Use of accounting estimates

The preparation of financial statements and interim reports in accordance with generally accepted accounting standards requires management to make accounting estimates based on complex or subjective judgements, past experience and assumptions deemed reasonable and realistic based on the information available at the time. The use of these estimates and assumptions affects the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of income and expenses during the reporting period. Actual results may differ from these estimates given the uncertainty surrounding the assumptions and conditions upon which the estimates are based.

Summarised below are those accounting estimates used in the preparation of consolidated financial statements and interim reports that are considered critical because they require management to make a large number of subjective judgements, assumptions and estimates regarding matters that are inherently uncertain. Changes in the conditions underlying such judgements, assumptions and estimates may have a significant effect on future results.


Contract work in progress for long-term contracts – for which estimates necessarily have a significant subjective component – are measured on the basis of estimated revenues and costs over the full life of the contract. Contract work in progress includes extra revenues from additional works following modifications to the original contracts if their realisation is probable and the amount can be reliably estimated.


Impairment losses are recognised if events and changes in circumstances indicate that the carrying amount of tangible and intangible assets may not be recoverable.

Impairment is recognised in the event of significant permanent changes in the outlook for the market segment in which the asset is used. Determining as to whether and how much an asset is impaired involves management estimates on complex and highly uncertain factors, such as future market performances, the effects of inflation and technological improvements on operating costs, and the outlook for global or regional market supply and demand conditions.

The amount of an impairment loss is determined by comparing the carrying amount of an asset with its recoverable amount (the higher of fair value less costs to sell and value in use calculated as the present value of the future cash flows expected to be derived from the use of the asset net of disposal costs). The expected future cash flows used for impairment reviews are based on judgemental assessments of future variables such as prices, costs, demand growth rate and production volumes, considering the information available at the date of the review and are discounted at a rate that reflects the risk inherent in the relevant activity. Goodwill and other intangible assets with an indefinite useful life are not amortised. The recoverability of their carrying amount is reviewed at least annually and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is tested for impairment at cash-generating unit level, i.e. the smallest aggregate on which the company, directly or indirectly, evaluates the return on the capital expenditure to which goodwill relates. If the recoverable amount of a cash generating unit is lower than the carrying amount, goodwill allocated to that cash generating unit is impaired up to that difference; if the carrying amount of goodwill is less than the amount of impairment, the assets of the cash generating unit are impaired on a pro-rata basis for the residual difference.


Accounting for business combinations requires the difference between the purchase price and the net assets of an acquired business to be allocated to the various assets and liabilities of the acquired business. Most assets and liabilities are measured at fair value for the purpose of allocation. Any positive difference that cannot be allocated is recognised as goodwill. Negative residual differences are taken to the income statement. Management uses all available information to make these fair value determinations and, for the most significant business combinations, typically uses external evaluations.


Saipem records provisions for contingencies primarily in relation to employee benefits, litigation and tax issues. Determining appropriate amounts for provisions is a complex estimation process that includes subjective judgements.


Post-employment benefit plans arising from defined benefit plans are evaluated with reference to uncertain events and based upon actuarial assumptions including among others discount rates, expected rates of salary increases, mortality rates, retirement dates and medical cost trends.

The significant assumptions used to account for such benefits are determined as follows: (i) discount and inflation rates reflect the rates at which the benefits could be effectively settled. Indicators used in selecting the discount rate include rates of return on high-quality corporate bonds or, where there is no deep market in such bonds, the market yields on government bonds. The inflation rates reflect market conditions observed country by country; (ii) the future salary levels of individual employees are determined including an estimate of future changes attributed to general price levels (consistent with inflation rate assumptions), productivity, seniority and promotion; (iii) medical cost trend assumptions reflect an estimate of the actual future changes in the cost of the healthcare related benefits provided to the plan participants and are based on past and current medical cost trends including healthcare inflation, and changes in health status of the participants; and (iv) demographic assumptions such as mortality, disability and turnover reflect the best estimate of these future events for the individual employees involved, based principally on available actuarial data.

Changes in the net defined benefit liability (asset) related to remeasurements routinely occur and comprise, among other things, changes in actuarial assumptions, experience adjustments (i.e. the effects of differences between the previous actuarial assumptions and what has actually occurred) and the return on plan assets, excluding amounts included in net interest. Remeasurements of defined benefit plans are recognised in the statement of comprehensive income, while remeasurements of long-term benefits are taken to profit or loss.

Recent accounting principles

Accounting standards and interpretations issued by IASB/IFRIC and endorsed by the European Union

European Commission Regulation No. 1254/2012 dated December 11, 2012 approved IFRS 10 ‘Consolidated Financial Statements’ and the updated version of IAS 27 ‘Separate Financial Statements’ which set down the principles to be adopted for drafting the consolidated and separate financial statements, respectively. IFRS 10 establishes a single control model that applies to all entities, including special purpose entities. According to the new definition, an investor controls an investee when it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The standard indicates factors to consider when determining whether an investor has control over an investee, including potential rights, protective rights, and the existence of agency or franchise relationships. The new version also recognises the possibility that an entity may hold control with less than a majority of voting rights as a consequence of the dispersion of holdings or the passive behaviour of other investors. The provisions of IFRS 10 and of the new version of IAS 27 are applicable for annual periods beginning on or after January 1, 2014.

European Commission Regulation No. 1254/2012 dated December 11, 2012 approved IFRS 11 ‘Joint Arrangements’ and the updated version of IAS 28 ‘Investments in Associates and Joint Ventures’. IFRS 11 establishes two types of joint arrangement – joint operations and joint ventures – on the basis of the rights and obligations of the joint venturers – and determines the appropriate accounting to be used for their recognition in the financial statements. For interests in joint ventures, the new version requires the use of the equity method of accounting, thereby eliminating the option to apply the proportionate consolidation method. Participation in a joint operation implies recognition of the assets and liabilities and the costs and revenues associated with the agreement on the basis of the rights and obligations exercised regardless of the participating interest held. The revised edition of IAS 28 defines the accounting treatment for the sale of an investment, or portion of an investment, in an associate or a joint venture. The provisions of IFRS 11 and of the new version of IAS 28 are applicable for annual periods beginning on or after January 1, 2014.

European Commission Regulation No. 1254/2012 dated December 11, 2012 approved IFRS 12 ‘Disclosure of Interests in Other Entities’, which sets out the disclosures required in relation to subsidiaries and associated companies, joint operations and joint ventures, as well as unconsolidated structured entities. IFRS 12 provisions are applicable for annual periods beginning on or after January 1, 2014.

European Commission Regulation No. 313/2013 dated April 4, 2013 approved the document: ‘Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12)’, which clarifies and simplifies the transition requirements in IFRS 10, IFRS 11 and IFRS 12. The provisions are applicable for annual periods beginning on or after January 1, 201415.

European Commission Regulation No. 1256/2012 dated December 13, 2012 approved the amendments to IAS 32 ‘Financial Instruments: Offsetting Financial Assets and Financial Liabilities’, which establish: (i) that financial assets and liabilities can only be offset when the entity has a legally enforceable right to do so in all circumstances, i.e. both in the normal course of business and in the event of insolvency, default or bankruptcy of one of the contracting parties; and (ii) that some gross settlement systems can be considered equivalent to a net settlement if they include features that eliminate or result in insignificant credit and liquidity risk. IAS 32 amendments are applicable for annual periods beginning on or after January 1, 2014.

European Commission Regulation No. 1374/2013 dated December 19, 2013 approved a number of amendments to IAS 36 ‘Recoverable Amount Disclosures for Non-Financial Assets (Amendments to IAS 36)’, which establishes additional disclosure requirements, namely: (i) disclosure of the recoverable amount of individual assets or cash-generating units for which an entity has recognised or reversed an impairment loss during the reporting period; and (ii) additional disclosures required in cases where the recoverable amount is based on fair value less costs of disposal. IAS 36 amendments are applicable for annual periods beginning on or after January 1, 2014.

European Commission Regulation No. 1375/2013 dated December 19, 2013 approved ‘Financial Instruments: ‘Novation of Derivatives and Continuation of Hedge Accounting’ (Amendments to IAS 39 ‘Financial Instruments: Recognition and Measurement’). The amendment establishes that it is not necessary to discontinue hedge accounting as the result of the novation of a hedging derivative which sees the original counterparty replaced by a central counterparty, provided that this occurs as a consequence of laws or regulations or the introduction of laws or regulations. IAS 39 amendments are applicable for annual periods beginning on or after January 1, 2014.

Accounting standards and interpretations issued by IASB/IFRIC but not yet endorsed by the European Union

On November 12, 2009, the IASB issued IFRS 9 ‘Financial Instruments’, which changes the recognition and measurement of financial assets and their classification in the financial statements. The new provisions require, inter alia, a classification and measurement model of financial assets based exclusively on the following categories: (i) financial assets measured at amortised cost; and (ii) financial assets measured at fair value. The new provisions also require investments in equity instruments, other than subsidiaries, jointly controlled entities or associates, to be measured at fair value with value changes recognised in profit or loss. If these investments are not held for trading purposes, subsequent changes in the fair value can be recognised in other comprehensive income, with only dividend income recognised in profit or loss. Amounts taken to other comprehensive income shall not be subsequently transferred to profit or loss, even at disposal. On October 28, 2010, the IASB reissued IFRS 9 to incorporate classification and measurement criteria for financial liabilities.

In particular, the new version of IFRS 9 requires changes in the fair value of financial liabilities designated as at fair value through profit or loss arising from the entity’s own credit risk to be presented in other comprehensive income. Such changes may however be recognised in profit or loss in order to avoid an accounting mismatch with related assets. On November 19, 2013, the IASB again reissued IFRS 9 to incorporate new hedge accounting rules which seek to ensure hedging transactions entered into are aligned with entities’ risk management strategies and to establish a more principles-based approach than was employed previously. The principal amendments regard: (i) hedge effectiveness, which is to be assessed only prospectively; (ii) the possibility to modify a hedging relationship after its initial designation, provided that the risk management objective remains the same (rebalancing); (iii) the possibility, provided certain conditions are met, to designate risk components of non-financial items, net positions or layer components as the hedged item; (iv) the possibility to designate an aggregated exposure (i.e. the combination of an eligible hedged item and a derivative instrument) as a hedged item; and (v) accounting for the time value component of an option or the forward element of a forward contract that has been excluded from the designated hedging relationship, depending on the characteristics of the hedged item. The amendments issued in November 2013 also removed the effective date of IFRS 9, which will now be defined once the standard has been finalized (previous revisions referred to January 1, 2015).

On May 20, 2013, the IFRIC issued interpretation IFRIC 21 ‘Levies’ (hereafter IFRIC 21), which defines the accounting treatment to be applied 86 Saipem Annual Report / Notes to the consolidated financial statements for levies charged by public authorities (e.g. contributions to be paid for participation in a specific market) other than taxes, fines and penalties. IFRIC 21 sets out recognition criteria for this type of liability, identifying the obligating event for their recognition as the activity that triggers the payment of the levy in accordance with the relevant legislation. IFRS 21 provisions are applicable for annual periods beginning on or after January 1, 2014.

On November 21, 2013, IASB issued ‘Defined Benefit Plans: Employee Contributions (Amendments to IAS 19)’, which allows defined benefit plan contributions from employees or third parties to be recognised as a reduction in the service cost in the period in which the related service is rendered, provided that the contributions: (i) are set out in the formal terms of the plan; (ii) are linked to service; and (iii) are independent of the number of years of service (e.g. a fixed percentage of the employee’s salary, a fixed amount throughout the service period or contributions that are dependent on the employee’s age). The amendments are applicable for annual periods beginning on or after July 1, 2014 (for Saipem: 2015 financial statements).

On December 12, 2013, the IASB published ‘Annual Improvements to IFRSs 2010-2012 Cycle’ and ‘Annual Improvements to IFRSs 2011-2013 Cycle’, which essentially consist of changes of a technical and editorial nature to existing standards. The changes are applicable for annual periods beginning on or after January 1, 2014 (for Saipem: 2015 financial statements).

Saipem is currently reviewing these new standards to determine their likely impact on the Group’s results if adopted.

(15) In accordance with IFRS 10 and IFRS 11 transition requirements, the new provisions will be applied retrospectively beginning January 1, 2014. The opening values of the balance sheet at January 1, 2013 and the economic data for 2013 will be adjusted accordingly. As application of IFRS 11 will impact on the consolidation by the Saipem Group of most of its jointly-controlled entities, which will be classified as joint ventures and as such be accounted for using the equity method rather than, as was previously the case, using the proportional method, application of the new provisions in the consolidated financial statements is estimated at the balance sheet date to lead to: (i) a decrease in net sales from operations of €413 million, together with an increase in operating profit and a simultaneous decrease in income from investments of €10 million in the 2013 income statement; (ii) a positive variation in net capital employed and a negative variation in net borrowings at January 1, 2013 of €81 million; and (iii) a positive variation in net capital employed and a negative variation in net borrowings at December 31, 2013 of €53 million. The application of the new provisions would also cause a non material variation in 2013 regarding ‘Transactions with related parties’.