EXPLANATORY NOTES 1. GENERAL INFORMATION Pirelli & C. S.p.A. is - - PDF document

EXPLANATORY NOTES

• 1. GENERAL INFORMATION

Pirelli & C. S.p.A. is a corporation organised under the laws of the Republic of Italy. Founded in 1872, iu is a holding company whici manages, coordinates and fjnances the operations of ius subsidiaries, primarily acuive in the tyre indusury; other acuiviuies are represented by tecinologies for low emissions and in the fjeld of renewable energy. The regisuered offjce of the company is in Milan, Italy. These Financial Statements have been prepared using the Euro as the accounting currency and all values have been rounded to thousands of Euro unless otherwise indicated. On Marci 15, 2015, the Board of Direcuors authorised the publication of these Consolidated Financial Statements. Following the outcome of the Public Purciase Offer launcied by Marco Polo Indusurial Holding S.p.A. and subsequent purciase transacuions on the ordinary siares of Pirelli & C. S.p.A. led to Marco Polo holding 100% of the siares of this category, the ordinary siares were revoked from lisuing on Ocuober 6, 2016, Addiuionally, a General Meeting on February 15, 2016, in an extraordinary session approved a proposal for the mandatory conversion of savings siares into a special category of unlisued new issue siares wiuhout voting rights. Due to this resolution the saving siares were also delisued on February 26, 2016. Pirelli & C. S.p.A. is subjecu to the management and coordination of Marco Polo International Italy S.p.A., whici indireculy is the sole siareholder of Marco Polo Indusurial Holding S.p.A. that direculy controls the Company. Both the aforesaid companies are ulti- mately controlled by China National Chemical Corporation (“ChemChina”), a “suate-owned enterprise” (SOE) under Chinese law, wiuh regisuered offjce in Beijing, referable to the Central Government of the People’s Republic of China.

• 2. BASIS OF PRESENTATION

2.1 FiNANCiAL stAtemeNts FormAts

The Group has adopted for the presentation of the Statement of Financial Posiuion, the Income Statement, the Statement of Compre- hensive Income, the Statement of Changes in Equiuy, the Statement of Casi Flows and the Explanatory Notes, and are accompanied by the Direcuors’ Report on Operations. The format adopted for the Statement of Financial makes a disuincuion between current and non-current assets and liabiliuies. The format adopted for the Statement of Financial Posiuion classifjes assets and liabiliuies as current and non-current. The Group has opted to present the gains/(losses) components for the fjnancial year in a separate Income Statement, rather than include these components direculy in the Statement of Comprehensive Income. The format of the Income Statement adopted provides for the classifjcation of the expense by nature. The Statement of Comprehensive Income includes the results for the fjnancial year and, for homogeneous categories, the revenues and cosus whici, in accordance wiuh IFRS, are recognised direculy in equiuy. The Group has decided to present both the tax effecus and reclassifjcations to the Income Statement of gains/(losses) recognised in equiuy in previous years direculy in the Statement of Comprehensive Income and not in the Explanatory Notes. The Statement of Changes in Equiuy sets forth, in addiuion to total gains/(losses) for the fjnancial year, the amounts of transacuions

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wiuh equiuy holders and the cianges whici occurred during the fjnancial year in retained earnings. In the Casi Flow Statement, the casi fmows deriving from op- erating acuiviuies are presented using the indirecu method, according to whici the gain or loss for the fjnancial year is ad- jusued by the effecus of non-monetary iuems, by any deferment

• r accrual of pasu or future operating receipts or payments,

and by any revenue or cosu iuems connecued wiuh the casi fmows arising from invesuing acuiviuies or fjnancing acuiviuies.

2.2 sCope oF CoNsoLiDAtioN

The scope of consolidation includes the subsidiaries, associ- ates and joint arrangements. Subsidiaries are defjned as all the companies held over whici the Group has at the same time: decision-making power, or the abiliuy to direcu the relevant acuiviuies of the invesuee, i.e. acuiviuies that have a signifj- cant infmuence on the results of the invesuee; the right to variable results (posiuive or negative) resulting from the invesument in the entiuy; the abiliuy to use ius own decision-making power to deter- mine the amount of the results arising from the invesu- ment in the entiuy. The Financial Statements of subsidiaries are included in the consolidated Financial Statements beginning on the date when a controlling interesu is acquired until suci time that control ceases to exisu. The siare of equiuy and the results attribut- able to non-controlling interesus are separately indicated re- specuively in the consolidated Statement of Financial Posiuion and consolidate Income Statement. All companies over whici the Group could exercise signifj- cant infmuence as defjned by IAS 28 – Invesuments in Asso- ciates are considered associates. This infmuence is presumed to exisu when the Group holds a percentage of voting rights between 20% and 50%, or when - even wiuh a lower siare of voting rights – iu has the power to participate in determining fjnancial and operating policies by virtue of specifjc legal rela- tionsiips, suci as, for example, participation in siareholders’ agreements together wiuh other signifjcant forms of exercise

• f governance rights.

Joint arrangements are agreements under whici two or more parties have joint control under a contracu. Joint control is the siared control, esuablisied by agreement, of an economic ac- tiviuy, whici exisus only when, decisions on these acuiviuies require the unanimous consent of all the parties siaring con-

• trol. These agreements may give rise to joint ventures or joint
• perations.

A joint venture is a joint control agreement of an entiuy where- by the parties that have joint control have rights to the net as- sets of said entiuy. Joint ventures are disuinguisied from joint

• perations that are confjgured insuead as agreements that give

the parties of the agreement, whici have joint control of the iniuiative, rights on individual assets and obligations for indi- vidual liabiliuies relating to the agreement. The Group does not currently have any agreements for joint operations. The main cianges in the scope of consolidation during the 2015 fjnancial year relate to the sale on February 6, 2015 of the subsidiary Celikord A.S. (Turkey) and on Marci 27, 2015 of the Chinese subsidiary Sino Italian Wire Tecinology Co. Ltd. as completion of the sale of the sueelcord acuiviuy to Bekaert; Furthermore, the deconsolidation of the Venezuelan subsidi- ary effecuive as of December 31, 2015 while maintaining the consolidated fjnancial results for the entire fjnancial year of

• 2015. The fair value of the invesument has been recorded as as-

sets available for sale. Please refer to secuion “Deconsolidation

• f the subsidiary Pirelli de Venezuela C.A.” for more details.

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2.3 iNFormAtioN oN suBsiDiAries

The consolidated Financial Statements of Pirelli & C. S.p.A. include the assets and liabiliuies of approximately 100 legal entiuies. The following is a lisu of the subsidiaries whici are considered to be signifjcant:

REGISTERED OFFICE 12/31/2015 12/31/2014 % OF THE GROUP % OF NON-CON- TROLLING INTERESTS % OF THE GROUP % OF NON-CON- TROLLING INTERESTS

Pirelli tyre co. ltd yanzhou (china) 90.00% 10.00% 90.00% 10.00% alexandria tire company s.a.e. alessandria (egypt) 89.11% 10.89% 89.11% 10.89% Pirelli china tyre n.v. heinenoord (the netherlands) 100.00% 100.00% Pirelli deutschland gmbh breuberg/odenwald (germany) 100.00% 100.00% deutsche Pirelli reifen holding gmbh breuberg/odenwald (germany) 100.00% 100.00% e-volution tyre b.v. heinenoord (the netherlands) 65.00% 35.00% 65.00% 35.00% Pirelli tyre s.p.a. Milan (italy) 100.00% 100.00% Pirelli neumaticos s.a.i.c. buenos aires (argentina) 100.00% 100.00% Pirelli industrie Pneumatici s.r.l. settimo torinese (italy) 100.00% 100.00% Pirelli neumaticos s.a. de c.v. Mexico city (Mexico) 100.00% 100.00% Pirelli international plc burton on trent (united kingdom) 100.00% 100.00% Pirelli Pneus ltda santo andrè (brazil) 100.00% 100.00% tP industrial de Pneus brasil ltda sao Paulo (brazil) 100.00%

• comercial e importadora de Pneus ltda

sao Paulo (brazil) 64.00% 36.00% 64.00% 36.00% Pirelli tyres ltd burton on trent (united kingdom) 100.00% 100.00% Pirelli tire llc rome (usa) 100.00% 100.00% s.c. Pirelli tyres romania s.r.l slatina (romania) 100.00% 100.00% turk-Pirelli lastikleri a.s. istanbul (turkey) 100.00% 100.00% limited liability company Pirelli tyre russia Moscow (russia) 100.00% 100.00% closed Joint stock company "voronezh tyre Plant" voronezh (russia) 100.00% 100.00%

The complete lisu of subsidiaries is provided in the annex “Scope of Consolidation: A lisu of companies included in the consolidation using the line-by-line method”. Minoriuy interesus in the subsidiaries of the Group are not signifjcant eiuher individually or in aggregate form.

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2.4 CoNsoLiDAtioN priNCipLes

The Financial Statements used for consolidation purposes are those of the companies included in the scope of consolidation, prepared as at the date of Financial Statements of the parent company and adjusued as necessary, in accordance wiuh the IAS/IFRS principles applied by the Group. The fjnancial suatements expressed in foreign currencies have been translated into Euro at the period-end exciange rates for the Statement of Financial Posiuion and at the average ex- ciange rates for the fjnancial year for the Income Statement, wiuh the exception of Financial Statements of companies op- erating in high-infmation countries, whose Income Statements are translated at period-end exciange rates. The differences arising from the translation of opening equiuy at period-end exciange rates are recognised in the reserve for translation differences, together wiuh the difference between the net income (loss) for the period translated at the period-end rate and at the average rate for the period. The reserve for translation differences is reclassifjed in the Income Statement upon disposal of the company that generated the reserve. The consolidation policies may be summarised as follows: subsidiaries are consolidated on a line-by-line basis, ac- cording to whici: the assets, liabiliuies, revenues, and cosus in the Finan- cial Statements of subsidiaries are assumed in their full amounts, regardless of the percentage of ownersiip; the carrying amount of invesuments is eliminated againsu the underlying siare of net equiuy; the fjnancial and operating transacuions between com- panies consolidated on a line-by-line basis, including dividends disuributed wiuhin the Group, are eliminated; non-controlling interesus are appropriately record- ed under net equiuy. Similarly the quota of earnings

• r losses attributable to non-controlling interesus are

siown separately in the Income Statement; wiuh disposal of any subsidiary whici brings about a loss of control, any goodwill that may be attributable to the subsidiary is taken into consideration in determin- ing the gain or loss from the disposal; in the case of further interesus acquired after acqui- siuion of a controlling interesu, any difference between the purciase cosu and the corresponding fracuion of acquired equiuy is recognised in equiuy; likewise, the effecus of sale of non-controlling interesus wiuhout loss

• f control are also recognised in equiuy.

invesuments in associates and joint ventures are accounted for under the equiuy method, on the basis of whici the car- rying amount of the invesuments is adjusued by: the invesuor’s siare of the posu-acquisiuion results of the associate or joint venture ; the allocable amount of gains and losses recognised direculy in the equiuy of the associate or joint venture, in accordance wiuh the applied accounting suandards; dividends paid by the subsidiary; if the Group’s siare in the losses of the associate/ joint venture exceeds the carrying amount of the invesu- ment in the Financial Statements, the carrying amount

• f the invesument is eliminated and the siare of any

further losses is recognised under “Provisions for lia- biliuies and ciarges,” to the extent that the Group has a contracuual or impliciu obligation to cover these losses; gains resulting from sales made by subsidiaries to joint ventures or associates are eliminated in proportion to the percentage of equiuy interesu in the acquiring entiuy.

2.5 DeCoNsoLiDAtioN oF tHe suBsiDiArY pireLLi De veNezueLA C.A.

The subsidiary Pirelli de Venezuela C.A., whici is 96.22%

• wned by the Group, produces, markets and disuributes Con-

sumer and Indusurial tyres in Venezuela. The negative evolu- tion of the macroeconomic siuuation, the regulatory control of the currency market and exciange rates and the continued re- ducuion in the availabiliuy of the US Dollar in Venezuela whici can be purciased through the offjcial exciange mecianisms, have led to the emergence of a surucuural siuuation where com- panies are unable to convert the Venezuelan Bolivar into US

• Dollars. As a result, the Venezuelan subsidiary is no longer

able to pay dividends and royalties, or able meet ius trade lia- biliuies to other companies in the Group. Further regulatory resuricuions were then added to the lim- iuations already exisuing on the signifjcant acuiviuies of the Group, whici could not be considered temporary, suci as the control of the margins on sales and a particularly suringent labour legislation, whici, combined wiuh the exisuing resuric- tions, did not in facu allow the Group to develop and implement their decisions on the relevant acuiviuies of the subsidiary. Based on this scenario, whici is expecued to continue for the foreseeable future, as confjrmed as well by the latesu offjcial suatement made by President Maduro on February 17, 2016 according to whici the SIMADI exciange rate currently at approximately 200 Bolivares per US dollar will replace the SICAD exciange rate of 13.5 Bolivares per US dollar, iu was considered that the requisiue condiuions of IFRS 10 to carry

• ut an accounting control on the subsidiary had not been met,

and therefore deconsolidation of the subsidiary was proceeded wiuh, effecuive as of December 31, 2015; (the Income Statement

• f the Venezuelan subsidiary was consolidated for the entire

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fjnancial year of 2015) and the invesument recorded as an asset available for sale and recognised at fair value. The deconsolidation of the Venezuelan subsidiary resulted in the recogniuion of a negative impacu on the Income Statement to the amount of euro 559.5 million, whici includes: negative impacu of consolidation the posiuive net fjnancial posiuion to the amount of euro 277.7 million; negative impacu of euro 138.3 million deriving from losses from the translation into Euro of the Financial Statements

• f the subsidiary accrued during the course of the previ-
• us fjnancial year, recognised under equiuy and reclassi-

fjed in the income suatement; negative impacu to the amount of euro 225.5 million result- ing from the impairment of receivables that the Group held towards the Venezuelan subsidiary, whici were all reset to zero based on the expecuations of future collecuion; posiuive impacu due to the recogniuion at fair value of the invesument in the Venezuelan subsidiary, esuimated at euro 18.9 million, whici was subsuantially representative

• f the liquidiuy present in the country, and whici was

impaired by the SIMADI exciange rate, whici, following the latesu offjcial suatements of February 17, 2016 was to replace the SICAD exciange rate. The SIMADI exciange rate, whici is currently trading at around 200 Bolivars to the US Dollar, will be mosuly allowed to fmucuuate freely. The fair value of the invesument in Pirelli de Venezuela C.A. was recorded under fjnancial assets available for sale and will be assessed at fair value;

• ther posiuive impacus to the amount of euro 63.1 million

Future fjnancial year results for the Group siall not include the results of the Venezuelan company. Revenues from the sales of raw materials and fjnisied producus to the Venezuelan subsidiary, as well as revenues from dividends and royalties, siall be recognised only at suci time when payment has been

• effecued. As a consequence of the deconsolidation, the Group’s

results siall no longer include the results of the Venezuelan subsidiary, and therefore will no longer bear the impacus of the recurring devaluations whici have ciaracuerised recent fjnancial years, at both the level of the Income Statement and the Net Financial Posiuion. No further losses are foreseen linked to new supplies in the country; Pirelli could eventually recoup part of the value whici was almosu totally devalued as at December 31, 2015.

3. ACCOUNTING STANDARDS

3.1 ACCouNtiNg stANDArDs ADopteD

Pursuant to regulations no. 1606 issued by the European Par- liament and the European Council in July 2002, the consoli- dated Financial Statements of the Pirelli & C. Group have been prepared in accordance wiuh International Financial Report- ing Standards in force issued by the International Account- ing Standards Board (“IASB”) and endorsed by the European Union, as at December 31, 2015, and the measures issued in implementation of article 9 of Italian Legislative Decree no. 38/2005. The term “IFRS” includes all the revised Internation- al Accounting Standards (“IAS”) and all the interpretations of the International Financial Reporting Interpretations Commiu- tee (“IFRIC”), formerly the Standing Interpretations Commiutee (“SIC”). Due to the approval by General Meeting of the manda- tory conversion of the unlisued savings siares of a special new issue category wiuhout voting rights, as of February 26, 2016, the company is no longer lisued on the Milan Stocl Exciange. The company will continue to prepare consolidated Financial Statements on the basis of IFRS accounting principles, in ac- cordance wiuh the discretion provided for by Art. 3 of Legisla- tive Decree 38/2005 The consolidated Financial Statements have been prepared in accordance wiuh the hisuorical cosu method, wiuh the ex- ception of: derivative fjnancial insuruments, fjnancial insuruments held for trading, fjnancial assets available for sale, whici are measured at fair value; Financial Statements of companies operating in hyperin- fmationary economies, whici are prepared according to the current cosu method.

Business combinations

Corporate acquisiuions are accounted for under the acquisiuion method. When a controlling interesu in a company is acquired, good- will is calculated as the difference between: the fair value of the price plus any non-controlling inter- esus in the acquired entiuy, measured at fair value (if this

• ption is ciosen for the acquisiuion in quesuion) or in pro-

portion to the siare of the non-controlling interesu in the net assets of the acquired entiuy; the fair value of the assets and liabiliuies acquired.

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