In addition to the Statement of Earnings, Balance Sheet and Statement of Cash Flows, the Consolidated Financial Statements also include a Statement of Changes in Equity and a Statement of Recognized Income and Expense. Segment reporting is provided in these Notes.
For purposes of clarity, a number of items are combined in the Statement of Earnings and in the Balance Sheet. These items are broken down into their constituents and commented on elsewhere in these Notes. The Statement of Earnings is presented using the nature of expense method of analysis.
The Consolidated Financial Statements are presented in euros.
The Consolidated Financial Statements relate to the 2008 fiscal year, comprising the reporting period from January 1 to December 31, 2008. Corresponding prior-year figures are stated.
The Executive Board of HOCHTIEF Aktiengesellschaft released the financial statements for publication on February 16, 2009. They will be approved at the Supervisory Board meeting on March 18, 2009.
All monetary amounts in the text of these Notes are rounded to the nearest thousand euros unless specifically stated otherwise.
Holdings in subsidiaries or associated companies or jointly controlled entities deemed to be of minor significance from a Group perspective are not consolidated and are accounted for in accordance with IAS 39.
The combined list of subsidiaries, associates and other equity interests held by the HOCHTIEF Group and HOCHTIEF Aktiengesellschaft (pursuant to Sections 285 (11) and 313 (2) 1-4 of the German Commercial Code (HGB)) is published in the electronic Bundesanzeiger (Federal Official Gazette). The main consolidated subsidiaries and equity-method investments and other participating interests are listed on pages 188 – 189.
Some subsidiaries included in the Consolidated Financial Statements make use of the provision in Section 264 (3) of the German Commercial Code not to publish their annual financial statements in the electronic Bundesanzeiger. A list of the companies that make use of this exemption is included on page 187.
The Consolidated Financial Statements as of December 31, 2008 include HOCHTIEF Aktiengesellschaft and a total of 58 German and 340 foreign consolidated companies. The number of consolidated companies showed a net increase of 31 over the previous year. Thirteen German and 41 foreign companies were consolidated for the first time in 2008. These primarily relate to the Asia Pacific (19), Americas (10) and Real Estate (9) divisions. Most companies added in the Asia Pacific division are in the infrastructure sector. The additions in the Americas division mostly relate to joint ventures at Turner and those in the Real Estate division mostly to project companies.
Five domestic and 18 foreign companies have been removed from the consolidated group. These include five domestic mergers. The foreign companies relate to seven removed on the transfer of Leighton subsidiary Gulf Leighton L.L.C. to associate Al Habtoor Engineering Enterprises Co. L.L.C. plus eight project companies in the Asia Pacific division. An entity is generally added to or removed from the consolidated group at the time the equity stake in the entity is acquired or disposed of.
Fifty-two affiliated companies not material to the Group's financial position and results of operations were not consolidated in the year under review. Their combined sales represented less than one percent of consolidated sales.
Fifteen domestic and 101 foreign associates were accounted for using the equity method. This number showed a net increase of three, with 25 companies added and 22 removed from the category. Most of the entities added and removed from the category were project companies in the Asia Pacific division. Due to their minor significance, a further 23 companies were not accounted for using the equity method.
A total of EUR 47,476,000 was paid out in cash in 2008 under asset deals, for purchases of companies consolidated for the first time and to increase existing shareholdings. Acquisitions affected earnings and the balance sheet as follows:
| (EUR million) | 2008 | 2007 |
|---|---|---|
| Non-current assets | 23,703 | 321,819 |
| Current assets excluding cash and cash equivalents | 32,448 | 78,178 |
| Cash and cash equivalents | 758 | 78,532 |
| Assets | 56,909 | 478,529 |
| Provisions | 165 | 28,572 |
| Other liabilities | 27,950 | 186,054 |
| Liabilities | 28,115 | 214,626 |
| Sales | 54,690 | 144,938 |
| Profit before taxes | 2,231 | 4,286 |
Prior-year acquisitions mostly related to the purchase of 100 percent of Flatiron Construction Corp.
Income, expenses, receivables and liabilities between consolidated companies are eliminated. Unrealized intercompany profits and losses are eliminated unless they are of minor significance. Any impairment losses recognized for consolidated companies in their separate financial statements are reversed.
The same policies apply for equity-method investments. These include the Group's associates and jointly controlled entities. Any goodwill increases the carrying amount of an investment. Like other goodwill, goodwill on equity-method investments is not amortized. Reductions in carrying amount due to impairment are reported in the share of profits and losses of equity-method associates and jointly controlled entities. The financial statements of all equity-method investments are prepared in accordance with uniform Group accounting and valuation principles.
| (In EUR) | Annual average | Daily average at reporting date | ||
|---|---|---|---|---|
| (All rates in EUR) | 2008 | 2007 | 2008 | 2007 |
| 1 US dollar (USD) | 0.68 | 0.72 | 0.72 | 0.68 |
| 1 Australian dollar (AUD) | 0.57 | 0.61 | 0.49 | 0.60 |
| 1 British pound (GBP) | 1.25 | 1.46 | 1.05 | 1.36 |
| 100 Polish zloty (PLN) | 28.35 | 26.49 | 24.08 | 27.83 |
| 100 Czech koruna (CZK) | 3.99 | 3.61 | 3.72 | 3.76 |
| 100 Chilean pesos (CLP) | 0.13 | 0.14 | 0.11 | 0.14 |
Financial statements of foreign companies are translated by applying the functional currency approach. As all companies outside the euro area operate autonomously in their own national currencies, their balance sheet items are translated into euros using the average exchange rate prevailing on the reporting date in accordance with official requirements. The same method is used to translate the annual valuation of the shareholders' equity of equity-method foreign associates. Differences from the previous year's translated valuation are recognized in other comprehensive income and are reversed to income or expense on sale. Goodwill of commercially independent foreign Group entities is translated at the exchange rate prevailing on the reporting date. Income and expense items are translated into euros using the annual average exchange rate.
Company names and goodwill are not amortized. They are tested instead for impairment losses in accordance with IAS 36 on an annual basis and whenever there are indications that they may be impaired. The Turner and Flatiron names were recognized as assets with an indefinite useful life as they do not have a product life cycle and are not subject to technical, technological or commercial depletion or any other restriction.
No development costs requiring the recognition of assets were incurred in the HOCHTIEF Group in the fiscal year.
Items of property, plant, machinery and equipment typically encountered in the HOCHTIEF Group are depreciated over the following uniform useful lives:
| No. of years | |
|---|---|
| Buildings and investment properties | 20 - 50 |
| Technical equipment and machinery; transportation equipment | 3 - 10 |
| Other equipment and office equipment | 3 - 8 |
Estimated useful lives and depreciation methods are reviewed annually.
Items of property, plant and equipment on finance leases are recognized at fair value or the present value of the minimum lease payments, whichever is lower, and are depreciated on a straight-line basis over their estimated useful life or over a shorter contract term if applicable.
Investment properties are stated at amortized cost. Transaction costs are included on initial measurement. The fair values of investment properties are disclosed in the Notes. These are assessed using internationally accepted valuation methods, such as taking comparable properties as a guide to current market prices or by applying the discounted cash flow method. Like property, plant and equipment, investment properties are depreciated using the straight-line method.
Equity-method investments are stated at cost, comprising the acquired equity interest in an associate or jointly controlled entity plus any goodwill. The carrying amount is increased or decreased annually to recognize the Group's share of after-tax profits or losses, any dividends, and other changes in equity. The full carrying amount is tested for impairment in accordance with IAS 36 whenever there are indications that it may be impaired. If the recoverable amount of an equity-method investment is less than its carrying amount, an impairment loss is recognized for the difference.
Jointly controlled entities are a type of joint venture. Joint ventures are contractual arrangements under which two or more parties undertake an economic activity which is subject to joint control. In addition to jointly controlled entities accounted for using the equity method, joint ventures also include jointly controlled operations and construction joint ventures. The latter are accounted for as follows in accordance with IAS 31: As a party to a jointly controlled operation or construction joint venture, HOCHTIEF recognizes the assets it controls, the liabilities it enters into and the expenses it incurs, and reports its share of earnings from the activity under sales. Assets and liabilities remaining in jointly controlled operations and construction joint ventures (e.g. due to contracts awarded to subcontractors) lead to a share of earnings that is accounted for using a method equivalent to the equity method and included in receivables from or liabilities to construction joint ventures.
Receivables and other assets are measured at amortized cost using the effective interest rate method (accounting for factors such as premiums and discounts). An impairment loss is recognized if there is any objective material evidence that a financial asset may be impaired. Objective evidence for impairment includes, for example, downgrading of a debtor"s credit rating and related interruptions in payment or potential insolvency. Impairment losses are recognized according to actual credit risk. "Receivables" comprise financial receivables, trade receivables and other receivables. Sales are shown net of VAT and other taxes and expected reductions such as trade discounts and rebates. Sales of goods are recognized when:
Long-term loans (with a term of more than one year) are stated at amortized cost. Loans yielding interest at normal market rates are reported at face value, and non-interest-bearing and low-interest-bearing loans are discounted to present value. Discounting is always done using a risk-adjusted discount rate. The accounting policies for derivatives with a positive fair value accounted for under other assets are explained separately.
Construction contracts are reported using the percentage of completion (POC) method. Cumulative work done to date, including the Group's share of net profit, is reported under sales on a pro rata basis according to the percentage completed. The percentage of completion is measured as the ratio of contract costs incurred for work performed so far to total contract costs (cost-to-cost method). Construction contracts are reported in trade receivables and trade payables, as "Gross amount due from/to customers for/from contract work (POC)". If cumulative work done to date (contract costs plus contract net profit) of contracts in progress exceeds progress payments received, the difference is recognized as an asset and included in amounts due from customers for contract work. If the net amount after deduction of progress payments received is negative, the difference is recognized as a liability and included in amounts due to customers from contract work. Anticipated losses on specific contracts are accounted for on the basis of the identifiable risks. Construction contracts handled by construction joint ventures are also accounted for using the POC method. Trade receivables from construction joint ventures include pro rata entitlements to contract net profit. Anticipated losses are immediately recognized in full in contract net profit. Contract income on construction contracts undertaken by the Group independently or in construction joint ventures is recognized in accordance with IAS 11 as the income stipulated in the contract plus any claims and variation orders. Construction contract receivables are realized as part of the HOCHTIEF Group's operating cycle. In accordance with IAS 1.59, they are therefore included in current assets even though they are not expected to be realized within twelve months of the balance sheet date.
Deferred taxes arising from temporary differences between the IFRS accounts and tax base of individual Group companies or as a result of consolidation are recognized as separate assets and liabilities. Deferred tax assets are also recognized for tax refund entitlements resulting from the anticipated use of existing tax loss carryforwards in subsequent fiscal years provided it is sufficiently certain that they will be realized. Deferred tax assets and liabilities are offset within each company or group. Deferred taxes are measured on the basis of tax rates applying or expected to apply in each country when they are realized. For domestic operations, as in the prior year, a tax rate of 31.5 percent is assumed taking account of corporate income tax plus the German "solidarity surcharge" and the average rate of municipal trade tax faced by Group companies. For all other purposes, deferred taxes are measured on the basis of the tax regulations in force or enacted at the reporting date.
Inventories are initially stated at cost of purchase or production. Production cost includes costs directly related to the units of production plus an appropriate allocation of materials and production overhead, including production-related depreciation charges. Borrowing costs are included in cost from fiscal 2008 due to early application of the revised IAS 23. The cost of materials and supplies is determined mainly using the FIFO method and the moving average method. Inventories are written down to net realizable value if their recoverable amount is less than their carrying amount at the reporting date. If the recoverable amount of inventories subsequently increases, the resulting gain must be recognized. This is done by reducing materials expense.
Cash and cash equivalents consist of petty cash, cash balances at banks and marketable securities with maturities of no more than three months at the time of acquisition.
Non-current assets held for sale and associated liabilities are measured in accordance with IFRS 5. To be classed as held for sale, assets must be available for immediate sale and their sale must be highly probable. Assets held for sale can be individual non-current assets, groups of assets held for sale (disposal groups) or discontinued operations. Liabilities that are disposed of with assets in a single transaction are part of a disposal group or discontinued operation and are separately reported as liabilities held for sale. Non-current assets held for sale cease to be depreciated or amortized, and are measured at their carrying amount or at fair value less costs to sell, whichever is lower. Gains or losses arising on the measurement of discontinued operations at fair value less costs to sell, profits or losses of discontinued operations and gains or losses on their disposal are reported under results of discontinued operations. Gains or losses arising on the measurement of individual assets held for sale or of disposal groups are reported under results from continued operations until their ultimate disposal.
Provisions for pensions and similar obligations are recognized for current and future benefit payments to active and former employees and their surviving dependants. The obligations primarily relate to pension benefits, partly for basic pensions and partly for optional supplementary pensions. The individual benefit obligations vary from one country to another and are determined for the most part by length of service and pay scales. The Turner Group's obligations to meet healthcare costs for retired staff are likewise included in pension provisions due to their pension-like nature.
Provisions for pensions and similar obligations are computed by the projected unit credit method. This determines the present value of future entitlements, taking into account current and future benefits already known at the reporting date plus anticipated future increases in salaries and pensions and, for the Turner Group, in healthcare costs. The computation is based on actuarial appraisals using biometric accounting principles. Plan assets as defined in IAS 19 are shown separately as deductions from pension obligations. Plan assets comprise assets transferred to pension funds to meet pension obligations, shares in investment funds purchased under deferred compensation arrangements, and qualifying insurance policies in the form of pension liability insurance. If the fair value of plan assets is greater than the present value of employee benefits, the difference is reported – subject to the limit in IAS 19.58 – under other non-current assets.
Past service costs are recognized immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are recognized in income by amortization on a straight-line basis over the vesting period.
Tax provisions comprise current tax obligations. Income tax provisions are offset against tax refund entitlements if they relate to the same tax jurisdiction and are congruent in nature and reporting period.
Other provisions account for all identifiable obligations as of the reporting date that result from past business transactions or events but are uncertain in their amount and/or settlement date. Provisions are stated at the estimated settlement amount and are not offset against any rights to reimbursement. For obligations with a settlement probability exceeding 50 percent, the amount set aside is calculated on the basis of the most likely settlement outcome. A provision can only be recognized on the basis of a legal or constructive obligation toward third parties. Long-term provisions with a term of more than one year are stated at the present value of the estimated settlement amount as of the reporting date and are reported under non-current liabilities.
The accounting policies for derivatives with a negative fair value accounted for under other liabilities are explained below.
Derivative financial instruments are measured at fair value on the settlement date regardless of their purpose and reported under other receivables and other assets or other liabilities. All derivative financial instruments are measured on the basis of current market rates as of the balance sheet date. The recognition of changes in fair value depends on the purpose for which a derivative is held. Derivatives are only ever used for hedging purposes. For example, variable rate loans are hedged to counter variations in payment amounts due to interest rate changes. In such cases the items are accounted for as a rule as cash flow hedges. Unrealized gains and losses are initially recognized in equity. A cash flow hedge covers exposure to variability in cash flows from the hedged item. If a hedged planned transaction subsequently results in recognition of a financial asset or a financial liability, gains or losses recognized in equity in the meantime are reclassified to income or expense in the period when the asset or liability affects income. If a hedged planned transaction subsequently results in recognition of a non-financial asset or liability, gains or losses recognized in equity in the meantime are taken out of equity and subtracted from or added to the initial cost of the asset or liability. In the cases described, only the portion of changes in value that are determined to be effective for hedging purposes are recognized in equity. The ineffective portion is recognized directly as income or expense. The portion of the changes in value initially recognized in equity is reclassified to income as soon as the hedged item is recognized in income.
In isolated instances, derivative financial instruments are not designated as hedges. In such cases, changes in fair value are recognized in income or expense. In addition, if a fair value hedge is used (to hedge exposure to changes in the fair value of the hedged item), any change in the fair value of the hedging instrument or the hedged items is recognized as income or expense. Gains and losses from remeasuring a hedging instrument at fair value are recognized in the same items as gains and losses from remeasuring the hedged item. Fair value hedges are not currently used in the HOCHTIEF Group.
Judgments made by management in applying the accounting policies primarily relate to the following issues:
The decision made by the HOCHTIEF Group in each instance is set out under Accounting Policies in these Notes.
Preparation of the IFRS Consolidated Financial Statements requires Group management to make estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses, and disclosures of contingencies, commitments and other obligations. The main estimates and assumptions relate to the following:
At the time the Consolidated Financial Statements were prepared, there was no evidence of any need for significant change in their underlying estimates and assumptions. The reported amounts of assets and liabilities are therefore not expected to undergo significant adjustment in the coming fiscal year.
| IFRIC 11 | IFRS 2: Group and Treasury Share Transactions |
| IFRIC 14 | IAS 19: The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction |
Changes in International Financial Reporting Standards affecting the HOCHTIEF Group are as follows:
The IASB published IFRIC 11 – IFRS 2: Group and Treasury Share Transactions – in November 2006. IFRIC 11 requires that share-based payment arrangements in which an entity receives goods or services as consideration for its own equity instruments must be accounted for as equity-settled. This applies regardless of how the entity obtains the instruments to satisfy its obligations under the arrangement. IFRIC 11 also addresses whether share-based payment arrangements where a subsidiary grants equity instruments of its parent should be accounted for as equity-settled or cash-settled. Where a parent grants rights to its equity instruments directly to employees of its subsidiary, the transaction must be accounted for as anIFRIC 14 – IAS 19: The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction – was published in July 2007. IFRIC 14 addresses the measurement of a defined benefit asset (plan surplus) in the context of post-retirement benefit plan. The measurement of a defined benefit asset is limited to the present value of economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan. IFRIC 14 stipulates that there is no limit to the length of time that a future economic benefit can be available. It suffices for the entity to be able to realize it at some point during the life of the plan or when the plan liabilities are settled. If the entity's right to a refund of a surplus depends on the occurrence or non-occurrence of one or more future events not within its control, then no asset may be recognized. Any minimum funding requirement – where the entity is required to make a minimum level of contributions to a pension plan each year – may limit the entity's ability to reduce future contributions. Minimum funding contributions therefore reduce the amount of the asset that is available as a reduction in future contributions. If the entity has an obligation to pay contributions to cover an existing shortfall on the minimum funding basis, a liability is recognized to the extent that the contributions payable are not available as a reduction in future contributions or as a refund. IFRIC 14 is applicable for fiscal years beginning on or after January 1, 2008. The pronouncement does not currently have any material impact on HOCHTIEF.
Amendment to IAS 1 Presentation of Financial Statements: The amendment to IAS 1 provides that in future all non-owner changes in equity either have to be presented in one statement of comprehensive income or in two separate statements. In addition, all changes with an effect on income of components previously recognized directly in equity must in future be shown separately in the statement of changes in equity. Additionally, an opening balance sheet must be prepared for the prior year in certain cases. The amendments to IAS 1 are applicable for the first time for fiscal years beginning on or after January 1, 2009. While HOCHTIEF must comply with the amended standard in future, we do not currently expect any material consequences for the HOCHTIEF Consolidated Financial Statements.
Amendment to IAS 23 Borrowing Costs: Under the amendment to IAS 23, borrowing costs must be capitalized in future as part of the cost of qualifying assets. The new provision removes the option of recognizing borrowing costs for qualifying assets as an expense in the period incurred. The obligation to capitalize borrowing costs applies to all qualifying assets for which acquisition or production commences on or after January 1, 2009. The amended standard must therefore be applied prospectively. Voluntary early application of the new standard is permitted. Until December 31, 2007, HOCHTIEF had made use of the previously existing option to recognize borrowing costs for qualifying assets as an expense in the period incurred. HOCHTIEF has voluntarily applied the amended standard from January 1, 2008. This results in higher amounts being capitalized for qualifying assets for which acquisition or production commenced on or after that date.
Amendments to IAS 39 Financial Instruments: Recognition and Measurement: The IASB adopted two sets of amendments to IAS 39 in 2008. The first makes clear that it is permissible to designate only part of the changes in the cash flows or fair value of a financial instrument as a hedged item. If a purchased option is designated a hedging instrument, only its intrinsic value and not its time value is an effective hedge as the hedged item does not have a time value component. Finally, the amendment rules that inflation is not a separately identifiable and reliably measurable risk and so cannot be designated a hedged risk unless it is a contractually specified portion of cash flows. The changes apply retrospectively for fiscal years beginning on or after July 1, 2009. Earlier application is permitted. EU endorsement is still pending. The new rules have no material consequences for HOCHTIEF.
The second set of amendments permits entities to reclassify non-derivative financial instruments out of the "fair value through profit or loss" category provided that they were not designated as at FVTPL on initial recognition under the fair value option. Financial instruments may likewise be reclassified from the "available for sale" to the "loans and receivables" category if they would have met the definition of that category at initial recognition. The amendments may be applied from July 1, 2008. HOCHTIEF is not currently affected.
IFRIC 12 Service Concession Arrangements: IFRIC 12 closes a gap in IFRS as regards accounting for rights and obligations under service concessions granted to private-sector operators by government or government agencies in order to provide public services. The Interpretation solely addresses the accounting by private-sector operators. The applicable accounting treatment depends on whether the operator has an unconditional contractual right to payment or merely a right to charge based on the usage of services. In the first instance, the "financial asset model" is applied and a financial asset is recognized. In the second, the operator acquires an intangible asset permitting it to operate public infrastructure; that is, the "intangible asset model" is applied. In instances where an operator receives a fixed amount from the grantor and a right to charge users so that the ability to earn any excess over the fixed amount depends on intensity of use, a financial asset is recognized for the fixed amount and an intangible asset is recognized for the right to charge users. IFRIC 12 was intended to be effective for annual periods beginning on or after January 1, 2008. The pronouncement has not been applied by the HOCHTIEF Group for fiscal 2008, however, as its endorsement by the European Union is still pending. For HOCHTIEF, applying this interpretation will essentially only affect accounting for service concessions to which the intangible asset model applies (for example, in the case of toll roads and airports). Application of the new rules to such concessions may change the allocation of contract net profit among individual reporting periods during the operating phase. Service concessions that come under the financial asset model (for example, in the case of schools) are already largely accounted for at HOCHTIEF in accordance with the new rules.
| (EUR thousand) | 2008 | 2007 |
|---|---|---|
| HOCHTIEF Americas | 8,117,634 | 7,270,355 |
| HOCHTIEF Asia Pacific | 8,638,870 | 7,409,192 |
| HOCHTIEF Concessions | 167,452 | 196,032 |
| HOCHTIEF Europe | 3,239,155 | 2,868,536 |
| HOCHTIEF Real Estate | 813,978 | 521,020 |
| HOCHTIEF Services | 709,486 | 582,336 |
| Corporate Headquarters/ Consolidation | (43,259) | (74,581) |
| 21,643,316 | 18,772,890 |