Annual Report - EDP

notes to the EDP consolidated - Energias de Portugal, and company S.A. financial statementsNotes to for the the Consolidated years and ended Company 31 december Financial Statements 2012 and 2011for the years ended 31 December 2012 and 2011The regulatory authority of Brazil, Agência Nacional de Energia Elétrica (ANEEL) issued on 7 February 2012, the Normative Resolution 474, which revised the economicuseful life of assets associated to concessions, and established new annual depreciation rates with retroactive effect from 1 January 2012 onwards. Theimplementation of this change in annual depreciation rates led to an increase in the average usefull life of Bandeirante's and Escelsa's assets from 22 to 24 years and20 to 22 years, respectively.Usefull lives of generation assets - Hydro independent generator in BrazilThe hydro generation assets in Brazil for Independent Generators are amortised during the estimated useful lives, considering the existing facts and circumstances atthe date of preparation of the financial statements which includes, among other issues, EDP's best estimates of the useful lives of such assets, which are consistentwith the useful lives defined by the regulator (ANEEL), the respective contractual residual indemnisation values at the end of each concession period, as well as relatedtechnical and legal opinions. The remaining period of amortisation and the indemnisation values at the end of the concessions, may be influenced by any changes inthe Regulatory Legal Framework in Brazil.Tariff adjustmentsTariff adjustments in Portugal represent the difference between costs and income of the National Electricity and Gas System, estimated at the beginning of each periodfor purposes of calculating the tariff, and the actual costs and income of the System established at the end of each period. The tariff adjustments assets or liabilities arerecovered or returned through electricity tariffs to customers in subsequent periods.Considering the current legislation which establishes an unconditional right of the regulated operators to recover or return the tariff adjustments, the EDP Groupbooked in the caption Electricity and Gas sales of the period, the effects of the recognition of the tariff adjustment, against Other debtors / Other Creditors. Under thecurrent legislation, regulated companies can also sell to a third party, in whole or in part, the right to receive the tariff adjustments through the electricity and gastariffs.Tariff deficitIn Portugal, the Decree-Law 237-B/2006, of 19 December 2006, recognised an unconditional right of the operators of the binding sector to recover the tariff deficit of2006 and 2007, regardless of the form of its future payment or in situations of insolvency and cease of operations. The Decree-Law also allows the transfer of the tariffdeficit collection right to a third party. In 2008, the EDP Group sold unconditionally the tariff deficit of 2006 and part of deficit of 2007. In 2009, the tariff deficits regarding2008 and the remaining part of 2007 were transferred, as well as the non-regular tariff adjustment regarding the estimated overcost of the special regime productionfor 2009. In September 2011, the EDP Group sold unconditional tariff adjustment for the additional cost of cogeneration for the period 2009-2011.In Spain, the Royal Decree Law 6/2009, endorsed on 7 May 2009 establishes, among other matters: (i) the possibility to securitise the Spanish tariff deficit supported bythe electric sector companies using a State guarantee through the tariff deficit amortisation fund; (ii) the calendar for the elimination of the tariff deficit, such that on 1January 2013, access tariffs will be enough to cover regulated activities’ costs, without the creation of an ex-ante tariff deficit and, in order to ease this gradualelimination, the Royal Decree Law also provides for the passage of some costs currently included in the electricity tariff to the Spanish State Budget; (iii) the revocation,as from 1 July 2009, of Royal Decree Law 11/2007, which established the obligation to return the additional revenues obtained from the incorporation of CO2 costs inmarkets prices, and which was to be in force until 2012; (iv) the creation of a social subsidy, which translates to a lower tariff for low income consumers and (v) thecharge to electric companies of the costs with the management and treatment of radioactive waste from nuclear power plants and fuels consumed.The Royal Decree Law 14/2010, endorsed in 2010 addressed the correction of the tariff deficit of the electricity sector. Of this decree, the temporal mismatch of thesettlement of 2010 came to be considered as a revenue deficit of the electricity system and established a set of measures so that the various industry playerscontribute to the reduction, including: the establishment of the generation rates, financing plans of energy efficiency and savings by the generation companies, andvarious regulatory measures that help reduce the additional costs of certain technologies in the special regime.In 2012 was published the Royal Decree Law 1/2012 establishing a moratorium on adding new facilities in the pre-allocation remuneration and the Royal Decree Law13/2012 which provides reductions in the remuneration for the distribution activity and an extraordinary decrease on other regulated activities. Both decrees wereadopted with urgency to reduce the tariff deficit to reach the limit provided for 2012 in the Royal Decree Law 14/2010.EDP Group considers, based on the legislation issued, that the requirements for the recognition of tariff deficits as receivables against the income statement areaccomplished.Impairment of long term assets and GoodwillImpairment tests are performed, whenever there is a trigger that the recoverable amount of property, plant, equipment and intangible assets is less than thecorresponding net book value of the assets.On an annual basis the Group reviews the assumptions used to assess the existence of impairment in goodwill resulting from acquisitions of shares in subsidiaries.The assumptions used are sensitive to changes in macroeconomic indicators and business assumptions used by management. The goodwill in associates isreviewed when circumstances indicate the existence of impairment.Considering the uncertainties regarding the recoverable amount of property, plant and equipment, intangible assets and goodwill as they are based on the bestinformation available, changes in the assumptions can result in changes in the determination of the amount of impairment and, consequently, on the Group’s results.Doubtful debtsImpairment losses related to doubtful debts are estimated by EDP based on the estimated recoverable amounts, the date of default, debt write offs and other factors.Certain circumstances and facts may change the estimated impairment losses of doubtful debts, namely changes in the economic environment, economic sectortrends, client’s credit risk and increases in the rate of defaults. The evaluation process in determining whether an impairment loss should be recorded in the incomestatement is subject to numerous estimates and judgement. Changes in the estimates and judgement could change the impairment test results which could affect theGroup’s reported results.EDP - Annual Report 2012189