Accounting Principles and Consolidation Criteria
Content and Format of the Financial Statements
The Edison Group's Consolidated Financial Statements, which consist of a balance sheet, an income statement, a statement of cash flow, a statement of changes in shareholders' equity and the accompanying notes, were prepared in accordance with the International Financial Reporting Standards (IAS/IFRSs).
Following the enactment of European Regulation No. 1606 in July 2002, the Edison Group adopted as of January 1, 2005 the International Financial Reporting Standards (IAS/IFRSs) issued by the International Accounting Standards Board (IASB), as approved by the European Commission.
The abbreviation IAS/IFRSs is used to signify the International Financial Reporting Standards (IFRS), which represent a recent evolution of the International Accounting Standards revised (IAS), and all interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), previously known as the Standing Interpretations Committee (SIC).
On July 28, 2005, the Group published in a separate document the schedules required by IFRS 1. This document was accompanied by an audit report issued by PricewaterhouseCoopers Spa.
The section of these notes entitled "Reconciliation Schedules Required by IFRS 1" contains exclusively the reconciliation schedules required by IFRS 1. The abovementioned audited document should be consulted for any issues that is not specifically covered in these notes.
The principles applied in preparing the abovementioned reconciliation schedules are the same as those applied to this Annual Report.
Specifically, with regard to the accounting principles applied:
  • IFRS 6 "Exploration for and Evaluation of Mineral Resources" is being applied starting in 2005. Hydrocarbon exploration costs totaling 7 million euros that were incurred during the year in connection with successful development of gas fields in Algeria and Croatia were capitalized and added to property, plant and equipment.
  • IAS 32 and IAS 39 are being applied as of January 1, 2005 and, consequently, any data at December 31, 2004 that are affected by these standards are not comparable.
  • IFRS 4 "Insurance Contracts," IAS 26 "Accounting and Reporting by Retirement Benefit Plans" and IAS 41 "Agriculture" were not pertinent and were not applied.
The financial statements used for consolidation purposes are the latest statutory or consolidated statements of the individual companies or business operations, approved by respective corporate governance bodies, with the adjustments required to make them consistent with Group accounting principles.
For companies with fiscal years that do not coincide with the calendar year, the financial statements used were annual financial statements that match the Group's fiscal year approved by the respective Boards of Directors. Unless otherwise stated, the amounts that appear in the notes to the financial statements are in millions of euros.
The consolidated financial statements have been audited by PricewaterhouseCoopers Spa in accordance with the three-year assignment (from 2005 to 2007) it had received by a resolution of the Shareholders' Meeting of April 19, 2005.
The presentation formats that the Company has chosen for its financial statement have the following characteristics:
Balance Sheet
Assets and liabilities are analyzed by maturity. Current and non-current items, which are due within or after 12 months, respectively, are shown separately.
Income Statement
The Company has selected a step-by-step income statement, with the different components analyzed by type
Cash Flow Statement
The cash flow statement was prepared in accordance with the indirect method.
Scope of Consolidation
The consolidated financial statements include the financial statements of Edison Spa and of the Italian and foreign subsidiaries over which Edison exercises control, either directly or indirectly.
The consolidated financial statements comprise the total amount of the assets, liabilities, revenues and expenses of the companies consolidated on a line-by-line basis. The carrying amount of equity investments is eliminated by offsetting it against the underlying interest in the respective shareholders' equity, and the individual assets and liabilities and contingent liabilities are assigned the fair value they had on the date when ownership or control of the investee company was established. Any residual value is recognized as a non-current asset and posted to "Goodwill."
Minority interest in shareholders' equity and profit or loss are shown separately in the balance sheet and income statement, respectively.
When Edison shares control with other shareholders over the financial and operating policies of an associate pursuant to a contract, the associate in question is consolidated by the proportional method. The consolidated financial statements must show the interest of the Group in the assets, liabilities, revenues and expenses of the associate, all of which must be proportional to the interest held. Edipower is being consolidated at 50%, even though Edison owns 40% of the company. The 50% figure reflects Edison's interest in the tolling contract, the percentage of Edipower's indebtedness that is guaranteed by Edison and buy and sell rights secured by put-and-call options exchanged by Edison and Edipower's financial shareholders.
Investments in associates over which the Group exercises a significant influence, but not the joint control mentioned above, are valued by the equity method
Subsidiaries that are in liquidation or are parties to composition with creditors proceedings are not consolidated. They are carried instead at their estimated realizable value. Their impact on the Group's total assets and liabilities and net financial position is not significant.
Principal Changes in the Scope of Consolidation Compared
with December 31, 2004
The main change is that, in contrast with the scope of consolidation determined under the old accounting principles, all companies that can be classified as joint ventures in accordance with IAS 31 have been consolidated by the proportional method. More specifically, the proportional consolidation method was applied to Edipower (50%), Sel Edison (42%) and Serene (66.32%). Previously, Sel Edison was valued by the equity method and Serene was consolidated line by line. Lastly, special purpose entities (SPEs) must be consolidated line by line when risks and benefits can be attributed primarily to the Group, irrespective of the size of the equity investment held in the SPE. This approach resulted in the line-by-line consolidation of ETS, a securitization company in which the Group does not hold an interest, and of its segregated portfolio under Italian securitization law.
Additional changes to the scope of consolidation in the financial statements prepared in accordance with the IFRSs reflect the impact of a corporate simplificationprocess that continued in 2005, resulting in a reduction in the number of consolidated companies. This objective was achieved by means of dissolutions of companies in liquidation and mergers, the most significant of which included the following:
  • Megs Srl was absorbed by Edison Spa;
  • Parco Eolico Montemignaio Srl, Parco Eolico Vaglio Srl and Parco Eolico San Bartolomeo Srl were absorbed by Edison Energie Speciali Spa;
  • Asep Gas Srl was absorbed by Edison per Voi Spa.
The other main changes in the scope of consolidation that occurred in 2005 are reviewed below.