Economic Development (MISE) approvals on September 1, 2016 and on October 25, 2016 respectively. The completion of the transaction to establish the Joint Venture took place on November 5, 2016.

 

Overall, the transaction led to the creation of a new group jointly controlled by the VIP Group and the CK Hutchison Group and was concluded through the transfer (i.e., contribution) of the WIND Group under the control of VIP-CKH.

 

Upon the formation of the Joint Venture, the holding and operating companies of the telecommunications businesses in Italy of CK Hutchison and VEON, namely Wind Tre Italia and Wind Acquisition Holdings Finance SpA, and Wind Tre SpA (formerly known as H3G SpA, hereafter referred to as Wind Tre) and WIND Telecomunicazioni SpA, respectively and all their other subsidiaries became the subsidiaries of the Joint Venture, and the Joint Venture became the new parent company of the Group holding the telecommunications businesses in Italy of CK Hutchison and VEON. WIND Acquisition Holdings Finance SpA and WIND Telecomunicazioni SpA were merged with, and incorporated into, Wind Tre Italia and Wind Tre, respectively via legal mergers by incorporation that were completed on December 1, 2016 and December 31, 2016, respectively.

 

This Joint Venture created the biggest telecom operator in Italy. The Group is now working to deliver significant efficiencies and providing significant additional investment to drive development of Italy’s digital infrastructure. The new financial and industrial capabilities will enable the Group to provide innovative, high quality and greater network speed in line with the growing demand for connectivity and with the expectations of households and businesses consumption. The Group aims to become a key player in the integration and development of fixed-mobile in the next-generation fiber networks thanks to the agreement with Enel Open Fiber to create a network of ultra-broadband in Italy.

 

11



 

The following diagram illustrates the structure of the VIP-CKH Group at December 31, 2017.

 

 

As required by the European Commission as a mandatory condition for approving the aforementioned merger between WIND Telecomunicazioni SpA and H3G SpA, were implemented a number of remedies which included the signing of certain agreements with Iliad, a French telecom operator, aiming to allow Iliad to enter the Italian market.

 

The agreements have resulted in the commitment of the Wind Tre Group to sell to Iliad frequencies and sites in the period 2017 — 2019 as well as to sign certain temporary agreements which enable Iliad to operate telecommunications services in the Italian market while Iliad is creating its own network. By an accounting perspective the frequencies and sites that are expected to be transferred to Iliad by 12 months at each closing date are presented and measured as required by IFRS 5 and explained under the General Accounting Policies paragraph. Conversely, the sites that are expected to be transferred beyond the 12 months’ timeframe and that will still be utilized by the Group up to that moment have been subject to an accelerated depreciation mirroring the new expected limited useful life.

 

Iliad, the fourth infrastructure mobile operator, is expected to enter the market during 2018.

 

·                  Refinancing transaction

 

In order to optimize the capital structure, reduce annual interest costs and extend maturities of the existing debt, on November 3, 2017 the Group completed the refinancing of all the Wind Tre Group’s debt exposure to third parties by issuing €5.6 billion of senior secured notes, $2.0 billion of senior secured notes and by entering into an agreement for a new bank loan of €3.4 billion (including a €400 million revolving credit facility not used at December 31, 2017). The Group used the funds obtained from the transaction: (i) to repay the existing bank loan, (ii) to redeem the senior and senior secured notes issued by the subsidiary Wind Acquisition Finance and (iii) to pay the costs, fees and expenses, including premiums for call options and pre-cancellation costs relating to the above.

 

·                  Operation updates

 

In 2017 the subsidiary Wind Tre invested over €1.2 billion to strengthen its fixed and mobile networks, thereby accelerating the process of network integration. Trieste and Agrigento are the first two Italian cities to benefit from the new consolidated Wind Tre network which guarantees high performance for coverage, quality of service and

 

12



 

connection speed and ensures a better user experience. The consolidation of the mobile network is expected to be completed by the end of 2019.

 

The Group closed 2017 with a loss before tax from continuing operations of €2,763 million (loss of €1,832 million in 2016 unaudited) and a net loss for the year from continuing operations of €2,678 million (loss of €1,785 million in 2016 unaudited).

 

2                                         GENERAL ACCOUNTING POLICIES

 

2.1                               Basis of preparation

 

These financial statements (the “Rule 3-09 Financial Statements”) have been prepared for inclusion in the filing on Form 20-F of VEON Ltd for the purpose of Rule 3-09 of United States Securities and Exchange Commission (“SEC”) Regulation S-X. The Regulation S-X Rule 3-09 Financial Statements have been prepared on a consistent basis as included in the consolidated financial statements of VIP CK Group for the two years ended December 31, 2017 and 2016. The Rule 3-09 Financial Statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standard Board (IASB) and with all the SIC/IFRIC interpretations and item 17 of Rule 3-09 of SEC Regulation S-X.

 

The consolidated financial statements for the year ended December 31, 2017 have been prepared on a going concern basis despite the fact that the current assets cannot cover the current liabilities. The Board of Managers has reviewed the liquidity available for the period of 12 months as from the date of approval of the 2017 consolidated financial statements and has calculated that sufficient resources will be available to cover the short-term liabilities. In addition the loan from the related company (see note 16) is due to the Shareholders of the Company which confirmed via a letter that this amount will be managed in a way able to not generate financial difficulties for the Group for at least one year from the date of approval of the 2017 consolidated financial statements.

 

Commencing 2016, the consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standard Board (IASB) and with all the SIC/IFRIC interpretations. In the past, before the completion of the transaction described under note 1, no consolidated financial statements were prepared by the company as VIP-CKH applied the exemption on the basis of the criteria set out by Luxembourg Commercial Law of August 10, 1915 and consolidated financial statements were prepared at a higher level. Despite this, the only entity which was 100% controlled by the Company in the past, 3 Italia SpA, also prepared IFRS consolidated financial statements for the year ended December 31, 2015.

 

The statement of financial position is prepared using an analysis of assets and liabilities into current and non-current. The income statement is prepared in accordance with IAS 1 “Presentation of Financial Statements” with a classification of expenses by nature that is believed to provide more relevant information than a classification by function.

 

In preparing these consolidated financial statements the Group adopted historical cost as the basis of measurement except for certain financial instruments for which, in accordance with IAS 39, measurement at fair value has been used.

 

The accounting standards adopted by the Group are the same as those used for the preparation of the consolidated financial statements as of and for the year ended December 31, 2016.

 

13



 

These consolidated financial statements are expressed in euros, the currency of the economy in which the Group operates. Unless otherwise stated, all amounts shown in the tables and in these notes are expressed in millions of euros.

 

The preparation of these notes required management to apply accounting policies and methodologies that are occasionally based on complex, subjective judgments, estimates based on past experience and assumptions determined to be reasonable and realistic based on the related circumstances and on the available information. The application of these estimates and assumptions affects the reported amounts in the income statement, the statement of comprehensive income, the statement of financial position, the cash flow statement and the accompanying notes. Management’s significant judgments on the application of Group accounting policies and the main causes of uncertainty of these estimates are the same as those applied in the preparation of the consolidated financial statements as of and for the year ended December 31, 2016.

 

For the purposes of comparison, balances in the statement of financial position have been reclassified where necessary. These reclassifications do not affect the Group’s profit for the year or equity (see note 20 for further details).

 

·                  Comparative information

 

The consolidated income statements for the year ended December 31, 2017 are not immediately comparable with those of the same period of the previous year because the latter only reflect the full year’s consolidated results of predecessor 3 Italia Group and approximately two months’ consolidated results of predecessor WIND Acquisition Holdings Finance Group.

 

2.2                               Basis of consolidation

 

The companies controlled by the Group (“subsidiaries”) are consolidated on a line-by-line basis. Control exists when the Company has simultaneously:

 

·                  decisional power, that is the power to govern the financial and operating policies of the entity, meaning those activities that have a significant influence on the results of the company;

·                  the right to the variable results (positive or negative) arising from its investments in the entity;

·                  the ability to use its decision-making power to determine the amount of the results arising from its investments in the entity.

 

The existence of control is verified whenever facts and circumstances indicate a change in one or more of the three qualifying elements of control.

 

Subsidiaries are consolidated from the date of acquisition and deconsolidated when such control ceases.

 

Where there is an acquisition or loss of control of a company included in the consolidation perimeter, the consolidated financial statements include the net income of the company for the period in which the Group has control.

 

The financial statements used in the consolidation process are those prepared by the individual Group entities as of and for the year ended December 31, 2017.

 

The consolidation procedures used are as follows:

 

·                  the assets and liabilities and income and expenses of consolidated subsidiaries are included at 100% in the Group Financial Statements, allocating to non-controlling interests, where applicable, the share of equity

 

14



 

and profit or loss for the year that is attributable to them. The resulting balances are presented separately in consolidated equity and the consolidated income statement;

·                  except for business combinations under common control as noted below the purchase method of accounting is used to account for business combination in which control of an entity is acquired. The cost of an acquisition is measured as the fair value of the assets acquired, liabilities incurred or assumed and equity instruments issued at the acquisition date. Any excess of the cost of acquisition over the fair value of the assets and liabilities acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in profit or loss after first verifying that the fair values attributed to the acquired assets and liabilities and the cost of the acquisition have been measured correctly;

·                  business combinations in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination are considered business combinations involving entities under common control. In the absence of an accounting standard guiding the accounting treatment of these operations the Group applies IAS 8, consolidating the carrying amounts of the transferred entity and reporting any gains/losses arising from the transfer directly in equity;

·                  the purchase of investments from minority holders in entities where control is already exercised is not considered a purchase but an equity transaction. Therefore, the difference between the cost incurred for the acquisition and the respective share of the accounting equity acquired is recognized directly in equity;

·                  unrealized gains and losses arising from transactions carried out between companies consolidated on a line-by-line basis and the respective tax effects are eliminated, as are corresponding balances of receivables and payables, income and expense, and finance income and expense;

·                  gains and losses arising from the sale of investments in consolidated subsidiaries are recognized in income as the difference between the selling price and the corresponding portion of the consolidated equity sold.

 

The following table provides a summary of the Group’s investments showing the criteria used for consolidation and measurement.

 

 

 

% holding
12.31.2016
(unaudited)

 

% holding
12.31.2017

 

Basis of consolidation /
measurement
12.31.2017

 

Subsidiaries

 

 

 

 

 

 

 

Wind Tre Italia SpA

 

100

 

100

 

Line-by-line

 

Wind Tre SpA

 

100

 

100

 

Line-by-line

 

WIND Retail Srl

 

100

 

100

 

Line-by-line

 

WIND Acquisition Finance SA

 

100

 

100

 

Line-by-line

 

3lettronica Industriale SpA

 

100

 

100

 

Line-by-line

 

Associates

 

 

 

 

 

 

 

Galata SpA (*)

 

10

 

 

 

Others

 

 

 

 

 

 

 

MIX Srl

 

9.75

 

9.75

 

Cost

 

Consel — Consorzio Elis per la formazione professionale superiore a r.l.

 

1

 

1

 

Cost

 

Janna Scarl

 

17

 

17

 

Cost

 

QXN Società consortile per azioni

 

10

 

10

 

Cost

 

Dono per…Scarl in liquidazione

 

33.33

 

33.33

 

Cost

 

 


(*) On July 4, 2017, the whole 10% of the shares of the entity was sold.

 

15



 

The following table sets out investments in subsidiaries at December 31, 2017.

 

(thousands of euro)

 

Name

 

Registered office

 

Share/quota
capital as of
12/31/2017

 

Share/quota
holders’ equity

as of
12/31/2017(*)

 

Profit (loss) for
the year ended
12/31/2017(*)

 

Holding % as
of December
31, 2017

 

Carrying
amount as of
12/31/2017

 

Wind Tre Italia SpA

 

Trezzano sul Naviglio – Via L. da Vinci, 1

 

2,346,637

 

3,258,368

 

(128,213

)

100

%

9,062,723

 

Wind Tre SpA

 

Trezzano sul Naviglio – Via L. da Vinci, 1

 

474,304

 

1,612,038

 

(2,876,802

)

100

%

8,113,755

 

WIND Retail Srl

 

Rome - Via Cesare Giulio Viola, 48

 

1,027

 

36,315

 

(1,070

)

100

%

31,103

 

WIND Acquisition Finance SA

 

1, Route d’Esch L-1470 Luxembourg

 

60,031

 

(110,073

)

(145,159

)

100

%

61,797

 

3lettronica Industriale SpA.

 

Trezzano sul Naviglio, Via Leonardo da Vinci, 1

 

16,000

 

33,652

 

(8,800

)

100

%

48,859

 

 


(*) As per the financial statements prepared by the companies’ directors for the approval of the share/quota holders’ meetings, adjusted where necessary to comply with the measurement criteria used for the preparation of these separate financial statements.

 

The following table sets out non-controlling interests in companies and consortia at December 31, 2016 (unaudited).

 

(thousands of euro)

 

Name

 

Registered office

 

Share/quota
capital as of
12/31/2016
(unaudited)

 

Share/quota
holders’
equity as of
12/31/2016
(unaudited)

 

Profit (loss)
for the year
ended
12/31/2016
(unaudited)

 

Holding % as
of December
31, 2016
(unaudited)

 

Carrying
amount as of
12/31/2016
(unaudited)

 

Galata Spa

 

Rome - Via Carlo Veneziani,58

 

1,000

 

280,807

 

13,326

 

10

%

77,000

 

Consel - Consorzio Elis per la formazione professionale superiore a r.l.(**)

 

Rome - Via Sandro Sandri, 45

 

51

 

52

 

 

1

%

1

 

QXN Società consortile per azioni

 

Rome - Via Bissolati n.76

 

500

 

751

 

15

 

10

%

50

 

Janna Scarl (*)

 

Cagliari - Loc. Sa Illetta, Strada Statale 195 Km 2.3

 

13,717

 

9,382

 

(1,459

)

17

%

2,072

 

MIX srl

 

Milan - Via Caldera, 21

 

99

 

1,356

 

271

 

9.75

%

10

 

Dono per … Scarl in liquidazione

 

Rome - Via di Santa Maria in Via, 12

 

30

 

(69

)

(267

)

33.33

%

10

 

 


(*) The company is also owned by the Sardinia region, owner of the submarine cables that connect it with the rest of Italy.

(**) Data of the company are related to September 30, 2016

 

·                  Business combinations under common control and formation of Joint Venture

 

These transactions are not contemplated by IFRS 3, which outlines the accounting method for business combinations, or by any other IFRS. In the absence of an accounting standard of reference, it is believed that the selection of the accounting principle most suitable is the general objective set out in IAS 8 in order to provide relevant and reliable information about a transaction. Taking into account this the Group has decided to select the predecessor accounting method (based on continuity of values and not on IFRS 3 principles) as an accounting policy for this kind of transactions. Use of the predecessor accounting method is also in line with certain other generally accepted accounting principles that permit, or require, this accounting to be used for other common control transactions or similar circumstances.

 

The concept of continuing values requires the recognition in the financial statements of the acquirer of the same values as those recorded in the books of the companies / business segments acquired before the transaction or, if available, the values in the consolidated financial statements of the common parent (the “predecessor accounting” principle). Where the values transferred are higher than these historical values, both the acquirer and the seller must eliminate the excess by reducing equity.

 

16



 

·                  Segment reporting

 

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker.

 

The Board of Directors of Wind Tre SpA assess the financial performance and position of the group, and makes strategic decisions. The Board of Directors of Wind Tre SpA has been identified as being the chief operating decision maker, consists of the chief executive officer and the chief financial officer.

 

2.3                               Summary of main accounting policies

 

The principal accounting policies adopted in preparing these consolidated financial statements are set out below.

 

·                  Tangible assets

 

Property, plant and equipment are stated at purchase cost or production cost, net of accumulated depreciation and any impairment losses. Cost includes expenditures directly attributable to bringing the asset to the location and condition necessary for use and any dismantling and removal costs which may be incurred as a result of contractual obligations which require the asset to be returned to its original state and condition. The present value of an estimate of dismantling, removal and restoration costs is recognized with the corresponding liability stated as a liability under “Provisions”.

 

Costs incurred for ordinary and cyclical repairs and maintenance are taken directly to profit or loss in the period in which they are incurred. Costs incurred for the expansion, modernization or improvement of the structural elements of owned or leased assets are capitalized to the extent that they have the requisites to be separately identified as an asset or part of an asset, in accordance with the “component approach”. Under this approach each asset is treated separately if it has an autonomously determinable useful life and carrying amount.

 

Tangible assets are depreciated on a straight-line basis from the date on which the asset is available for use as intended by management, over their estimated useful life. The useful lives of property, plant and equipment and their residual values are reviewed and updated, where necessary, at least at each year end. Land is not depreciated. When a depreciable asset is composed of identifiable separate components whose useful lives vary significantly from those of other components of the asset, depreciation is calculated for each component separately, applying the “component approach”.

 

The useful lives estimated by the Group for the various categories of property, plant and equipment are as follows.

 

Property, plant and machinery

 

5-40 years

Planning and development costs of the fixed line and mobile telephone network

 

Residual term of license

Equipment

 

4-8 years

Other assets

 

5-10 years

 

Gains or losses arising from the sale or retirement of assets are determined as the difference between the selling price and the carrying amount of the asset sold or retired and are recognized in profit or loss under “Gains/(losses) on disposal of non-current assets”.

 

Finance leases are leases that substantially transfer all the risks and rewards incidental to the ownership of assets to the Group. Property, plant and equipment acquired under finance leases are recognized as assets at their fair value or, if lower, at the present value of the minimum lease payments, including any amounts to be paid for exercising a

 

17



 

purchase option. The corresponding liability due to the lessor is recognized as part of financial liabilities. An asset acquired under a finance lease is depreciated over the shorter of the lease term and its useful life.

 

Lease arrangements in which the lessor substantially retains the risks and rewards incidental to ownership of the assets are classified as operating leases. Lease payments under operating leases are recognized as an expense in profit or loss on a straight-line basis over the lease term.

 

·                  Intangible assets

 

Intangible assets are identifiable non-monetary assets without physical substance which can be controlled and which are capable of generating future economic benefits. Intangible assets are stated at purchase and/or production cost including any expenses that are directly attributable to preparing the asset for its intended use, net of accumulated amortization in the case of assets being amortized and any impairment losses. Amortization of intangible assets with finite useful life begins when the assets are available for use as intended by the management and it is charged on a straight-line basis over the estimated life of the particular asset. Rates and amortization methods are reviewed at least annually in order to verify if they are still applicable.

 

Intangible assets with indefinite life or not available for use as intended by management are not subject to systematic amortization, but are assessed annually to verify if there are indications that the carrying value may not be recoverable.

 

Gains and losses from disposals or retirement of intangible assets are determined as the difference between sales proceeds and the net book value of assets retired or disposed of and are recognized in the income statement of the relevant financial year.

 

·                  TLC license and frequencies

 

These are considered to have an indefinite useful life given that the Italian Ministry of Economic Development, together with the Italian Ministry of Economy, has confirmed that the license and frequencies can be extended for the same amount of time as they had previously been extended, thus making the license and frequencies a perpetual license and considering the expected renewal cost in relation to the expected benefits. The indefinite useful life is reviewed at least annually to consider any legislative, regulatory and economic changes.

 

·                  Industrial patents and intellectual property rights, concessions, licenses, trademarks and similar rights

 

Concessions, licenses and similar rights consist of rights of transmission on digital frequencies, right of use for optic fiber and infrastructures, the fair value of the rights of use related to site sharing agreements between the Group and other operators, the distribution of multimedia content and similar rights.

 

The Group holds a license as a national network operator for digital television broadcasting. The license was renewed and extended to 20 years in 2008 under Law no. 101/2008 and it qualifies as a “general authorization to supply electronic communication services” ex article 25.6 of the “Electronic Communications Code”, equivalent to the license for the supply of UMTS mobile services held by the Group, with the right to apply for both the extension of the term under article 1-bis of Law no. 40/07 and the renewed article 25.6 of the Electronic Communications Code. Based on this and considering the beginning of the conversion of the license to digital television broadcasting (DVB-T), the Group considered it appropriate to treat the license as having an indefinite useful life.

 

18


 

Following a series of new analyses of the expected cash inflows and taking into account the likelihood of the renewal of certain contracts relating specifically to this television license, the estimate of the useful life was reviewed downwards in 2016 to a shorter temporal horizon equal to 10 years, which now reflects the latest and most prudent expectation of the utilization of the rights related to the license in the current competitive scenario.

 

The indefeasible right of use of optic fiber and infrastructure owned by other operators is stated at cost and amortized on the basis of the duration of the underlying contract.

 

The benefit deriving from the Group’s right of housing its network equipment on sites made available by other operators is stated at fair value as of the date of the acquisition of the benefit and amortized on the basis of the equivalent useful life of the Group’s housed infrastructures.

 

Trademarks are not amortized as they are considered to have an indefinite useful life.

 

·                  Software

 

Costs relating to the development and maintenance of software programs are expensed as incurred. Unique and identifiable costs directly related to the production of software products which are controlled by the Group and which are expected to generate future economic benefits for a period exceeding one year are accounted for as intangible assets. Direct costs — where identifiable and measurable — include the cost of employees who develop the software, together with a share of overheads as appropriate.

 

Software is amortized on a straight-line basis over its useful life estimated depending on the different business functionalities to be supported by the investment, in a range of from 3 to 8 years, starting on the date on which the software becomes available for use as intended by the management.

 

Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment and amortized on a straight-line basis over the useful life of the relevant tangible asset.

 

·                  Goodwill

 

Goodwill represents the excess of the cost of an acquisition over the interest acquired in the fair value at the acquisition date of the assets and liabilities of the entity or business acquired. Goodwill relating to investments accounted for using the equity method is included in the carrying amount of the investment. Goodwill is subject to periodic tests to ensure that the carrying amount in the statement of financial position is recoverable (“impairment tests”). Impairment tests are carried out annually or more frequently when events or changes in circumstances occur that could lead to an impairment loss on the cash generating units (“CGUs”) to which the goodwill has been allocated. An impairment loss is recognized whenever the recoverable amount of goodwill is lower than its carrying amount. The recoverable amount is the higher of the fair value of the CGU less costs to sell and its value in use, which is represented by the present value of the cash flows expected to be derived from the CGU during operations and from disposal at the end of its useful life. The method for calculating value in use is described in the paragraph below “Impairment losses”. Once an impairment loss has been recognized on goodwill it cannot be reversed.

 

Whenever an impairment loss resulting from the above tests exceeds the carrying amount of the goodwill allocated to a specific CGU, the residual amount is allocated to the assets of that particular CGU in proportion to their carrying

 

19



 

amounts. The carrying amount of an asset under this allocation is not reduced below the higher of its fair value less costs to sell and its value in use as described above.

 

·                  Customer list

 

The customer list as an intangible asset consists of the list of customers identified on allocating the goodwill arising on acquisitions carried out by the Group. Amortization is charged on the basis of the respective estimated useful lives, which range from 5 to 15 years.

 

·                  Customers acquisition costs

 

These consist mainly of the cost of commissions paid to the sales network, capitalized as intangible assets, in accordance with the principles of reference and amortized over the minimum contract term.

 

·                  Impairment losses on non-financial assets

 

At each reporting date, property, plant and equipment and intangible assets with finite lives are assessed to determine whether there is any indication that an asset may be impaired. If any such indication exists, the recoverable amount of the asset concerned is estimated and any impairment loss is recognized in profit or loss. Intangible assets with indefinite useful lives are tested for impairment annually or more frequently when events or changes in circumstances occur that could lead to an impairment loss. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use, which is represented by the present value of its estimated future cash flows. In determining an asset’s value in use the estimated future cash flows are discounted using a pre-tax rate that reflects the market’s current assessment of the cost of money for the investment period and the specific risk profile of the asset. If an asset does not generate independent cash flows, its recoverable amount is determined in relation to the cash-generating unit (CGU) to which it belongs. An impairment loss is recognized in profit or loss when the carrying amount of an asset or the CGU to which it is allocated exceeds its recoverable amount. If the reasons for previously recognizing an impairment loss cease to exist, the carrying amount of an asset other than goodwill is increased to the carrying amount of the asset that would have been determined (net of amortization or depreciation) if no impairment loss had been recognized on the asset, with the reversal being recognized in profit or loss.

 

·                  Investments

 

Investments in non-consolidated subsidiaries are stated at cost. Investments in companies where the Group exercises a significant influence (“associates”), which is presumed to exist when the Group holds between 20% and 50%, are accounted for using the equity method.

 

The equity method is as follows:

 

·                  the Group’s share of the profit or loss of an investee is recognized in profit or loss from the date when significant influence or control begins up to the date when that significant influence or control ceases. Where the investee accounted for using the equity method has a deficit as the result of losses, its carrying amount is reduced to zero and any excess attributable to the Group, in the event that it has legal or constructive obligations on behalf of the investee or in any case to cover the losses, is recognized in a

 

20



 

specific provision. Equity changes in investees accounted for using the equity method that do not result from profit or loss are recognized directly in consolidated equity reserves;

 

·                  unrealized gains and losses generated from transactions between the Company or its subsidiaries and its investees accounted for using the equity method are eliminated on consolidation for the portion pertaining to the Group; unrealized losses are eliminated unless they represent an impairment loss.

 

The financial statements of the associate are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group.

 

Investments in other companies are measured at fair value with any changes in fair value being recognized in profit or loss. If the fair value cannot be reliably determined an investment is measured at cost. Cost is adjusted for impairment losses if necessary, as described in the paragraph “Impairment losses”. If the reasons for an impairment loss no longer exist, the carrying amount of the investment is reversed up to the extent of the loss with the related effect recognized in profit or loss. Any risk arising from losses exceeding the carrying amounts of investments is accrued in a specific provision under liabilities to the extent of the Group’s legal or constructive obligations on behalf of the investee or in any case to the extent that it is required to cover the losses. Investments held for sale or to be wound up in the short term are classified as current assets and stated at the lower of their carrying amount and fair value less costs to sell.

 

·                  Financial instruments

 

Financial instruments consist of financial assets and liabilities whose classification is determined on initial recognition and on the basis of the purpose for which they were purchased.

 

·                  Financial assets

 

Financial assets are initially recognized at fair value and classified in one of the following four categories and subsequently measured as described below:

 

i)                 Financial assets at fair value through profit or loss: this category includes financial assets purchased primarily for sale in the short term, those designated as such upon initial recognition, provided that the assumptions exist for such classification or the fair value option may be exercised, and financial derivatives except for the effective portion of those designated as cash flow hedges. These assets are measured at fair value; any change in the period is recognized in profit or loss as financial income or expense. Financial instruments included in this category are classified as current assets if they are held for trading or expected to be disposed of within twelve months from the reporting date. Derivatives are treated as assets or liabilities depending on whether their fair value is positive or negative; positive and negative fair values arising from transactions with the same counterparty are offset if this is contractually provided for.

ii)              Loans and receivables: these are non-derivative financial instruments, mostly relating to trade receivables, which are not quoted on an active market and which are expected to generate fixed or determinable repayments. They are included as current assets unless they are contractually due over more than twelve months after the reporting date in which case they are classified as non-current assets. These assets are measured at amortized cost using the effective interest method. If there is objective evidence of factors which indicate an impairment loss, the asset is reduced to the discounted value of future cash flows. The impairment loss is recognized in profit or loss.

 

21



 

iii)           Held-to-maturity investments: these are fixed maturity non-derivative financial instruments having fixed or determinable payments which the Group has the intention and ability to hold until maturity. These assets are measured at amortized cost using the effective interest method, adjusted as necessary for impairment losses. In the case of impairment the policies used for financial receivables are applied.

iv)          Available-for-sale financial assets: these are non-derivative financial instruments which are either specifically included in this category or included there because they cannot be classified in other categories. These assets are measured at fair value and any related gain or loss is recognized directly in an equity reserve and subsequently recognized in profit or loss only when the asset is actually sold or, if there are cumulative negative changes, when it is expected that the losses recognized in equity cannot be recovered in the future. For debt securities, if in a future period the fair value increases due to the objective consequence of events occurring after the impairment loss has been recognized in profit or loss, the original value of the instrument is reinstated with the corresponding gain recognized in profit or loss. Additionally, the yields from debt securities arising from the use of the amortized cost method are recognized in profit or loss in the same manner as foreign exchange differences, whereas foreign exchange differences relating to available-for-sale equity instruments are recognized in the specific equity reserve. The classification as current or non-current assets is the consequence of strategic decisions regarding the estimated period of ownership of the asset and its effective marketability, with those which are expected to be realized within twelve months from the reporting date being classified as current assets.

 

Financial assets are derecognized when the right to receive cash flows from them ceases and the Group has effectively transferred all risks and rewards related to the instrument and its control.

 

·                  Financial liabilities

 

Financial liabilities consisting of loans, trade payables and other obligations are initially recognized at fair value, net of transaction costs incurred, and subsequently measured at amortized cost using the effective interest method. When there is a change in expected cash flows which can be reliably estimated, the value of the loans is recalculated to reflect such change based on the present value of expected cash flows and the originally determined internal rate of return. Financial liabilities are classified as current liabilities except where the Group has an unconditional right to defer payment until at least twelve months after the reporting date.

 

Financial liabilities are derecognized when settled and the Group has transferred all the related costs and risks relating to the instrument.

 

Hybrid instruments, partly financial liability and partly equity, are broken down into their component parts of financial liability or equity on the base of the value that an equivalent financial liability, without the equity component, would have on the market. The equity part is recycled into profit and loss during the life of the instrument.

 

·                  Derivative financial instruments

 

At the date of signing of the contract the instrument is initially recognized at fair value, with subsequent changes in fair value being recognized as a financial component of income. Where instead it has been decided to use hedge accounting, meaning in those situations in which the hedging relationship is identified, subsequent changes in fair value are accounted for in accordance with the following specific criteria. The relationship between each derivative qualifying as a hedging instrument and the hedged item is documented to include the risk management objective,

 

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the hedging strategy and the means by which the hedging instrument’s effectiveness will be assessed. An assessment of the effectiveness of each hedge is made when each derivative financial instrument becomes active and throughout the hedge term.

 

In the case of a fair value hedge, i.e. the hedge refers to changes in the fair value of a recognized asset or liability, the changes in the fair value of the hedging instrument and those of the hedged item are both recognized in profit or loss. If the hedge is not fully effective, meaning that these changes are different, the non-effective portion is treated as finance income or expense for the year in profit or loss.

 

For a cash flow hedge, the fair value changes of the derivative are subsequently recognized, limited to the effective portion, in a specific equity reserve (the “cash flow hedge reserve”). A hedge is normally considered highly effective if from the beginning and throughout its life the changes in the expected cash flows for the hedged item are substantially offset by the changes in the fair value of the hedging instrument. When the economic effects deriving from the hedged item are realized, the reserve is reclassified to profit or loss together with the economic effects of the hedged item. Whenever the hedge is not highly effective, the non-effective portion of the change in fair value of the hedging instrument is immediately recognized as a financial component of profit or loss for the year. Cash flow hedges also include hedges of the currency risk for transactions carried out in US dollars. These obligations are translated at the year-end exchange rate and any resulting exchange gains and losses are offset in profit or loss against the change in the fair value of the hedging instrument.

 

When hedged forecast cash flows are no longer considered highly probable during the term of a derivative, the portion of the “cash flow hedge reserve” relating to that instrument is reclassified as a financial component of the profit or loss for the year. If instead the derivative is sold or no longer qualifies as an effective hedging instrument, the “cash flow hedge reserve” recognized to date remains as a component of equity and is reclassified to profit or loss for the year in accordance with the criteria of classification described above when the originally hedged transaction takes place.

 

Derivatives embedded in hybrid instruments are separated from the host contract and accounted separately if the whole hybrid instrument is not measured at fair value with gains reported in profit or loss and if the characteristics and risks of the derivative are not “closely related” to those in the main contract. Testing takes place at the inception of the contracts and afterwards if significant changes occur in the expected cash flows. In determining the fulfillment of the closely related criterion for puttable and callable options the Group has determined the accounting policy to compare the amortized cost of the host instrument, after having neutralized the embedded feature, with the exercise price of the options.

 

·                 Determination of fair value

 

Quotations at the reporting date are used to determine the fair value of financial assets and financial liabilities listed on active markets. In the absence of an active market, fair value is determined by referring to prices supplied by third-party operators and by using valuation models based primarily on objective financial variables and, where possible, prices in recent transactions and market prices for similar financial instruments. The Group uses unobservable inputs to determine the fair value of embedded derivatives.

 

·                 Sales of receivables

 

The Group carries out sales of receivables under factoring arrangements in accordance with Law no. 52/1991. These sales are characterized by the transfer of substantially all the risks and rewards of ownership of the receivables to

 

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third parties, meeting IAS 39 requirements for derecognition. Specific servicing contracts through which the buyer confers a mandate to the Company for the collection and management of the receivables leave the current Company/customer relationship unaffected.

 

·                 Taxation

 

Income taxes are recognized on the basis of taxable profit for the year and the applicable laws and regulations, using tax rates prevailing at the reporting date.

 

Deferred taxes are calculated on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements at the tax rates that are expected to apply for the years when the temporary differences will be realized or settled and tax losses carried forward will be reversed, based on tax laws that have been enacted or substantively enacted by the reporting date.

 

Current and deferred taxes are recognized in profit or loss, except for taxes arising from items taken directly to equity; in such cases the tax effect is recognized directly in the specific equity item.

 

Deferred income tax assets and liabilities are offset when (1) there is a legally enforceable right to set-off current tax assets against current tax liabilities and (2) when the deferred income taxes relate to the same fiscal authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

 

Deferred income tax assets, including those related to previous tax losses, to the extent they are not offset by deferred tax liabilities, are recognized if it is probable that future taxable profit will be available against which these can be used.

 

For the regulations on electing the tax consolidation procedure to apply, Wind Tre Italia SpA elected for consolidation, so it is required to determine a single overall tax base for corporate income tax (IRES) purposes consisting of the sum of the taxable profit or tax loss of the Company and those of its subsidiaries taking part in the procedure, and to settle a liability by making a single tax payment or to recognize a single tax credit for refund or to be carried forward.

 

·                 Inventories

 

Inventories are stated at the lower of purchase cost or production cost and net estimated realizable value. Cost is determined using the weighted average cost method for fungible goods or goods held for resale. When necessary, provisions are made for slow-moving and obsolete inventories.

 

·                 Cash and cash equivalents

 

Cash and cash equivalents mainly consist of cash-in-hand, bank and postal accounts balances, deposits held at call with banks and short-term highly liquid investments with original maturities of three months or less and which are subject to an insignificant risk of changes in value.

 

·                 Provisions

 

Provisions are recognized for a loss or expense of a specific nature that is certain or probable to arise but for which the timing or amount cannot be precisely determined.

 

Provisions are recognized when:

 

·                  the Group has a present legal or constructive obligation as a result of past events;

 

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·                  it is probable that an outflow of resources will be required to settle the obligation; and

·                  the amount can be reliably estimated.

 

Provisions represent the best estimate of liabilities at the end of the reporting period in respect of the timing and required disbursement to settle the obligation.

 

Risks, for which the likelihood of a liability arising is only possible, are disclosed in the notes under “Contingent assets and liabilities” and no provision is made.

 

·                 Employee benefits

 

·                  Short-term employee benefits

 

Short-term employee benefits are recognized in profit or loss in the period when an employee renders the related service.

 

·                  Post-employment benefits

 

Post-employment benefits can be divided into two categories: 1) defined contribution plans and 2) defined benefit plans. Contributions to defined contribution plans are charged to profit or loss when incurred, based on their nominal value. For defined benefit plans, since benefits are determinable only after the termination of employment, costs are recognized in profit or loss based on actuarial calculations.

 

In the Italian legislative system the employee severance indemnity (TFR), due in accordance with the provisions of article 2120 of the Italian Civil Code, accruing in companies with more than 50 employees is considered to be a defined benefit plan until December 31, 2006 and a defined contribution plan after that date.

 

Defined benefit pension plans are based on the average expected residual working life of employees and on the remuneration received by them during an estimated period of service. The liability recognized in the statement of financial position is the current value of the defined benefit obligation at the end of the reporting period. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The current value of the defined benefit obligation is determined by discounting estimated future cash outflows using the interest rates of high-quality corporate bonds that are denominated in the same currency in which the benefits will be paid (Euro), and that have terms to maturity approximating to the terms of the related liability.

 

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to other comprehensive income. Past-service costs are recognized immediately in profit or loss.

 

·                  Termination benefits and redundancy incentive schemes

 

Benefits due to employees on the termination of employment contracts are treated as a liability when the Group is demonstrably committed to terminating these contracts for a single employee or group of employees before the normal retirement date or to granting termination benefits in order to facilitate voluntary resignations of surplus employees following a formal proposal. These benefits do not create future economic advantages to the Group and the related costs are therefore immediately recognized in profit or loss.

 

·                 Assets held for sale and discontinued operations

 

Non-current assets and current and non-current assets of disposal groups whose carrying amount will mainly be recovered through sale, rather than through ongoing use, are classified as held for sale.

 

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This condition is met when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Non-current assets held for sale, current and non-current assets referring to disposal groups and liabilities directly associated with such assets are recognized in the statement of financial position separately from the other assets and liabilities of the entity.

 

Non-current assets held for sale are not depreciated and are measured at the lower of carrying amount and related fair value, less costs to sell.

 

The held-for-sale classification for investments accounted for using the equity method implies the suspension of the application of such method; therefore in this case the carrying amount is equal to the amount deriving from the application of the equity method at the date of reclassification.

 

Any difference between the carrying amount and the fair value less costs to sell is recognized in profit or loss as an impairment loss; any subsequent increase in value is recognized to the extent that it is not in excess of the cumulative impairment loss that has been recognized previously on the asset as held for sale.

 

When there is a plan to dispose of a subsidiary which results in the loss of control, the assets and liabilities of the subsidiary are all classified as held for sale regardless of whether a non-controlling interest will still be held in the former subsidiary after the sale.

 

When specific conditions are met the non-current assets or group of (i) non-current assets (ii) current assets and (iii) associated liabilities constituting a disposal group as described in the preceding paragraphs satisfy the definition of discontinued operations. The results of discontinued operations are presented separately in the income statement including the results of the discontinued operations and the gain or loss, if any, realized on abandonment or disposal net of the related tax effect. Further details on the composition of this item are provided in the notes.

 

·                 Translation of items in non-euro currencies

 

The financial statements are presented in Euro, which is the functional and presentational currency. Foreign currency transactions are initially recorded at the exchange rate prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss, except when deferred in equity as qualifying cash flow hedges.

 

With reference to foreign transactions whose currency risk is covered with derivatives, further details are provided in the note Financial instruments.

 

·                 Leases

 

Leases in which the Group is the lessee are classified as operating leases when a significant portion of the risks and rewards of ownership is retained by the lessor. Payments made under operating leases (net of any incentives received from the lessor) are charged in profit or loss on a straight-line basis over the period of the lease.

 

Assets acquired pursuant to finance leases and hire purchase contracts that transfer to the Group substantially all the rewards and risks of ownership are accounted for as if purchased.

 

Finance leases are capitalized at the inception of the lease at the lower of the fair value of the leased assets or the present value of the minimum lease payments. Lease payments are treated as consisting of capital and interest elements. The capital element of the leasing commitment is included as a liability and the interest element is charged to profit or loss.

 

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·                 Revenue recognition

 

Revenue is recognized at the fair value of the consideration received, net of rebates and discounts. The Group recognizes revenue when the amount of revenue can be reliably measured and it is probable that future economic benefits will flow to the entity.

 

Revenue from the sale of goods is recognized when the Group transfers the risks and rewards of ownership of the goods. Revenue from services is recognized in profit or loss by reference to the stage of completion and only when the outcome can be reliably estimated.

 

More specifically, the criteria followed by the Group in recognizing core-business revenue are as follows:

 

·                  revenue arising from post-paid traffic, interconnection and roaming is recognized on the basis of the actual usage of each subscriber and telephone operator. Such revenue includes amounts paid for access to and usage of the Group network by customers and other domestic and international telephone operators;

·                  revenue from the sale of prepaid cards and recharging is recognized on the basis of the prepaid traffic actually used by subscribers during the year. The unused portion of traffic at period end is recognized as “Other payables - Prepaid traffic to be used”;

·                  revenue from the sale of mobile phones and fixed-line phones and related accessories is recognized at the time of sale and one-off fees received for the granting of rights to use owned fiber optic cables are recognized at the time of the transfer of the underlying right and, therefore, of the related risks and rewards.

·                  one-off revenue from fixed and mobile (prepaid or subscription) activation and/or substitution and the activation of new services and tariff plans is recognized for the full amount at the moment of activation to the extent of the related costs, or deferred over the minimum contractual term. In the case of promotions with a cumulative plan still open at year end, the activation fee is recognized on an accrual basis so as to match the revenue with the period in which the service may be used;

 

·                 Grants

 

Grants are recognized when a formal decision of the disbursing government institution, in case of government grants, has been taken, with recognition being matched to the costs to which they relate. Revenue grants are taken to “Other revenue” in the Consolidated Income Statement, while grants related to Property, plant and equipment are recognized as deferred income in the Statement of Financial Position and taken to profit or loss on a straight-line basis over the useful life of the asset to which the grant directly relates.

 

·                 Finance income and expense

 

Finance income and expense is recognized on an accruals basis using the effective interest method, meaning at the interest rate that renders all cash inflows and outflows linked to a specific transaction financially equivalent.

 

Finance expenses that are directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalized and amortized over the useful life of the class of assets to which they refer.

 

·                 Research and development costs and advertising expenses

 

Research and development costs, as well as advertising expenses are charged directly to profit or loss in the year in which they are incurred.

 

Costs incurred on development projects are recognized as intangible assets when the following criteria are fulfilled:

 

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·                  it is technically feasible to complete the intangible asset so that it will be available for use;

·                  management intends to complete the intangible asset and use it;

·                  there is an ability to use the intangible asset;

·                  it can be demonstrated how the intangible asset will generate probable future economic benefits;

·                  adequate technical, financial and other resources to complete the development and to use the intangible asset are available; and

·                  the expenditure attributable to the intangible asset during its development can be reliably measured.

 

Other development expenditures that do not meet these criteria are recognized as an expense as incurred. Development costs previously recognized as an expense are not recognized as an asset in the subsequent period.

 

Capitalized development costs are recorded as intangible asset and amortized on a straight-line basis over its useful life from the date when the asset is ready for use as intended by management.

 

·                 New accounting standards and interpretations

 

The Group has adopted all the newly issued and amended standards of the IASB and interpretations of the IFRIC, applicable to its transactions and effective for financial statements for years beginning January 1, 2017 and thereafter.

 

Standard effective in 2017

 

With reference to the application of accounting standards that became effective from January 1, 2017 are reported in particular the following standards and amendments which, despite not having a significant impact on the financial statements at December 31, 2017, have been applied by the Group’s core business and may have relevance with respect to future transactions.

 

Amendment to IAS 7 “Statement of Cash flows” under the disclosure initiative - The amendment introduces an additional disclosure that will enable users of financial statements to evaluate changes in liabilities arising from financing activities. The amendment is part of the IASB’s Disclosure Initiative, aimed at understanding how financial statements disclosures can be improved.

 

Changes in annual improvements 2014—2016 - affecting the IFRS 12 “Disclosure of Interests in Other Entities”. The main parts of these changes applicable to the Group are as follows:

 

·                  IFRS 12 “Disclosure of Interests in Other Entities” - clarify the scope of the standard by specifying that the disclosure requirements apply to an entity’s interests in accordance with IFRS 5.

 

Amendment to IAS 12 “Income Taxes” — This amendment regarding the “Recognition of Deferred Tax Assets for Unrealised Losses” clarifies the requirements for recognising deferred tax assets on unrealised losses. The amendments clarify the accounting for deferred tax where an asset is measured at fair value and that fair value is below the asset’s tax base. They also clarify certain other aspects of accounting for deferred tax assets.

 

Accounting standards and interpretations issued by IASB/IFRIC — not yet effective

 

Set out below is the information required to assess the possible impact arising from the application of new accounting standards and interpretations that have already been issued but have not yet become effective or have not been adopted by the EU and thus cannot be applied to the financial statements as of December 31, 2017.

 

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Unless otherwise indicated, the Group does not believe that the application of these standards will have any significant impact on its economic results, except for the need for further possible disclosures.

 

Standard, amendment or interpretation

 

Status

IFRS 15 “Revenue from Contracts with Customers” (issued on May 28, 2014) including amendments to IFRS 15 (issued on September 11, 2015)

 

IASB Effective date: January 1, 2018
Endorsed by EU: September 22, 2016
Effective (EU): January 1, 2018

Clarifications to IFRS 15 Revenue from Contracts with Customers (issued on April 12, 2016)

 

IASB Effective date: January 1, 2018
Endorsed by EU: October 31, 2017
Effective (EU): January 1, 2018

IFRS 9 “Financial Instruments” (issued on July 24, 2014)

 

IASB Effective date: January 1, 2018
Endorsed by EU: November 22, 2016
Effective (EU): January 1, 2018

IFRIC 22 “Foreign Currency Transactions and Advance Consideration”

 

IASB Effective date: January 1, 2018
Expected EU endorsement in Q1 2018

 

Table 1 - IFRSs whose effective date is expected for accounting periods beginning on or after January 1, 2018 (EU effective date or expected endorsement date included for reference only)

 

IFRS 15 “Revenue from Contracts with Customers” — This replaces IAS 18 “Revenues” and IAS 11 “Construction Contracts” and the interpretations IFRIC 13 “Customer Loyalty Programs”, IFRIC 15 “Agreements for the Construction of Real Estate”, IFRIC 18 “Transfer of Assets from Customers” and SIC 31 “Barter Transactions Involving Advertising Services”. It applies to all contracts with customers except from those included in the scope of IAS 17 “Leases”, IFRS 4 “Insurance Contracts” or IAS 39/IFRS 9 “Financial Instruments”.

 

IFRS 15 introduces a model based on the following steps: (i) Identify the contract with a customer; (ii) Identify the performance obligations in the contract, the separable elements that are part of the contract but which, for accounting purposes, must be separated; (iii) Determine the transaction price; (iv) Allocate the transaction price to the performance obligations in the contract; (v) Recognize revenue when (or as) the entity satisfies a performance obligation.

 

In 2017, the Group started the necessary activities for the assessment of the expected impacts from the application of IFRS 15. The Group has now finalized the analysis of the impacts. In particular, the impacts from IFRS 15 are mainly driven by both the business model applied by an entity and by the complexity of the contracts offered to the end-customers. The main considerations around the application of IFRS 15 to the Group can be summarized as follow:

 

·                  The Group has utilized as transition method the so-called “simplified approach” which means that IFRS 15 will be applied to all contracts that are not completed by January 1, 2018. Those contracts will be accounted for as if IFRS 15 had been applied by the inception of those contracts. The cumulative post-tax effect of the transition will be then treated as an adjustment to the opening equity at January 1, 2018. Prior year comparative will not be adjusted but sufficient disclosure will be included in the 2018 financial statements to evaluate the impact of IFRS 15 on 2018 income statements and balance sheet;

·                  The Group sells “bundle” / multiple arrangements offers to the end-customers. However, considering the business model applied by the Group (mainly through indirect channel, thus generating a separation for the promise to sell handsets), and the pricing strategy of the Group in relation to the embedded discounts in bundles, IFRS 15 did not generate significant impacts on revenues as of January 1, 2018;

 

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·                  The above conclusions are mainly linked to the actual business model applied by the Group. Changes in the business model, including for example (i) changes in the distribution strategy; (ii) inclusion in the offers of significant options to activate future services at discounted price (material rights); (iii) the inclusion in the offers of services provided by third parties at discount; (iv) significant increase of the discount offered for “bundle” arrangements; and (iv) changes to the average length of the contracts may lead to impacts in the future;

·                  One-off contributions deriving from post-paid and pre-paid mobile activation with restrictions, as these revenues are not considered “separate performance obligations”, will now always be part of the transaction price allocated to other performance obligations. This adjustment did not generate significant impacts.

·                  Customer acquisition costs (mainly commissions for the Group) are now always capitalized for all types of commercial offers and amortized on the basis of the average customer life. The pre-tax impact on Equity of this adjustment at January 1, 2018 is equal to an increase in Equity of about €100 million.

 

Clarifications to IFRS 15 “Revenue from Contracts with Customers” — integrate the principles by providing clarifications on how to identify a “performance obligation” to the considerations related to the “principal/agent” and to the “licensing”.

 

IFRS 9 “Financial Instruments” — This replaces IAS 39 “Financial Instruments” and contains a model to evaluate financial instruments (based on a business model assessment of different portfolios of financial assets and the cash flow characteristics of each single financial asset) in three categories: amortized cost (“hold to collect” business model), fair value through profit or loss (“hold to collect and sale” business model) and fair value through other comprehensive income (“hold to sell” business model). The standard also envisages a new impairment model that is different from the model currently included in IAS 39 and is more focused on expected credit losses. Finally, the standard also simplifies the requirements for hedge accounting generally aligning management strategy with hedge accounting requirements. The Group started in 2017 the activities deemed necessary to assess the effect of the application of IFRS 9 and has now finalized the process. The main considerations around the application of IFRS 9 to the Group can be summarized as follow:

 

·                  From the analysis carried out by the Group, no significant impacts are expected on recognition and measurement of hedging derivatives;

·                  By a classification and measurement perspective no impacts have been identified in relation to the vast majority of financial assets which are generally managed through a “hold to collect” business model. The only main exception is related to handset receivables, which are mainly managed through and “hold to sell” business model. The fair value measurement of these assets generates a pre-tax impact on Equity of about €50 million of decrease at January 1, 2018.

·                  By an impairment perspective the modification of the credit impairment model, now based on the expected losses methodology, has led to an increase at January 1, 2018 of about €20 million in the allowance for doubtful accounts and, therefore, to a corresponding decrease of pre-tax equity.

·                  Future changes in business model or in the expected credit loss may lead to additional impacts in the future.

 

IFRIC 22 “Foreign Currency Transactions and Advance Consideration” - this IFRIC addresses foreign currency transactions or parts of transactions where there is consideration that is denominated or priced in a foreign currency.

 

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Standard, amendment or interpretation

 

Status

IFRS 16 “Leases” (issued on January 13, 2016)

 

IASB Effective date: January 1, 2019
Endorsed by EU: October 31, 2017
Effective (EU): January 1, 2019

Amendment to IFRS 9 “Financial Instruments” relating to the valuation of certain financial instruments denominated “negative compensation”

 

IASB Effective date: January 1, 2019
Expected EU endorsement in 2018

Amendment to IAS 28 “Investments in Associates and Joint ventures” (issued on October 12, 2017)

 

IASB Effective date: January 1, 2019
Expected EU endorsement in 2018

Annual improvements 2015-2017 (issued on December 12, 2017)

 

IASB Effective date: January 1, 2019
Expected EU endorsement in 2018

Amendment to IAS 19 “Amendments, curtailments or settlements of the Defined Benefit Plan for Employee” (issued on February 7, 2018)

 

IASB Effective date: January 1, 2019
Expected endorsement in 2018

IFRIC 23 “Uncertainty over income tax treatments”

 

IASB Effective date: January 1, 2019
Expected EU endorsement in Q3 2018

 

Table 2 - IFRSs whose effective date is expected for accounting periods beginning on or after January 1, 2019 (EU effective date or expected endorsement date included for reference only)

 

IFRS 16 “Leases” — This replaces IAS 17 “Leases” and interpretations IFRIC 4 “Determining Whether an Arrangement Contains a Lease”, SIC 15 “Operating Leases - Incentives” and SIC 27 “Evaluating the Substance of Transactions Involving the Legal Form of a Lease”. IFRS 16 eliminates the classification of leases as either operating leases or finance leases for a lessee; instead all leases are treated in a similar way to finance leases applying IAS 17. Leases are to be recognized as right-of-use assets with the corresponding recognition of a financial liability. Partial exemptions to this rule are allowed for short-term leases (i.e. leases of 12 months or less) and leases of low-value assets (for example, the lease of a personal computer). By some preliminary considerations several types of assets at present held under operating leases by the Group might be affected by the implementation of this standard (physical sites in particular but potentially additional assets). This may lead to the recognition in the statement of financial position of significant right of use assets, and corresponding significant financial liabilities, from January 1, 2019. Ultimately, this may lead to an increase in both future EBITDA (due to the change in the nature of from lease operating expense to depreciation and interest of the income statement impact) and future net financial positions of the Group. The Group has started up and will complete within 2018 the activities deemed necessary to assess the effect of the application of IFRS 16.

 

Amendment to the IFRS 9 “Financial Instruments” — This amendment confirms that when a financial liability measured at amortised cost is modified without this resulting in de-recognition, a gain or loss should be recognised immediately in profit or loss.

 

Amendment to IAS 28 “Investments in Associates and Joint ventures — clarifies that an entity must apply IFRS 9 “Financial Instruments”, including impairment considerations, to long term interests in an associate or joint ventures for which the equity method is not applied.

 

Annual improvements 2015-2017 - affecting IFRS 3 “Business Combinations”, IFRS 11 “Joint Arrangements”, IAS 12 “Income taxes” and IAS 23 “Borrowing Costs”. The main parts of these changes applicable to the Group are as follows:

 

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·                  IFRS 3 “Business Combinations” and IFRS 11 “Joint Arrangements” — the amendments propose changes to the definition of business and the accounting of investments already held in a business in which control or joint control is subsequently acquired.

 

·                  IAS 12 “Income taxes” — the amendment clarifies that all income tax consequences of dividends should be recognised in profit or loss, regardless of how the tax arises.

 

·                  IAS 23 “Borrowing Costs” - the amendment clarifies that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalization rate on general borrowings.

 

Amendment to IAS 19 “Amendments, curtailments or settlements of the Defined Benefit Plan for Employee” — the amendments require an entity to use updated assumptions to determine current service cost and net interest for the remainder of the period after a plan amendment, curtailment or settlement.

 

IFRIC 23 “Uncertainty over income tax treatments” — explains how to recognise and measure deferred and current income tax assets and liabilities where there is uncertainty over a tax treatment (or where there is uncertainty over whether that treatment will be accepted by the tax authority).

 

2.4                               Accounting estimates and use of judgment

 

The preparation of these consolidated financial statements required management to apply accounting policies and methodologies based on complex, subjective judgments, estimates based on past experience and assumptions determined from time to time to be reasonable and realistic based on the related circumstances. The use of these estimates and assumptions affects the amounts reported in the statement of financial position, the income statement and the cash flow statement as well as the notes. The final amounts for items for which estimates and assumptions were made in the consolidated financial statements may differ from those reported in these financial statements due to the uncertainties that characterize the assumptions and conditions on which the estimates were based.

 

In this respect, the situation caused by the persisting difficulties of the economic and financial environment in the Eurozone led to the need to make assumptions regarding future performance which are characterized by significant levels of uncertainty; as a consequence, it cannot be excluded that results may arise in the future which differ from estimates, and which therefore might require adjustments, even significant, to be made to the carrying amount of assets and liabilities, which at the present moment can clearly neither be estimated nor predicted. The main items affected by these situations of uncertainty are non-current assets (tangible and intangible assets), deferred tax assets, provisions, contingent liabilities and impairment provisions.

 

The estimates and underlying assumptions are reviewed periodically and continuously by the Group. If the items considered in this process perform differently, then the actual results could differ from the estimates, which would accordingly require adjustment. The effects of any changes in estimate are recognized in profit or loss in the period in which the adjustment is made if it only affects that period, or in the period of the adjustment and future periods if it affects both current and future periods.

 

The accounting principles requiring a higher degree of subjective judgment in making estimates and for which changes in the underlying conditions could significantly affect the consolidated financial statements are briefly described below.

 

·                                          Goodwill: goodwill is tested for impairment at least on an annual basis to determine whether any

 

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impairment losses have arisen that should be recognized in profit or loss. More specifically, the test is performed by allocating the goodwill to a cash generating unit (CGU) and subsequently estimating the unit’s fair value. Should the fair value of the net capital employed be lower than the carrying amount of the CGU, an impairment loss is recognized on the allocated goodwill. The allocation of goodwill to cash generating units and the determination of the fair value of a CGU require estimates to be made that are based on factors that may vary over time and that could as a result have an impact on the measurements made by management which might be significant.

·                                          Estimation of finite and indefinite useful life of non-current assets: the useful life of intangible and tangible fixed assets is reviewed on a periodic basis to verify that is representative of the related assets. Some intangible assets other than goodwill, such as TLC licenses and trademarks, are considered to have an indefinite life. In particular, TLC licenses are expected to generate benefits which are significantly higher than cost of renewal for the same licenses. These assessments are periodically updated to reflect the best and most up to date market developments in order to confirm the conditions which led to a non-finite useful life identification for such assets. Future market developments or changes in regulation could change the conditions of these estimates and require amortization, or impairment of such assets. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period.

·                                          Impairment losses on non-current assets: non-current assets are reviewed to determine whether there are any indications that the carrying amount of these assets may not be recoverable and that they have suffered an impairment loss that needs to be recognized. In order to determine whether any such elements exist it is necessary to make subjective measurements, based on information obtained within the Group and in the market and also on past experience. When a potential impairment loss emerges it is estimated by the Group using appropriate valuation techniques. The identification of the elements that may determine a potential impairment loss and the estimates used to measure such loss depend on factors which may vary over time, thereby affecting estimates and measurements.

·                                          Depreciation of non-current assets: the cost of property, plant and equipment is depreciated on a straight-line basis over the useful lives of the assets. The useful life of property, plant and equipment is determined when the assets are purchased and is based on the past experience of similar assets, market conditions and forecasts concerning future events which may affect them, amongst which are changes in technology. The actual useful lives may therefore differ from the estimates of these. The Group regularly reviews technological and business sector changes, dismantling costs and recoverable amounts in order to update residual useful lives. Such regular updating may entail a change of the depreciation period and consequently a change in the depreciation charged in future years.

·                                          Deferred tax assets: the recognition of deferred tax assets is based on forecasts of future taxable profit. The measurement of future taxable profit for the purposes of determining whether or not to recognize deferred tax assets depends on factors which may vary over time and which may lead to significant effects on the measurement of this item.

·                                          Contingent liabilities and provisions: the accruals related to legal, arbitration and fiscal disputes are the result of a complex estimation process based upon the probability of an unfavorable outcome. The definition of such provisions entails making estimates based on currently known factors which may vary over time and which could actually turn out to be significantly different from those referred to in preparing the notes to

 

33



 

these financial statements.

·                                          Fair value of financial instruments: the fair value of certain financial instruments (derivatives) is determined using valuation models that incorporate subjective measures such as estimated cash flows, price volatility, interest rate curves etc.

·                                          Embedded derivatives: bifurcation of embedded derivatives from host contracts is based on judgments in the determination of the “closely related” criterion and on the amortized cost to be used (i.e., amortized cost of the host debt pre or after bifurcating the embedded feature).

 

2.5                               Risk management

 

Credit Risk Management

 

The Group’s credit risk is principally associated with trade receivables which at December 31, 2017 amounted to €1,498 million (€1,528 million at December 31, 2016 unaudited). The Group minimizes credit risk through a preventive credit check process which ensures that all customers requesting new products and services or additions to existing services are reliable and solvent, also by using a preference for contracts which provide for the use of automatic payment methods with the aim of reducing the underlying credit risk. This check is carried out in the customer acceptance phase through the use of internal and external information.

 

The Group additionally exercises timely post-customer acquisition measures for the purpose of credit collection such as the following:

 

·                  sending reminders to customers;

 

·                  employing measures for the collection of overdue receivables, separated by strategy, portfolio and customer profiles;

 

·                  measuring and monitoring the debt status through reporting tools.

 

As a general rule, the Group has a limited level of credit concentration as the consequence of diversifying the product and services portfolio it offers to its customers.

 

The Group is also assisted by sureties issued by primary banks as collateral for the obligations resulting from supplies and receivables from dealers.

 

In relation to the exposure of financial counterparties’ credit risk, the Group reviews and amends the credit limits set for each national and international banking group.

 

These credit limits take into consideration the sum of the following components (NFA or, Net Financial Assets): i) availability of balances in bank or postal current accounts; ii) deposits or short term financial investments; iii) positive mark to market arising on derivatives used for hedging; iv) bank guarantees issued in favor of the company.

 

The Group had a positive cash net balance in its current accounts of €619 million at December 31, 2017 (€633 million at December 31, 2016 unaudited). The Group’s credit risk exposure from derivative contracts is represented by their realizable value or fair value, if positive.

 

34



 

Liquidity Risk Management

 

Liquidity risk arises mostly from the cash flows generated by debt servicing, in terms of both interest and principal, and from all of the Group’s payment obligations that result from business activities.

 

In 2017 the Group proceeded to settle the pre-existing debt and negotiate new loan contracts to optimize the capital structure and reduce the annual interest costs. In particular, the following debts were repaid:

 

·                  a floating rate long-term loan agreement (the Senior Facility Agreement) entered on November 24, 2010 by the Group and renegotiated on March 12, 2015, denominated in euros, with full repayment at maturity in 2019 and with total nominal value of €700 million to which should be added €400 million of unused revolving credit facility at December 31, 2016;

·                  the bonds issued by the subsidiary WIND Acquisition Finance SA, which were listed in the Luxembourg Stock Exchange market and held by institutional investors, set out in the table below:

 

(millions of euro)

 

Issue date

 

Currency

 

Notional
amount

 

Maturity

 

Interest rate

 

Senior Notes 2021 €

 

04/23/2014

 

EUR

 

1,750

 

04/23/2021

 

7.00

%

Senior Notes 2021 $

 

04/23/2014

 

USD

 

2,800

 

04/23/2021

 

7.375

%

Senior Secured Notes 2020 €

 

07/10/2014

 

EUR

 

2,475

 

07/15/2020

 

4.00

%

Senior Secured Notes 2020 $

 

07/10/2014

 

USD

 

1,900

 

07/15/2020

 

4.75

%

Senior Secured Floating Rate Notes 2020 €

 

07/10/2014

 

EUR

 

575

 

07/15/2020

 

Eur3M+4.00

%

Senior Secured Floating Rate Notes 2020 €

 

03/30/2015

 

EUR

 

400

 

07/15/2020

 

Eur3M+4.125

%

Senior Secured Floating Rate Notes 2019 €

 

04/29/2013

 

EUR

 

150

 

04/30/2019

 

Eur3M+5.25

%

Senior Secured Fixed Rate Notes 2020 $

 

04/29/2013

 

USD

 

550

 

04/30/2020

 

6.50

%

 

The debt managed by the Group is composed of:

 

·                  a floating rate medium-long term loan agreement (the Senior Facility Agreement) entered on October 24, 2017 denominated in euros, with full repayment at maturity in 2022 and with total nominal value of €3.000 million to which should be added €400 million of unused revolving credit facility at December 31, 2017;

·                  the bonds issued by Wind Tre, which are listed in the Luxembourg Stock Exchange and Wien Stock Exchange markets and are held by institutional investors, and reported below:

 

(millions of euro)

 

Issue date

 

Currency

 

Notional
amount

 

Maturity

 

Interest rate

 

Senior Secured Fixed Rate Notes 2023 €

 

11/03/2017

 

EUR

 

1,625

 

01/20/2023

 

2,625

%

Senior Secured Floating Rate Notes 2024 €

 

11/03/2017

 

EUR

 

2,250

 

01/20/2024

 

Euribor 3M + 2,750

%

Senior Secured Fixed Rate Notes 2025 €

 

11/03/2017

 

EUR

 

1,750

 

01/20/2025

 

3,125

%

Senior Secured Fixed Rate Notes 2026 $

 

11/03/2017

 

USD

 

2,000

 

01/20/2026

 

5,000

%

 

The bonds issued are subject to mandatory repayment in the following scenario: i) in case of a change of control, all bondholders will be entitled to request the total or partial repurchase of the bonds they hold at a price equal to 101% of the notional amount plus the interest accrued at the repurchase date, and ii) in case of asset sales, any proceeds not reinvested in the form envisaged by the offering memorandum and which exceed the amount of €250 million must be used to make a pari-passu repurchase offer to bondholders and debtholders at a price of 100% of the notional amount plus the interest accrued at the repurchase date;

 

·                  loans granted by the related company VIP-CKH Ireland Ltd of €5,114 million.

 

The above bonds are secured by pledge as indicated in note 38.

 

35



 

The maturity dates in accordance with the described above agreements, with exclusive reference to the amounts used, translating US dollar tranches at the hedge agreement exchange rate where applicable, are as follows.

 

(millions of euro)

 

2018

 

2019

 

2020

 

2021

 

2022

 

2023

 

2024

 

2025

 

2026

 

Total

 

Senior Facility Agreement

 

 

 

450

 

600

 

1,950

 

 

 

 

 

3.000

 

Senior Secured Fixed Rate Notes 2023 Euro

 

 

 

 

 

 

1,625

 

 

 

 

1.625

 

Senior Secured Floating Rate Notes 2024 Euro

 

 

 

 

 

 

 

2,250

 

 

 

2.250

 

Senior Secured Fixed Rate Notes 2025 Euro

 

 

 

 

 

 

 

 

1,750

 

 

1.750

 

Senior Secured Fixed Rate Notes 2026 Dollar

 

 

 

 

 

 

 

 

 

1,666

 

1.666

 

Loan from VIP-CKH Ireland Ltd

 

5,114

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,114

 

Total

 

5,114

 

 

450

 

600

 

1,950

 

1,625

 

2,250

 

1,750

 

1,666

 

15,405

 

 

The Senior Facility Agreement contains financial covenants (“Financial Covenants”) effective starting from January 1, 2018.

 

USD denominated bond tranches are hedged by cross currency swaps. As concerns liquidity risk, these cross currency swaps will lead to an exchange of principal at maturity.

 

The following tables set forth the contractual due dates for financial liabilities, including those for interest payments, which are representative of the respective effects on cash flows calculated as of December 31, 2017 and December 31, 2016.

 

(millions of euro)

 

Carrying
amount
at
December
31, 2017

 

Total
contractual
cash flows

 

2018

 

2019

 

2020

 

2021

 

2022

 

2023

 

2024

 

2025

 

2026

 

2027/
2035

 

Non-derivative financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank loans

 

2,970

 

(3,275

)

(61

)

(61

)

(511

)

(652

)

(1,990

)

 

 

 

 

 

Financing from related company

 

5,114

 

(5,114

)

(5,114

)

 

 

 

 

 

 

 

 

 

Bonds

 

7,286

 

(8,982

)

(190

)

(243

)

(243

)

(243

)

(243

)

(1,847

)

(2,404

)

(1,861

)

(1,708

)

 

Trade payables

 

2,341

 

(2,341

)

(2,341

)

 

 

 

 

 

 

 

 

 

Other financial liabilities included in Other payable and Other liabilities

 

559

 

(559

)

(198

)

(220

)

(10

)

(11

)

(3

)

(3

)

(4

)

(5

)

(5

)

(100

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net derivative financial liabilities

 

57

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outflows

 

 

 

(1,992

)

(46

)

(60

)

(59

)

(58

)

(1,769

)

 

 

 

 

 

Inflows

 

 

 

2,081

 

59

 

83

 

83

 

83

 

1,773

 

 

 

 

 

 

Total

 

18,327

 

(20,182

)

(7,891

)

(501

)

(740

)

(881

)

(2,232

)

(1,850

)

(2,408

)

(1,866

)

(1,713

)

(100

)

 

36


 

(millions of euro)

 

Carrying amount
at December 31,
2016
(unaudited)

 

Total
Contractual cash
flows

 

2017

 

2018

 

2019

 

2020

 

2021

 

2022/
2035

 

Non-derivative financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank loans

 

686

 

(795

)

(30

)

(30

)

(735

)

 

 

 

Financing from related company

 

5,114

 

(5,114

)

(5,114

)

 

 

 

 

 

Bonds

 

10,453

 

(12,795

)

(583

)

(583

)

(730

)

(6,328

)

(4,571

)

 

Trade payables

 

2,271

 

(2,271

)

(2,271

)

 

 

 

 

 

Other financial liabilities included in Other payable and Other liabilities

 

128

 

(128

)

(1

)

(1

)

(2

)

(2

)

(2

)

(120

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net derivative financial liabilities

 

(1,031

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outflows

 

 

 

(4,751

)

(215

)

(208

)

(208

)

(2,029

)

(2,091

)

 

Inflows

 

 

 

6,333

 

315

 

315

 

315

 

2,628

 

2,760

 

 

Total

 

17,621

 

(19,521

)

(7,899

)

(507

)

(1,360

)

(5,731

)

(3,904

)

(120

)

 

The Group assessed the concentration of risk with respect to its debt and concluded it to be low based on liquidity in the markets the Group has access to and recent refinancing history. The Group believes that access to sources of funding and to credit lines for working capital management is sufficiently available and the Group’s policy is to diversify the funding sources where possible.

 

Market Risk Management

 

The Group’s strategy for managing interest rate and currency risks is aimed at both managing and controlling such financial risks. More specifically, this strategy is aimed at eliminating currency risk and optimizing debt cost wherever possible, taking into account the interests of the Group’s stakeholders.

 

Managing market risk for the Group refers to financial liabilities from the time they actually arise or from when there is a high probability that they will arise.

 

More specifically, the following market risks are monitored and managed:

 

·                  Cash flow risk - this is the risk that movements in the yield curve could have an impact on the income statement in terms of greater finance expense.

·                  Fair value risk - this is the risk that movements in the yield curve could have an impact on the fair value of debt.

·                  Currency risk - this is the risk that the fair value of financial instruments in currencies other than the Euro or their cash flows, or the amounts payable or receivable generated in the ordinary course of operations other than in Euros, could be negatively affected by fluctuations in exchange rates.

 

The main objectives that the Group intends to reach are: i) to defend the strategic plan scenario from the effects of exposure to currency, interest rate and inflation risks, identifying an optimum combination of the fixed rate, floating rate and inflation components for financial liabilities; ii) to reduce the cost of debt; and iii) to manage derivatives in compliance with the Group’s approved strategies, taking into consideration the different effects that derivative transactions could have on the income statement and the statement of financial position.

 

Cash Flow Risk and Currency Risk

 

Following the renegotiation of the financial debt, all the existing derivatives have been repaid and new derivatives linked to the new loans have been renegotiated. Therefore at December 31, 2017 the interest rate risk was hedged

 

37



 

to a level of approximately 57%, with a maximum hedge term of less than five years. At December 31, 2017, outstanding derivative contracts for hedging interest rate risk amounted to €3,000 million.

 

The outstanding balance of the long-term loans (excluding intercompany loans) at December 31, 2017 amounted to €10,325 million (liabilities in foreign currencies are translated at the rates provided in the relevant CCS) with the following fixed to floating ratio at that date.

 

(millions of euro)

 

Outstanding
at 12.31.2017

 

% at
12.31.2017

 

 

 

 

 

 

 

At fixed rate

 

8,075

 

78

%

At floating rate

 

2,250

 

22

%

 

The currency risk resulting from the bonds issued has been fully hedged by cross currency swap transactions having a total notional of USD 2,000 million. These amounts represent only significant assets and liabilities in currency other than euro and thus that suffer a potential foreign exchange risk.

 

All derivative agreements were entered into at market rates, without any up-front payments or receipts (a zero cost basis) and with a credit margin being applied.

 

It is estimated that an increase of 100 basis points in the Euro interest rate yield curve (all other variables remaining constant) would lead to an increase in borrowing costs, with regard to the unhedged portion of floating rate debt and the ineffective portion of hedging instruments, of approximately €23 million and in the fair value derivatives of approximately €189 million. Accordingly, the profit/loss for the year, and the net equity could be impacted by a further charge of €211 million.

 

Fair value hierarchy

 

IFRS 13 requires financial instruments recognised in the statement of financial position at fair value to be classified on the basis of a hierarchy that reflects the significance of the inputs used in determining fair value. The following levels are used in this hierarchy:

 

·                  Level 1 — quoted prices in active markets for the assets or liabilities being measured;

·                  Level 2 — inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) in the market;

·                  Level 3 — inputs that are not based on observable market data.

 

The following tables provides an analysis of financial assets and liabilities measured at fair value by hierarchy at December 31, 2017 and 2016.

 

At December 31, 2017
(millions of euro)

 

Note

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets at fair value

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

17

 

 

 

7

 

7

 

Total assets

 

 

 

 

 

7

 

7

 

Liabilities at fair value

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

17

 

 

57

 

 

57

 

Total liabilities

 

 

 

 

57

 

 

57

 

 

38



 

At December 31, 2016 (unaudited)
(millions of euro)

 

Note

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets at fair value

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

17

 

 

1,061

 

399

 

1,460

 

Total assets

 

 

 

 

1,061

 

399

 

1,460

 

Liabilities at fair value

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

17

 

 

30

 

 

30

 

Total liabilities

 

 

 

 

30

 

 

30

 

 

In 2017 and 2016 there were no transfers either from Level 1 to Level 2 or vice versa or from Level 3 to other levels or vice versa. For further details regarding the fair value calculation and the level classification reference should be made to note 17.

 

3                                         ACQUISITIONS AND DISPOSALS

 

On July 4, 2017, the whole 10% of the shares of Galata SpA was sold to Cellnex for a total of approximately €88 million.

 

On July 6, 2017 in order to harmonize and optimize the handling of the activities relating to the administrative-commercial and first level technical assistance supplied to its customer the “Call Center 133” was sold to Comdata company. Following the sold of the business unit, €2 million of Employee benefits, €1 million of Other payables and €1 million of fixed assets were transferred to Comdata.

 

4                                         TANGIBLE ASSETS

 

The following tables set out the changes in Tangible assets at December 31, 2017 and 2016.

 

(millions of euro)

 

Net book
value as at
December 31,
2016
(unaudited)

 

Addition

 

Depreciation

 

(Impairment
losses)/Gains

 

Disposals

 

Others

 

Net book
value as at
December 31,

2017

 

Land and buildings

 

1

 

 

 

 

 

 

1

 

Plant and machinery

 

5,503

 

712

 

(2,738

)

 

(14

)

(45

)

3,418

 

Equipment

 

43

 

29

 

(20

)

 

 

2

 

54

 

Other

 

71

 

10

 

(18

)

 

 

(7

)

56

 

Total

 

5,618

 

751