VINCI - 2005 annual report

Provisions for completion losses on contracts and construction project
liabilities are made mainly when end-of-contract projections, based on
the most likely estimated outcome, indicate a loss, and when work needs
to be carried out in respect of completed projects under completion
warranties.
Provisions for disputes connected with operations mainly relate to
disputes with customers, sub-contractors, joint contractors or suppliers.
Restructuring provisions include the cost of plans and measures for which
there is a commitment whenever these have been announced before the
year end.
Provisions for other current liabilities mainly comprise provisions for late
delivery penalties, for individual dismissals and for other risks related to
operations.
Non-current provisions
Non-current provisions are provisions not directly linked to the operating
cycle and that are generally likely to reverse in more than one year.
They include in particular provisions for disputes.
Provisions for major repairs are made in respect of contractual obligations
to return assets operated under concessions to good condition. These are
calculated at the end of each period on the basis of a work programme
covering several years which is reviewed annually to take account of planned
expenditure.
That part of non-current provisions that matures within less than one year
is shown under current provisions.
Financial debt (current and non-current)
Financial debt comprises bonds and other loans and is recognised at
amortised cost using the effective interest rate method. Under this method,
the redemption premiums and issuance costs, shown as a deduction from
the nominal amount of the liability, are included in the cost of borrowing.
Under this method, the interest expense is recognised actuarially under
the cost of gross financial debt.
This heading also includes the debt component of the OCEANE bonds.
An OCEANE bond is a hybrid instrument that includes a “debt” component
and an “equity” component that corresponds to the option for
conversion into a set number of VINCI shares granted to the holder.
In accordance with IAS 32, the issue price of the hybrid instrument is
apportioned between its debt component and its equity component, the
equity component being defined as the difference between the issue price
and the debt component. The debt component corresponds to the fair
value of a debt having the same features but without the conversion option
plus the fair value of issuers’ calls and investors’ puts, if any. The value
attributed to the conversion option is not altered during the term of the
loan. The debt component is measured using the amortised cost method
over its estimated term. Issuance costs are allocated proportionately
between the debt and equity components.
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VINCI 2005 ANNUAL REPORT
The part at less than one year of borrowings is included in current
borrowings.
Fair value of derivative financial instruments
(assets and liabilities)
The Group uses derivative financial instruments to hedge its exposure
to market risks (interest rates, exchange rates, equity prices). Most interest
rate and exchange rate derivatives used by VINCI may be considered as
hedging instruments. Recognition as a hedging instrument is applicable if:
– the hedging relationship is clearly defined and documented at the date
when it is set up;
– the effectiveness of the hedging relationship is demonstrated from the
outset, and regularly while it is in place.
Financial instruments considered as hedging instruments
Derivative financial instruments considered as hedging instruments are
systematically recognised in the balance sheet at fair value. Nevertheless,
their recognition varies depending on whether they are considered as:
– a fair value hedge of an asset or liability or of a firm commitment to buy
or sell an asset;
– a cash flow hedge; or
– a hedge of a net investment in a foreign entity.
– Fair value hedge
A fair value hedge enables the exposure to the risk of a change in the fair
value of an asset, a liability such as fixed rate loans and borrowings, assets
and liabilities denominated in foreign currency or firm commitments not
recognised, to be hedged.
Changes in the fair value of the hedging instrument are recognised in
profit or loss for the period. The impact of the revaluation of the hedged
item is recognised symmetrically in profit or loss for the period. Except
for the ineffective part of the hedge, these two revaluations offset each
other within the same line items in the income statement.
– Cash flow hedge
A cash flow hedge allows the exposure to variability in future cash flows
associated with a recognised asset or liability, or a highly probable forecast
transaction, to be hedged.
Changes in the fair value of the derivative financial instrument are recognised
net of tax under equity for the effective part and in profit or loss for
the period for the ineffective part. Cumulative gains or losses in equity
must be reclassified in profit or loss under the same line item as the hedged
item – i.e. under operating income and expenses for cash flows from
operations and under financial income and expense otherwise - whenever
the hedged cash flow affects profit or loss.
If the hedging relationship is interrupted, in particular because it is no
longer considered effective, the cumulative gains or losses in respect of
the derivative instrument are retained in equity and recognised symmetrically
with the cash flow hedged. If the future cash flow is no longer
highly probable, the gains and losses previously recognised in equity are
immediately taken to profit or loss.