New accounting principles

Following the endorsement of the European Union, as from the 1st January 2013 new principles and amendments shall be applied. The most relevant changes regarding the Group’s consolidated financial statements at 31 December 2013 are described in the following notes. In addition, the main documents issued by the International Accounting Standard Board, that could be relevant for the Group, but not yet effective, are described. The new rules are presented by subject.

Amendments to IFRS 7 and IAS 32 – Offsetting financial assets and financial liabilities

From 1 January 2013 amendments to IFRS 7 published in December 2011 become effective. They concern the new accounting disclosure requirements for the offsetting of financial assets and financial liabilities. In particular gross and net amounts of assets and liabilities subject to offsetting shall be disclosed.

Furthermore the IASB also clarified offsetting requirements publishing the amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities.

A financial asset and a financial liability shall be offset and the net amount presented in the statement of financial position when, and only when, an entity:

  • A financial asset and a financial liability shall be offset and the net amount presented in the statement of financial position
    when, and only when, an entity:
  • intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously

If both conditions are met net positions are presented in balance sheet.

The effective date is 1 January 2014 and subsequent periods.

Amendments to IFRS 7 and IAS 32 has been endorsed by European Regulation (UE) n. 1256 of 13 December 2012.

IFRS 10, 11, 12, Amendments to IAS 27 and IAS 28

Concerning the Consolidation project, on May 12 2011, the IASB issued IFRS 10 Consolidated Financial Statements, which
replaced IAS 27 and the interpretation of SIC12 Consolidation - Special Purpose Entities, IFRS 11 Joint Arrangements, which replaced IAS 31 and IFRS 12 Disclosure of Interests in Other Entities which contains the disclosure requirement for IFRS 10,
11, 12. IFRS 10 unified and specified the consolidation principles in IAS 27 and SIC 12. According to IAS 27 control is defined as the power to govern the financial operating policies of an entity to obtain benefits from its activities and for special purpose vehicles SIC 12 indicates the majority of the risk and rewards that can be obtained from the investment as a criterion for their consolidation. According to IFRS 10 an investor has control over another company when it jointly has:

  • power to direct the "significant activities" (which influence the economic returns)
  • exposure to returns of the investee ability to affect those returns through its power over the investee
  • ability to affect those returns through its power over the investee

IFRS 11 defined a joint arrangement as an arrangement of which two or more parties have joint control. Distinguishes between joint operations and joint ventures: a joint operation is an agreement whereby the parties have rights to the assets, and obligations for the liabilities relating to the arrangement. For  accounting purposes, the assets and liabilities that are part of the arrangement are reflected in the financial statements using the applicable IFRS. A joint venture is an agreement whereby the parties have rights to the net assets of the arrangement. For accounting purposes, the joint venture is consolidated using the equity method (proportional method no longer available as optional IFRS 11).

IFRS 12 established the minimum information designed to understand the nature and risk of the interest held by an entity in one or other entities and the effects that these interest bearing financial position, performance and cash flows of 'entity.

On 31 October 2012, the IASB published amendments to IFRS 10, IFRS 12 and IAS 27 Investment Entities. The standard defines investment entities and requires that they measure investments in subsidiaries at fair value through profit or loss excluding line by line consolidation. However, the parent company of an investment company shall consolidate the subsidiaries of the investment entity.

An investment company is a company that:

  • obtains funds from one or more investors for the purpose of providing those investor(s) with investment management services;
  • commits to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and;
  • measures and evaluates the performance of substantially all of its investments on a fair value basis.

On 28 June 2012, the IASB published the amendment "Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance".
The guidance introduces limits to the application of the new standards on the consolidated IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interest in Other Entities, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures, which will become effective for annual periods beginning on 1 January 2014, following the postponement.

IFRS 13 – Fair value measurement

From 1 January 2013 IFRS 13 is effective. The principle offers a unique guide for the measurement and disclosure of fair value, defined as the price that would be received in the case of sale of the asset or paid to transfer the liability in an ordinary transaction market.

The fair value is the price of the assets and liabilities in its principal or most advantageous market between market participants at the measurement date in the current market conditions (i.e., an exit price from the perspective of a market participant that holds the asset or obligation). Assets and liabilities measured at fair value are classified for accounting purposes in accordance with a fair value hierarchy into three levels:

  1. quoted prices in active markets for identical financial instruments
  2. inputs other than those included in Level 1 that are observable for the asset or liability, either directly (such as quoted prices for similar instruments in active markets), or indirectly (i.e. derived from prices)
  3. inputs for the asset or liability that are not based on observable market data.

IFRS 13 has been endorsed by European Regulation (UE) n. 1254 of 11 December 2012.

IAS 19 revised – Employee benefits

From 1 January 2013 IAS 19 Employee Benefits revised in June 2011 become effective, and introduced the following changes:

  1. Elimination of the option not to recognize part of the actuarial gains/losses arising from changes in estimates of obligations related to the defined benefit plan or changes in the fair value of the assets of the plans, that is the amendment removed the option to use the corridor method to recognize offbalance- sheet profits or losses.
  2. New disclosure in the profit or loss account of interest expenses arising from defined benefit plans

More specifically, the current service cost is recorded as personnel expenses, interest expense related to the component of the "time value" in the actuarial calculations shall be accounted for in financial expenses. Finally, the gains / losses arising from the  re-measurement of defined benefit plans and of the assets of the plan, as a result of subsequent changes of assumptions used for valuations, shall be accounted for in the other comprehensive income (without recycling).

3. Increased disclosure in relation to the characteristics of defined benefit plans and the risks deriving from them, the amounts recognized in the financial statements and participation in plans for more than one employer.

The amended IAS 19 is effective for annual periods beginning 1 January 2013 or later and has been endorsed by European Union with Regulation (EU) n. 475 of 5 June 2012. The estimated impacts on the Group are described in the relevant section of the note.

IAS 1 Presentation of financial statements

From 1 January 2013 amended IAS 1 Presentation of Financial Statements became effective, requiring the grouping of items presented within the statement of other comprehensive income.
All items for which recycling of previously accounted unrealized gains and losses to profit or loss is permitted (ie. unrealized gains and losses on available for sale assets) should be grouped together and presented separately form items forwhich recycling is not permitted (ie revaluation of land and buildings, actuarial gains on defined benefit plans).

This amendment has been endorsed by European Union with Regulation (UE) n. 475 of 5 June 2012.

IFRS 9 – Financial instruments

On 12 November 2009, the IASB published IFRS 9 - Financial Instruments, the same principle has been subsequently amended. The principle which shall be applied from 1 January 2015 retrospectively, it is the first part of a phased process that aims to replace IAS 39 and introduces new requirements for the classification and measurement of financial assets and liabilities. In particular, with regards to financial assets, the new standard uses a single approach based on a business model and the contractual cash flow characteristics of the financial  asset in order to determine the criteria, replacing the many different rules in IAS 39. For financial liabilities, however, the main change concerns the accounting treatment of changes in fair value of a financial liability designated as at fair value through profit or loss, in the event that the change is due to changes in the credit risk of the liability. Under the new standard, such changes shall be recognized in other comprehensive income / (loss) and no longer in the income statement.

The other phases of the project address the accounting for hedges (hedge accounting) and impairment losses (impairment) on financial instruments.

IFRS 9 – Limited Amendments (Exposure draft)

On 28 November 2012, the IASB published the Exposure draft “IFRS 9 – Limited Amendments”. The document’s purpose is to consider the interaction between the classification and measurement of financial assets with the insurance contracts project and to clarify classification and measurement requirements. The exposure draft reaffirms the basic principles of IFRS 9 Financial Instruments and introduces an amendment to the contractual cash flow characteristics assessment to allow financial instruments to be classified at amortised cost. The contractual cash flows shall represent solely payments of principal and interests on the principal amount outstanding. In making such an assessment an entity considers benchmark cash flows and if the modification of the contractual characteristics are “more than insignificantly different” than the benchmark cash flows, the contractual cash flows are not solely payments of principal and interests.

Furthermore the exposure draft introduces a third measurement category to be measured at fair value through Other comprehensive income for financial instruments held within a business model in which assets are managed both in order to collect contractual cash flows and for sale. These proposed amendments will be applicable starting on or after 1st January 2018.

IFRS 9 – Financial Instruments – Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39

On 19 November 2013 , the IASB issued IFRS 9 Financial Instruments - Hedge Accounting and Amendments to IFRS 9 , IFRS 7
and IAS 39. The new standard has completed the section relating to hedge accounting of the project to replace IAS 39 Financial Instruments: Classification and Measurement and introduced important changes to the effective date of IFRS 9 . The most important new features relate to the effectiveness test of the hedging relationships, the extension of possible hedging instruments and hedged items and the discontinuation or modification of the hedging relationship. The new principle broadened the scope of eligible hedged items and hedging instruments and replaced the threshold of hedge effectiveness established by IAS 39 Financial Instruments:
Recognition and Measurement ( 80% -125% ) with an approach that is based on the economic relationship between the hedged
item and the hedging instrument defined by the risk management of the company. With regard to the effective date the amendment
to IFRS 9 has determined that :

  • The principle is available for application (including classification and measurement ) ;
  • Until the project on macro hedges (hedges of open portfolios of financial instruments) is completed the entity will be able to choose to continue to apply IAS 39 to all hedging relationships ;
  • The effective date of January 1, 2015 has been removed and the entire IFRS 9 will be effective on January 2018.

IFRS 9 – Financial Instruments – Expected Credit Losses (Exposure Draft)

On 7 March 2013 the IASB published the exposure draft “Expected Credit Losses”, that introduced an expected credit losses
approach for financial assets measured at amortised cost. If, at the reporting date, effective credit losses exceed those expected at
initial recognition an impairment loss shall be recognized in the profit or loss. The exposure draft indicates three stages that reflect
the deterioration of credit quality:

  • stage 1 – financial instruments that have not deteriorated significantly in credit quality since initial recognition or that have low credit risk (i.e. investment grade). For these items, 12-month expected credit losses are recognized and interest revenue is calculated on the gross carrying amount of the asset;
  • stage 2 – financial instruments that have deteriorated significantly in credit quality since initial recognition but do not have objective evidence of a credit loss event. For these items, lifetime expected credit losses are recognized but interest revenue is still calculated on the gross carrying amount of the asset;
  • stage 3 – financial assets that have objective evidence of impairment at the reporting date. For these items, lifetime expected
    credit losses are recognized and interest revenue is calculated on the net carrying amount (i.e. reduced for expected credit losses).

IFRS 4 – Insurance Contracts (Exposure draft)

On 20 June 2013, the IASB published the exposure draft "Insurance Contracts" . The E.D. proposes a new model for the measurement of insurance contracts that will replace the current IFRS 4 - Insurance Contracts. The valuation method is structured on a Building Block Approach based on the expected value of future cash flows, weighted by the probability of occurrence, on a risk adjustment and on a margin for the services provided within the contract ("contractual service margin"). The contractual service margin is a component of the compensation that the insurer requires for its activity, that is characterized by uncertainty and various types of risk. A simplified approach ("Premium Allocation Approach") is permitted if the coverage period of the contract is less than one year, or if the model used for the assessment provides a reasonable approximation compared to the building block approach. The effective date is three years after the publication of the final standard. Early application is permitted.

Other changes not significant for the Group
Change Effective Date
Date of publication
Annual improvements to IFRSs 2009-2011 cycle....
1 January 2013
May 2012
Narrow scope amendments to IAS 39 Financial Instruments - Novation of Derivatives and Continuation of Hegde Accounting 1 January 2014
June 2013
Narrow scope amendments to IAS 36 Impairment of Assets - Recoverable Amount Disclosure for Non-Financial Assets
1 January 2014
May 2013
Annual improvements to IFRSs 2010-2012 cycle 1 July 2014
December 2013
Annual improvements to IFRSs 2011-2013 cycle
1 July 2014
December 2013
Narrow scope amendments to IAS 19 Employee Benefits - Defined Benefit Plans: Employee Contributions
1 July 2014
November 2013

Changes in accounting policies and changes in presentation of financial statements

IAS 19 revised

Starting from 1st January 2013 the IAS 19 revised is effective, introducing several changes compared to previous standard, among which:

  • actuarial gains and losses on defined benefit plan are now recognised in the other comprehensive income (OCI), withoutpossibility of recycling into profit or loss;
  • new requirement to recognised interest on the net defined benefit liability (assets), calculated using the discount rate tomeasure the defined benefit obligation; as a consequence the expected return on plan assets are no longer recognised inprofit or loss;
  • unvested past service costs are now immediately recognised in profit or loss;
  • additional disclosures.

The main impact for the Group is the elimination of the corridor option previously applied to report off-balance sheet the actuarial gains and losses relating to defined benefit obligations and related plan assets. These components are recognised in OCI according to the new standard.
IAS 19 has been applied retrospectively from 1st January 2012. As a consequence, the comparative periods included in the financial statements and notes of this report were restated according to the new standard. The impact on the financial position from the revised IAS 19 is presented below.

(€ million)
31/12/2012 01/01/2012
Impact of defined benefit plan obligation
-1,151 -415
Impact on deferred taxes and deferred policyholders liabilities
310 103
Net impact on equity
-841 -312
Equity attributable to the Group
-815 -312
Equity attributable to minority interests
-26 0

The impact of IAS 19 on the income statement at 31.12.2012 is a reduction of costs equal to € 7 million (€ 4 million on the net result).

Changes in the accounting rules and in the financial statements

According to IFRS 5 – Non-current assets held for sale and discontinuing operations, commencing with this report, the comparative periods of income and expenses of the income statement and the cash flow statement have been restated by excluding the contribution of the non-current assets held for sale and discontinuing operations, namely Fata Assicurazioni Danni S.p.A, and the operations disposed of during the period - Generali U.S. Holdings and its subsidiaries, Seguros Banorte Generali and Pensiones Banorte Generali. According to this change in presentation, all the related tables included in the notes were restated accordingly.
Moreover, the comparative amounts of the items of shareholders equity related to the other comprehensive income were restated
by reclassifying the other comprehensive income from discontinuing operations into the specific items in the Other Comprehensive
Income from non-current assets or disposal groups classified as held for sale.
Starting from 31.12.2013 and with retrospective application, hedging derivatives have been presented as financial instruments at fair value through profit or loss and no longer among the related accounting categories of the hedged item. The comparative figures were restated accordingly.

Accounting treatment of shares of Banca d’Italia classified as equity investment available for sale

Generali holds at 31 December 2013, indirectly through Generali Italia, 19,000 shares of Banca d’Italia, corresponding to 6.33% of its share capital .

Law Decree 133/2013 introduced many innovations in the discipline regarding the capital of Banca d’Italia, among which the capital increase to € 7.5 billion, the change of ownership rights (the annual dividend, payable out of the net profits, is set up to a maximumof 6% of the capital) and administrative rights (the shareholding limit, both direct and indirect, to the extent of 3%) as well as the changes of the regime of transfers of new shares.

These ammendments have been incorporated in the new statute of Banca d’Italia, approved during the extraordinary meeting on 23
December 2013, approved by decree of the Presidente della Repubblica of 27 December 2013. Therefore, the new regulations are already effective for the 2013 financial statements of insurance companies that hold shares in the capital of Banca d’Italia. In addition, article. 6, section 6-ter of the law Decree 133/2013, as amended by the law of conversion, provides that the new statute
"enters into force on 31 December 2013 and that the financial statements of Banca d’Italia for the year ended 2013 are prepared in accordance with the relevant provisions."

The unique nature and atypical characteristics of the transaction, also in relation to the fact that it is a public entity whose participatory governance is also drawn by the legislator, required the use of a high degree of professional judgment by management in defining the most appropriate method for the accounting representation of the case.

In order to apply the proper accounting treatment for the transaction described above, it was necessary to define whether the
cancellation and the new issuance of Banca d’Italia shares determined the derecogntion of the former shares in Banca d’Italia and the recognition of new shares. The international accounting standards do not specifically regulate this type of transaction, therefore,
it was necessary to refer to the accounting treatment for transactions that have similar characteristics.

Given that the amendments to the statute of Banca d’Italia fundamentally affect the characteristics its shares, this operation was treated as cancellation of existing and re-issuance of new shares of Banca d’Italia, triggering the recognition of previously
accounted unrealised gains in the income account, according to the requirements IAS 39. Therefore, the difference between the carrying value of the old shares and the current value of the new shares has been recognized in the income statement.
In this sense the motivations and the basis of the recent position taken by IVASS on the accounting treatment in the individual financial statements of insurance companies confirming the need for representing the operation as a realization event, also for solvency purposes, were considered important and significant in the interpretation process by analogy. It is also noted that the
competent authorities have jointly announced that an in-depth analysis is currently ongoing at international competent bodies on the accounting treatment to be adopted in relation to the transaction in question with reference to the financial statements in accordance with International Accounting Standards (IAS / IFRS) and suggested the broader disclosure. Such analysis might bring out adifferent interpretation of accounting principles about the effects of the current approach, determining the inclusion of the aforementioned revaluation in other comprehensive income and not in profit or loss, without affecting the total comprehensive
income.

The transaction led to the recognition of a gross capital gain of € 290 million and the recognition of new shares for € 475 million, corresponding to a valuation of € 25,000 per share. The related tax impact of € 35 million was also accounted for.

 

Assicurazioni Generali S.p.A. - C.F. e P.IVA 00079760328