Presentation to the market regarding the main effects on the Group’s 2004 accounts following the introduction of IAS international accounting standards
The Telecom Italia Group’s CFO Enrico Parazzini today illustrates to financial analysts the principal repercussions on the Group’s 2004 accounts of adopting the IAS/IFRS standards, which are becoming compulsory for the consolidated accounts of listed companies in 2005.
The Telecom Italia Group is adopting these new accounting standards with effect from January 1, 2005. The Group’s first quarter 2005 accounts will be drawn up on the basis of these criteria. The 2005-2007 business targets due to be presented to the financial community on April 8, 2005 are based on these principles. The new criteria will be applied to the Parent Company from 2006.
The main effects of these new principles on the 2004 accounts are:
• Operating income rises 0.4 billion euros (from 7.2 billion euros to 7.6 billion euros);
• Net income (the Parent company’s share) is up 1 billion euros (rising from 0.8 to 1.8 billion euros);
• Shareholders’ equity increases by 1.2 billion euros (from 15.2 to 16.4 billion euros);
• Net financial borrowings increase by 3.3 billion euros (from 29.5 to 32.8 billion euros).
The main impact of the new accounting standards on the income statement concerns the amortization of goodwill (equal to 1.5 billion euros in 2004). Under the IAS/IFRS standards, goodwill is no longer systematically amortized but instead is subject to annual valuation through a so-called impairment test. Further changes to the income statement arise from reclassifications, revised criteria for calculating revenues, and a different method of entering certain types of real estate transaction onto the accounts.
Most of the increase in Shareholders’ equity from 15.2 to 16.4 billion euros may be ascribed to changes in how goodwill is amortized.
Differences in net financial borrowings may primarily be ascribed to a different accounting process applied to real estate sales and leasebacks undertaken between 2000 and 2003, securitization contracts and factoring.
All changes in the calculation of net financial borrowings have already been taken into account by the ratings agencies during their recent revisions.
Under the new standards, a number of Group real estate sales containing 19-21 year leaseback provisions are entered onto the accounts as long-term investments. In consequence, the assets leased back are entered onto the balance sheet on the assets side, while the residual debt is entered as a liability. Amortization of a share of interest charges rather than rental fees is entered onto the income statement, while gains realized at the time of the sale are deferred for the length of the contract. These revised accounting rules for real estate transactions of this nature have prompted a bookkeeping increase of 1.6 billion euros in the net financial borrowings figure at year-end 2004.
Adoption of these new accounting standards has had an impact on securitization too, requiring the full consolidation of the TI Securitization Vehicle entity, set up specifically for securitization purposes; although it is wholly-owned by other entities, the entity’s operations are, in a de facto sense, controlled by Telecom Italia. This consolidation results in a 0.7 billion euro rise owing to the negative bookkeeping effect on net financial borrowings.
The revised accounting principles also entail stricter factoring criteria regarding the definitive transfer of receivables. This has resulted in a 0.8 billion euro rise owing to the negative bookkeeping effect on net financial borrowings.
The effect of accounting changes on the revenues of the Group’s main Business Units is negligible. After the reclassification of extraordinary income and expenses (in addition to adjustments regarding the definition of revenues and provisions for contingencies), Wireline’s operating income is revised from 5.2 to 4.8 billion euros, Mobile BU operating income is revised from 4.07 to 3.98 billion euros, and Internet & Media operating income rises from -0.09 to -0.07 billion euros.
The slide presentation that accompanies the conference call illustrating the detailed impact of new IAS accounting criteria on the Group's 2004 accounts is available on the Telecom Italia Group web site www.telecomitalia.it under Investor Relations.
The information contained herein should be considered as preliminary and liable to amendment and have been calculated on the basis of current IAS / IFRS standards and currently available interpretations. External auditors Reconta Ernst & Young have been commissioned to check the data concerning the transition process which is under way.
Milan, March 16, 2005