Annual Report - EDP

notes to the consolidated EDP and - Energias company de Portugal, financial S.A. statementsfor the years ended 31 december 2012 and 2011Notes to the Consolidated and Company Financial Statementsfor the years ended 31 December 2012 and 2011Revenue recognitionElectricity sales revenue is recognised when the monthly electricity invoices are issued, based on actual meter readings or estimated consumption based on thehistorical data of each consumer. Revenue relating to electricity to be invoiced, regarding consumption up to the balance sheet date but not measured, is bookedbased on estimates which take into consideration factors such as consumption in prior periods and analysis relating to the energy balance of the operations.The use of different estimates and assumptions can affect the Group’s revenue and, consequently, its reported results.Income taxesThe Group is subject to income taxes in several jurisdictions. Certain interpretations and estimates are required in determining the global amount of income tax.There are several transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Different interpretationsand estimates could result in a different level of income taxes, current and deferred, recognised in the year.In Portugal, the Tax Authorities are entitled to review the EDP, S.A. and its subsidiaries determination of its annual taxable earnings, for a period of five years for annualperiods starting from 2012, four years for annual periods of 2011 and 2010 and six years for previous annual periods in case of tax losses carried forward. As a result,it is possible that some additional taxes may be assessed, mainly as a result of differences in interpretation of the tax law. However, EDP Group and its subsidiariesbelieve that there will be no significant corrections to the income tax booked in the financial statements.Pensions and other employee benefitsDetermining pension and other employee benefits liabilities requires the use of assumptions and estimates, including actuarial projections, estimated rates of returnon investments, discount rates and pension and salary growth and other factors that can impact the cost and liability of the pension, medical plans and other benefits.Changes in the assumptions can materially affect the amounts determined.Provisions for dismantling and decommissioning of power generation unitsThe EDP Group considers that there are legal, contractual or constructive obligations to dismantle and decommission of Property, plant and equipment assetsallocated to electricity generation operations. The Group records provisions in accordance with existing obligations to cover the present value of the estimated cost torestore the locations and land where the electricity generations units are located. The calculation of the provisions is based on estimates of the present value of thefuture liabilities.The use of different assumptions in the estimates and judgement from those referred to could lead to different financial results than those considered.Measuremet criteria of the concession financial receivables under IFRIC 12In 2012, was published in Brazil the Provisional Measure 579/12, meanwhile converted into Law 12.783/13, which determines the amount of the indemnizationpayable to the distribution companies regarding the assets not amortised or depreciated at the end of each concession, that should be determined based in themethodology of the new replacement value. This methodology determined an increase in the indemnization amount ( financial asset IFRIC 12 )of Bandeirante andEscelsa, booked, under IFRIC 12 terms, against other operating income. This amount corresponds to the difference between the new replacement value versus thehistorical cost.4. FINANCIAL-RISK MANAGEMENT POLICIESFinancial risk managementThe EDP Group’s business is exposed to a variety of financial risks, including the effect of changes in market prices, foreign exchange and interest rates. The Group’sexposure to financial risks arises essentially from its debt portfolio, resulting in interest and exchange rate exposures. The unpredictability of the financial markets isanalysed on an on-going basis in accordance with the Group’s risk management policy. Derivative financial instruments are used to minimise potential adverseeffects, resulting from interest rate and/or foreign exchange rate risks on EDP Group's financial performance.The management of financial risks of EDP, S.A. and other EDP Group entities is undertaken centrally by the Financial Department of EDP S.A., in accordance withpolicies approved by the Executive Board of Directors. The Financial Department identifies, evaluates and submits to the Board for approval, hedging mechanismsappropriate to each exposure. The Executive Board of Directors is responsible for the definition of general risk management principles and the establishment ofexposure limits.All transactions undertaken using derivative financial instruments require prior approval by the Executive Board of Directors, which defines the parameters of eachtransaction and approves the formal documents describing their objectives.As for the subsidiaries in Brazil, the Local Risk Management Department is responsible for the management of market risks arising from fluctuation in interest andexchange rates. This management is performed according to the principles/policies set by the EDP Group for this geographical area.Exchange-rate risk managementEDP, S.A. Financial Department is responsible for managing exchange rate risk exposure resulting from foreign currency loans, seeking to mitigate the impact ofexchange rate fluctuations on the financial costs of the EDP Group companies and, consequently, on the consolidated results, through exchange rate derivativefinancial instruments and/or other hedging structures.The policy implemented by the EDP Group consists of undertaking derivative financial instruments to hedge exchange rate risk with characteristics similar to those ofthe hedged asset or liability. The operations are revalued and monitored throughout their useful lives and, periodically, their effectiveness in controlling and hedgingthe risk that gave rise to them is evaluated.190A World Full Of Energy