Porsche International Financing Group

Transcription

1 Porsche International Financing Group Directors' report and consolidated financial statements for the year ended 31 December 2012

2 DIRECTORS REPORT AND CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2012 TABLE OF CONTENTS PAGE GROUP INFORMATION 2 DIRECTORS REPORT 3 INDEPENDENT AUDITOR S REPORT 8 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 10 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 11 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 12 CONSOLIDATED STATEMENT OF CASH FLOWS

3 GROUP INFORMATION DIRECTORS John Gilsenan Frank Mueller (German) - resigned 27 November 2012 Christian Nicklis (German) Dr. Johannes Lattwein (German) - appointed 27 November 2012 SECRETARY Wilton Secretarial Ltd., Fitzwilton House, Wilton Place, Dublin 2 REGISTERED OFFICE 1 Exchange Place, IFSC, Dublin 1. SOLICITORS William Fry, Fitzwilton House, Wilton Place, Dublin 2. BANKERS Deutsche Bank AG, Theodor-Heuss-Strasse 3, Stuttgart, Germany. Barclays Bank Ireland plc Two Park Place, Hatch Street, Dublin 2 AUDITORS Ernst & Young, Chartered Accountants, Ernst & Young Building, Harcourt Centre, Harcourt Street, Dublin

4 DIRECTORS REPORT for the year ended 31 December 2012 The directors present herewith their report and audited consolidated financial statements for the year ended 31 December Comparatives included in the financial statements relate to the year ended 31 December Porsche International Financing plc (the parent) and Porsche International Reinsurance Limited (the subsidiary) are collectively known as Porsche International Financing Group (referred to as Group ). Volkswagen AG is the ultimate parent company. Dr. Ing. h.c.f. Porsche AG is the immediate parent company. PRINCIPAL ACTIVITIES, FUTURE DEVELOPMENTS AND KEY PERFORMANCE INDICATORS The principal activities of the parent company, Porsche International Financing plc, are the provision of financial and treasury services to other corporate entities within the Dr. Ing. h.c.f. Porsche AG Group ( group ). The principal activity of the subsidiary, Porsche International Reinsurance Limited, is the provision of warranty reinsurance cover on pre-owned Porsche cars sold in Europe. There has been no change in the nature of this activity during the year under review and the subsidiary intends to continue to reinsure warranty contracts on pre-owned Porsche cars in the European market through its fronting insurer, Allianz Versicherung AG. In August 2012, the parent redeemed in full the USD 1,000,000, % Undated Subordinated Fixed Rate Securities of The redemption was financed by proceeds from loan repayment by Dr. Ing. h.c.f. Porsche AG. During the year the subsidiary carried out an independent actuarial review of its technical reserves and determined that it had not accounted for its unearned premium reserves in accordance with its accounting policy. Accordingly, the subsidiary has retrospectively accounted for unearned premium reserves based on its accounting policy and made prior year adjustments to retained profit for the year ended 31 December Further details regarding the prior year adjustments are given in note 2(s) to the consolidated financial statements. Net earned premiums have increased significantly on the previous year s amount, due to an increase in the number of warranty contracts written. Claims incurred net of reinsurance have marginally decreased reflecting good claims management and an improvement in loss ratios. The subsidiary continues to monitor its loss ratios very closely in conjunction with the parent company, Porsche AG. Key non financial indicators include the terms of the Reinsurance contract between the company and Allianz Versicherung AG, the fronting insurer. The monitoring of the split between, and the pricing of, one and two year contracts on pre owned Porsche cars in Europe is also a key performance indicator. The Group intends to continue to provide funding and deposit services to and from group companies, ensuring the prudent investment of the bond proceeds and the maintenance of a sufficient interest margin. Liquidity is maintained by ensuring sufficient deposit and borrowing base to meet group lending requirements. The investment return from the proceeds of bonds exceeds bond interest payable. The interest margin is 3.95% (31 December 2011: 2.89%)

5 DIRECTORS REPORT for the year ended Besides the above financial and non-financial key performance indicators for the subsidiary, the directors see the interest margin and the maintenance of sufficient liquidity to meet group funding requirements as the key performance indicators. The key non-financial performance indicators are compliance with group and regulatory requirements. FINANCIAL RISK MANAGEMENT Further details regarding financial risk factors and exposure of the Group to price risk, credit risk and liquidity risk and accounting policies are provided in the notes to the consolidated financial statements. RESULTS AND DIVIDENDS The consolidated profit on ordinary activities before taxation amounted to 13,372,922 (31 December 2011 restated: 7,560,895). After deducting corporation tax of 1,723,438 (31 December 2011 restated: 937,288), an amount of 11,649,484 (31 December 2011 restated: 6,623,607) is available for dividend and retention. No dividend has been paid or is proposed for the year (31 December 2011: Nil). DIRECTORS AND SECRETARY S INTERESTS IN SHARES The following directors held office during the financial year and, unless otherwise stated, were in office for the entire year: John Gilsenan Christian Nicklis (German) Frank Mueller (German) resigned 27 November 2012 Dr. Johannes Lattwein (German) appointed 27 November 2012 The secretary who held office during the year was: Wilton Secretarial Limited In accordance with the Articles of Association, there is no requirement for the directors to retire by rotation. None of the directors nor the secretary held any interest in the shares of the parent company or any other group companies in the year. BOOKS OF ACCOUNT The directors are responsible for ensuring that proper books and accounting records, as outlined in Section 202 of the Companies Act 1990, are kept by the Group. The directors believe that they have complied with the requirements of Section 202 of the Companies Act 1990 with regard to the books of account by employing a professionally qualified and experienced financial controller and by providing adequate resources to the finance function. The books of account of the Group are maintained at Porsche International Financing plc, 1 Exchange Place, IFSC, Dublin 1. POLITICAL DONATIONS The Group did not make any political donations during the year (31 December 2011: Nil). TRANSACTIONS INVOLVING DIRECTORS There were no contracts or arrangements of any significance in relation to the business of the company in which the Directors had any interests, as defined by the Companies Act, 1990, at any time during the year

6 DIRECTORS REPORT for the year ended IMPORTANT EVENTS AFTER THE YEAR END There were no important events after the year end. CORPORATE GOVERNANCE STATEMENT The Group s financial reporting is based on International Financial Reporting Standards (IFRSs) as adopted by the European Union. The Directors are responsible for the system of internal control relating to the parent and the subsidiary. Such internal control system is designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. In respect of the financial reporting process, the parent and the subsidiary have in place appropriate practices to ensure that: Business transactions are properly authorised and executed Financial reporting is accurate and complies with the financial reporting framework Systems are in place to achieve high standards of compliance with regulatory requirements The Board of Directors has the responsibility to ensure compliance with internal controls and risk management programmes by regularly reviewing the effectiveness of the compliance and control systems

7 DIRECTORS REPORT for the year ended STATEMENT OF DIRECTORS RESPONSIBILITIES IN RESPECT OF THE CONSOLIDATED FINANCIAL STATEMENTS The directors are responsible for preparing the Directors Report and the consolidated financial statements in accordance with Irish law and regulations. Irish company law requires the directors to prepare consolidated financial statements giving a true and fair view of the state of affairs of the Group and the profit or loss of the Group for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. In preparing these financial statements, the directors are required to: Select suitable accounting policies and then apply them consistently; Make judgements and accounting estimates that are reasonable and prudent; State that the consolidated financial statements comply with IFRSs as adopted by the European Union; and Prepare the consolidated financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping proper books of account that disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Acts 1963 to They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors confirm to the best of their knowledge and belief: (i) (ii) the financial statements, prepared in accordance with IFRSs as adopted by European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group, and the directors report includes a fair review of the development and performance of the business and the position of the Group together with a description of the principal risks and uncertainties that they face

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13 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2012 Called-up Retained share capital earnings Total At 1 January ,292 57,960,655 58,471,947 Restatement - (1,083,363) (1,083,363) At 1 January 2011 as restated 511,292 56,877,292 57,388,584 Profit for the year - restated - 6,623,607 6,623,607 At 31 December 2011 as restated 511,292 63,500,899 64,012,191 ========= =========== ========== At 1 January ,292 63,500,899 64,012,191 Profit for the year - 11,649,484 11,649,484 At 31 December ,292 75,150,383 75,661,675 ========= =========== ========== Porsche International Financing plc holds 100% (31 December 2011: 100%) equity ownership interest in Porsche International Reinsurance Limited

14 CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 31 December 2012 Restated 31 December 31 December Notes Operating activities Profit or ordinary activities before tax 13,372,922 7,560,895 (Increase) in financial assets (55,504) - Decrease in loans and receivables 1,040,621, ,906,270 Increase in deposits due to customers 43,128, ,776,153 Decrease in interest payable on bonds (9,264,288) (31,621,187) (Decrease)/ increase in trade and other payables (47,357,768) 39,561,605 Movement in deferred acquisition costs (138,769) (109,669) Increase in insurance receivables (9,572,819) (3,243,039) Increase in insurance contract liabilities 12,283,969 21,233,641 Taxation paid (1,386,428) (1,036,515) Amortisation of transaction costs on interest bearing loans and borrowings 7,622,860 4,541,277 (Decrease)/ increase in due to related parties (467,971) 777,591 Unrealised foreign exchange gain 1,536, ,100 Net cash flow from operating activities 1,050,323, ,820,123 Investing activities Purchase of investments (257,760,037) (14,021,204) Proceeds from sale of investments - 3,143,330 Net cash flow (used in)/ from investing activities (257,760,037) (10,877,874) Financing Interest bearing loans and borrowings (773,006,763) (969,769,445) Net cash used in financing activities (773,006,763) (969,769,445) Net increase/ (decrease) in cash and cash equivalents 19,556,249 (827,196) Cash and cash equivalents at the beginning of the year 76,150,498 77,450,794 Unrealised foreign exchange (loss)/ gain (989,429) (473,100) Cash and cash equivalents at the end of year 10 94,717,318 76,150,498 ============= ============ Interest received as cash during the year amounted to 93,130,647 (31 December 2011: 105,165,355), while interest paid as cash amounted to 92,582,120 (31 December 2011: 125,221,814) Interest received and paid relates to operating activities

15 31 December CORPORATE INFORMATION AND BASIS OF PREPARATION These consolidated financial statements cover Porsche International Financing plc (the parent company) and Porsche International Reinsurance Limited (the subsidiary) collectively known as Porsche International Financing Group ( the Group ). The registered office for both companies is Porsche International Financing plc, 1 Exchange Place, IFSC, Dublin 1. The consolidated financial statements of the Group for the year ended 31 December 2012 were authorised and approved for issue in accordance with a resolution of the Board of Directors on 30 April The parent company is a limited company domiciled in the Republic of Ireland. The ultimate parent of the parent company is Volkswagen AG which is incorporated in Germany. The consolidated financial statements have been prepared under the historical cost convention, except for financial instruments classified at fair value through profit or loss and derivative financial instruments that have been measured at fair value. The reporting currency used in these consolidated financial statements is euro, which is denoted by the symbol ' '. Amounts are rounded to the nearest euro except where otherwise indicated. The consolidated statement of financial position shows assets and liabilities in order of their liquidity, which the directors consider to be more relevant to the Group s business than a current/non-current classification. 2. ACCOUNTING POLICIES The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Group s consolidated financial statements. (a) Basis of consolidation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRSs ) as adopted by the European Union (EU) and with those parts of the Companies Acts 1963 to 2012 applicable to companies reporting under IFRS. The subsidiary is fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continues to be consolidated until the date that such control ceases. The financial statements of the subsidiary are prepared for the same reporting year as the parent company, using consistent accounting policies. All intra-group balances, income and expenses are eliminated in full. Porsche International Financing plc holds 100% of the shares in Porsche International Reinsurance Limited and hence there is no minority interest arising on consolidation. There is no goodwill or negative goodwill arising on acquisition of Porsche International Reinsurance Limited as the fair value of the net assets of the subsidiary is equal to the purchase consideration paid by Porsche International Financing plc

16 2. ACCOUNTING POLICIES (Continued) (b) Foreign currencies The functional and presentation currency is euro. Transactions in foreign currencies are initially translated at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currency are retranslated at the rate ruling at the reporting date. Non-monetary items that are measured in terms of historical cost in a foreign currency rate are translated using the exchange rate as at the date of initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rate at the date when the fair value was determined. Translation differences arising from the application of year-end exchange rates are recognised in the statement of comprehensive income. (c) Revenue and interest recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and revenue can be reliably measured. Interest income and expense are recognised in the statement of comprehensive income for all instruments measured at amortised cost using the effective interest method. This is a method of calculating the amortised cost of a financial asset or liability and of allocating the interest income or expense over the relevant year. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or liability. Fees and commissions which represent a return for services provided or risk borne are credited to income over the period during which the service is performed or the risk is borne as appropriate. (d) Financial assets Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss; loans and receivables; available-for-sale financial assets; or as held-to-maturity investments, as appropriate. The classification depends on the purpose for which the assets were acquired. The Group determines the classification of its financial assets at initial recognition and re-evaluates this designation at each financial year-end. Financial instruments are used by the Group, mainly for the provision of inter-group financial and treasury services and for trading purposes. Derivative financial instruments are mainly used to economic hedge the currency and interest risk exposure of the Group. Derivatives are not entered into for trading purposes. Purchases and sales of financial assets are recognised on the trade date. Loans are recognised when cash is advanced to borrowers. The subsequent measurement of financial assets depends on their classification as follows:

17 2. ACCOUNTING POLICIES (Continued) (d) Financial assets (continued) Financial assets at fair value through profit or loss Financial assets classified as held for trading and other assets designated as such on inception are included in this category. Financial assets are classified as held for trading if they are acquired for sale in the short term. Financial assets are carried in the statement of financial position at fair value, with gains or losses on financial assets at fair value through profit or loss recognised in the statement of comprehensive income. Financial assets designated at fair value through profit or loss (FVPL) are designated by management on initial recognition when the following criteria are met: (i) The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognising gains or losses on them on a different basis; or (ii) The assets and liabilities are part of a group of financial assets, financial liabilities or both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or (iii) The financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded. The Group believes that FVPL assets meet criteria (ii) as the Group uses fair value of investments in cash funds as a key performance indicator. Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Group has the positive intention and ability to hold to maturity. The Group did not have any held-to-maturity financial asset at year end. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, do not qualify as trading assets and have not been designated at either fair value through profit or loss or available-forsale. Such assets are carried at amortised cost. Gains and losses are recognised in the statement of comprehensive income when the loans and receivables are derecognised or impaired, as well as through the amortisation process. Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as such or are not classified in any of the three preceding categories. After initial recognition, available-for-sale financial assets are measured at fair value, with gains or losses being recognised as a separate component of equity, the availablefor-sale reserve, until the investment is derecognised or until the investment are determined to be impaired. At this time, the cumulative gain or loss previously reported in equity is included in the statement of comprehensive income. The Group did not have any available-for-sale financial assets at year end

18 2. ACCOUNTING POLICIES (Continued) (d) Financial assets (continued) Fair value The fair values of money market fund investments held by the Group are their quoted current bid prices at statement of financial position date. (e) Financial liabilities Financial liabilities include interest bearing loans and borrowings, deposits due to customers and bank overdrafts. Interest bearing loans and borrowings and deposits due to customers are measured initially at fair value plus directly attributable transaction costs. After initial recognition, interest bearing loans and borrowings and deposits due to customers are measured in the statement of financial position at amortised cost. Deposits due to customers represent balances payable to group undertakings in relation to the provision of treasury services. Bank overdrafts are stated at fair value. When the estimates of cash flows relating to interest bearing loans and borrowings are revised, the carrying value of interest bearing loans and borrowings is recalculated by computing the present value of the estimated future cash flows at the original effective interest rate of the interest bearing borrowings. The adjustment is recognised in the statement of comprehensive income and included within amortisation of transaction costs on interest bearing loans and borrowings. (f) Impairment of financial assets The Group assesses at each statement of financial position date whether a financial asset or group of financial assets is impaired. Assets carried at amortised cost If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced, with the amount of the loss recognised in the statement of comprehensive income. If, in a subsequent year, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the statement of comprehensive income, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date

19 2. ACCOUNTING POLICIES (Continued) (g) Derivatives The Group uses derivative financial instruments to economic hedge its exposure to interest rate risks and risks of changes in foreign exchange rates. Derivative financial instruments are recognised initially at the fair value on the date a derivative contract is entered into. Subsequent to initial recognition, derivative financial instruments are remeasured to fair value. The fair value of derivative financial instruments is the estimated amount that the Group would receive or pay to terminate the instrument at the statement of financial position date. Interest rate swaps are valued by calculating the net present value of the cash flows over the life of the swap. The gain or loss on remeasurement to fair value is recognised in the statement of comprehensive income. (h) (i) (j) Cash and cash equivalents Cash and cash equivalents in the statement of financial position comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purpose of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of bank outstanding overdraft. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event; it is probable that an outflow of economic resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Financial guarantees In the ordinary course of business the Group gives financial guarantees. Financial guarantees are initially recognised in the consolidated financial statements (within Due to group undertakings ) at fair value, being the premium received. Subsequent to initial recognition, the Group s liability under each guarantee is measured at the higher of the amount initially recognised less, when appropriate, cumulative amortisation recognised in the statement of comprehensive income, and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee

20 2. ACCOUNTING POLICIES (Continued) (k) Income taxes Corporation tax is calculated at current attributable rates. Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantially enacted by the statement of financial position date. Deferred income tax is provided using the liability method on temporary differences at the statement of financial position date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the related asset is realised or liability is settled, based on tax rates and laws that are enacted or substantively enacted by the statement of financial position date. Income tax is charged or credited directly to equity if it relates to items that are credited or charged to equity. Otherwise income tax is recognised in the statement of comprehensive income. (l) Derecognition of financial assets and liabilities Financial assets A financial asset is derecognised where: the rights to receive cash flows from the assets have expired; the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; or the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Financial liabilities A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires. (m) Gross premiums and unearned premiums Gross written premiums comprise the total premiums receivable for the whole period of cover provided by contracts entered into during the accounting period and are recognised on the date on which the policy commences. Premiums include any adjustments arising in the accounting period for premiums receivable in respect of business written in prior accounting periods. Premiums collected by intermediaries, but not yet received, are assessed based on estimates from underwriting or past experience and are included in premiums written

21 2. ACCOUNTING POLICIES (Continued) (m) Gross premiums and unearned premiums (continued) Unearned premiums are those proportions of premiums written in a year that relate to periods of risk after the statement of financial position date. Gross premium written are accounted for in the period in which the risk commences. Written premiums are recognised as earned income over the period of the policy on a time apportionment basis, having regard where appropriate to the incidence of risk. Unearned premiums are calculated on a monthly pro rata basis. The proportion attributable to subsequent periods is deferred as a provision for unearned premiums. (n) Gross benefits and claims Gross benefits and claims incurred comprise amounts paid or provided for in respect of claims occurring during the current year, together with adjustments to claims outstanding from previous years. Provision is made at the period end for the estimated cost of claims incurred but not settled at the statement of financial position date, including the cost of claims incurred but not yet reported to the subsidiary. The estimated cost of claims includes expenses to be incurred in settling claims and is an estimate, based on analysis of historical experience. (o) (p) Deferred acquisition costs Commission relating to unearned premiums is deferred and charged in the accounting period in which those premiums are earned. Such deferred acquisition costs are carried forward at the statement of financial position date to the extent that these are considered to be recoverable. Reinsurance contracts Reinsurance contracts are those contracts that transfer significant insurance risk at the inception of the contract. Insurance risk is transferred when the company agrees to compensate the policyholder if a specified uncertain future event (other than a change in a financial variable) adversely affects the policyholder. All contracts meet the definition of insurance contracts under IFRS 4: Insurance Contracts. Contracts entered into with insurers that meet the classification requirements for insurance contracts under IFRS 4 are classified as reinsurance contracts held. Contracts that do not meet these classification requirements are classified as financial assets in accordance with IAS 39: Financial Instruments Recognition and Measurement. The benefits under the reinsurance contracts held are recognised as insurance assets. Amounts recoverable from or due to reinsurers are measured consistently with the amounts associated with the insured insurance contracts and in accordance with the terms of each reinsurance contract. (q) Insurance receivables Insurance receivables are recognised when due and measured on initial recognition at the fair value of the consideration received or receivable. Subsequent to initial recognition, insurance receivables are measured at amortised cost, using the effective interest rate method. The carrying value of insurance receivables is reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable, with the impairment loss recorded in the statement of comprehensive income. Insurance receivables are derecognised when the derecognition criteria for financial assets, as described in Note 2 (l), have been met

22 2. ACCOUNTING POLICIES (Continued) (r) Insurance contract liabilities Insurance contract liabilities are recognised when contracts are entered into and premiums are charged. These liabilities are collectively known as the outstanding claims provision, and are based on the estimated ultimate cost of all claims incurred but not settled at the date of statement of financial position, whether reported or not, together with related claims handling costs and reduction for the expected value of salvage and other recoveries. Delays can be experienced in the notification and settlement of certain types of claims, therefore the ultimate cost of these cannot be known with certainty at the date of the statement of financial position. The liabilities are calculated at the reporting date using a range of standard actuarial claim projection techniques, based on empirical data and current assumptions that may include a margin for adverse deviation. The liabilities are not discounted for the time value of money. No provision for equalisation or catastrophe reserves is recognised. The liabilities are derecognised when the contract expires, is discharged or is cancelled. The provision for unearned premiums represents premiums received for risks that have not yet expired. Generally the reserve is released over the term of the contract and is recognised as premium income. At each reporting date, the subsidiary, Porsche International Reinsurance Limited, reviews its unexpired risk and a liability adequacy test is performed as laid out under IFRS to determine whether there is any overall excess of expected claims and deferred acquisition costs over unearned premiums. This calculation uses current estimates of future contractual cash flows after taking account of the investment return expected to arise on assets relating to the relevant insurance technical provisions. If these estimates show that the carrying amount of the unearned premiums (less related deferred acquisition costs) is inadequate, the deficiency is recognised in the statement of comprehensive income by setting up a provision for liability adequacy. (s) Prior year restatement The subsidiary has in the past been accounting for unearned premium reserves on the basis of when warranty reinsurance contracts are written, regardless of whether or not they had actually commenced as stated in its accounting policies. However, following an independent actuarial review, the subsidiary determined that unearned premium reserves were not accounted for in line with accounting policy and should be accounted for on the basis of when warranty reinsurance contracts commenced. Accordingly, the subsidiary has retrospectively accounted for unearned premium reserves based on when warranty reinsurance contracts commenced and has decided to make a prior year adjustment. The impact of the prior year adjustment is shown in the table below

23 2. ACCOUNTING POLICIES (Continued) (s) Prior year restatement (Continued) Impact of the prior year adjustment on the statement of comprehensive income is as follows: 31 Dec Dec 2010 Gross change in provision for unearned premiums (6,164,932) (4,197,107) Gross change in insurance contract liabilities 4,585,718 2,958,974 Profit before taxation (1,579,214) (1,238,133) Corporation tax expense 197, ,770 Net impact on retained earnings after tax decrease (1,381,813) (1,083,363) Impact of the prior year adjustment on the statement of financial position 31 December 2011 As previously stated Adjustment As restated Insurance contracts liabilities (51,186,479) (2,817,347) (54,003,826) Corporation tax receivable 336, , ,061 Retained profit for the year ( 8,005,420) 1,381,813 (6,623,607) Retained profit brought forward (57,960,655) 1,083,363 (56,877,292) 1 January 2011 As previously stated Adjustment As restated Insurance contract liabilities (31,532,052) (1,238,133) (32,770,185) Corporation tax liability (376,509) 154,770 (221,739) Retained profit for the financial year (6,730,922) 1,083,363 (5,647,559) (t) Adoption of IFRS during the year The following new and revised standards and interpretations have been adopted during the year and the impact is described below. IAS 12: 'Income Taxes' on Deferred Tax (Amendment) This amendment introduces an exception to the existing principle for the measurement of deferred tax assets or liabilities arising on investment property measured at fair value. The amendment became effective for annual periods beginning on or after 1 January The adoption of amendments to IAS 12 had no impact on the financial statements of the Group

24 2. ACCOUNTING POLICIES (Continued) (t) Adoption of IFRS during the year (continued) IFRS 7 Financial Instruments: Disclosures - Enhanced Derecognition Disclosure Requirements The amendment requires additional disclosure about financial assets that have been transferred but not derecognised to enable the user of the Group s financial statements to understand the relationship with those assets that have not been derecognised and their associated liabilities. In addition, the amendment requires disclosures about continuing involvement in derecognised assets to enable the user to evaluate the nature of, and risks associated with, the entity s continuing involvement in those derecognised assets. The amendment became effective for annual periods beginning on or after 1 July The amendment affects disclosure only and had no impact on the Group s financial position or performance. Standards issued but not yet effective The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group s financial statements are disclosed below. The Group intends to adopt these standards, if applicable, when they become effective. Standards and Interpretations Effective date IAS 1 Financial Statements Presentation Presentation of 1 July 2012 Items of Other Comprehensive Income IAS 19 Employee Benefits (Revised) 1 January 2013 IAS 27 Separate Financial Statements (as revised in 2012) 1 January 2013 IAS 28 Investments in Associates and Joint Ventures 1 January 2013 (as revised in 2011) IAS 32 Financial instruments: Presentation 1 January 2014 IFRS 7 Financial instruments: Disclosures 1 January 2013 IFRS 9 Financial Instruments: Classification and Measurement 1 January 2015 IFRS 10 Consolidated Financial Statements 1 January 2014 IFRS 11 Joint Arrangements 1 January 2014 IFRS 12 Disclosure of Interests in Other Entities 1 January 2014 IFRS 13 Fair Value Measurement 1 January 2014 Annual Improvements May January 2014 IAS 1 Financial Statements Presentation Presentation of Items of Other Comprehensive Income The amendment becomes effective for annual periods beginning on or after 1 July The amendments to IAS 1 change the grouping of items presented in the statement of comprehensive income. Items that could be reclassified (or recycled ) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amendment affects presentation only and is deemed to have no impact on the Group s financial position or performance

25 2. ACCOUNTING POLICIES (Continued) (t) Adoption of IFRS during the year (continued) IAS 19 Employee Benefits (Revised) The IASB has issued numerous amendments to IAS 19. These range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and re-wording. The amendment will have no impact on the Group s financial statements. The amendment becomes effective for annual periods beginning on or after 1 January IAS 27 Separate Financial Statements (as revised in 2012) The amendment becomes effective for annual periods beginning on or after 1 January As a consequence of the new IFRS 10 and IFRS 12, what remains of IAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in separate financial statements. The amendment will have no impact on the Group s financial statements. The amendment becomes effective for annual periods beginning on or after 1 January IAS 28 Investments in Associates and Joint Ventures (as revised in 2011) As a consequence of the new IFRS 11 Joint Arrangements, and IFRS 12 Disclosure of Interests in Other Entities, IAS 28 Investments in Associates, has been renamed IAS 28 Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. The Group has no investments in associates or joint arrangements, as such, the adoption of this revised standard is expected to have no impact on the financial statement of the Group. The revised standard becomes effective for annual periods beginning on or after 1 January IAS 32: Financial instruments: presentation (Amendment) These amendments clarify the meaning of currently has a legally enforceable right to set-off. The amendments also clarify the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. These amendments are not expected to impact the Group s financial position or performance and become effective for annual periods beginning on or after 1 January IFRS 7: Financial instruments: disclosures (Amendments) These amendments require an entity to disclose information about rights to set-off and related arrangements (e.g., collateral agreements). The disclosures would provide users with information that is useful in evaluating the effect of netting arrangements on an entity s financial position. The new disclosures are required for all recognised financial instruments that are set off in accordance with IAS 32 Financial Instruments: Presentation. The disclosures also apply to recognised financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set off in accordance with IAS 32. These amendments will not impact the Group s financial position or performance and become effective for annual periods beginning on or after 1 January

26 2. ACCOUNTING POLICIES (Continued) (s) Adoption of IFRS during the year (continued) IFRS 9 Financial Instruments: Classification and Measurement IFRS 9 as issued reflects the first phase of the IASBs work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39. The standard is effective for annual periods beginning on or after 1 January IFRS 9 replaces the multiple classification models in IAS 39 with a single model that has only two classification categories: amortised cost and fair value. Classification under IFRS 9 is driven by the entity's business model for managing financial assets and the contractual characteristics of the financial assets. This will impact on the classification of the financial assets of the Group when adopted. IFRS 10 Consolidated Financial Statements IFRS 10 replaces the portion of IAS 27 Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also addresses the issues raised in SIC-12 Consolidation Special Purpose Entities. IFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by IFRS 10 will require management to exercise significant judgement to determine which entities are controlled and therefore are required to be consolidated by a parent, compared with the requirements that were in IAS 27. Based on the preliminary analyses performed, IFRS 10 is not expected to have any impact on the currently held investment of the Group. This standard becomes effective for annual periods beginning on or after 1 January IFRS 11 Joint Arrangements IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities Non-monetary Contributions by Venturers. IFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method. The effective date of this standard is 1 January The Group has no joint arrangements, as such, the adoption of this standard is expected to have no impact on the financial statement of the Group. IFRS 12 Disclosure of Interests in Other Entities IFRS 12 includes all of the disclosures that were previously in IAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in IAS 31 and IAS 28. These disclosures relate to an entity s interests in subsidiaries, joint arrangements, associates and structured entities. IFRS 12 is a disclosure only standard and therefore will have no effect on profit or loss or the equity of the Group. This standard becomes effective for annual periods beginning on or after 1 January

27 2. ACCOUNTING POLICIES (Continued) (s) Adoption of IFRS during the year (continued) IFRS 13 Fair Value Measurement The standard becomes effective for annual periods beginning on or after 1 January It aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements, which are largely aligned between IFRS and US GAAP do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs or US GAAP. The Group is currently assessing the impact that this standard will have on the financial position and performance but based on the preliminary analyses, no material impact is expected. Annual Improvements May 2012 These improvements will not have an impact on the Group, but include: IFRS 1 First-time Adoption of International Financial Reporting Standards This improvement clarifies that an entity that stopped applying IFRS in the past and chooses, or is required, to apply IFRS, has the option to re-apply IFRS 1. If IFRS 1 is not re-applied, an entity must retrospectively restate its financial statements as if it had never stopped applying IFRS. IAS 1 Presentation of Financial Statements This improvement clarifies the difference between voluntary additional comparative information and the minimum required comparative information. Generally, the minimum required comparative information is the previous period. IAS 16 Property Plant and Equipment This improvement clarifies that major spare parts and servicing equipment that meet the definition of property, plant and equipment are not inventory. IAS 32 Financial Instruments, Presentation This improvement clarifies that income taxes arising from distributions to equity holders are accounted for in accordance with IAS 12 Income Taxes. IAS 34 Interim Financial Reporting The amendment aligns the disclosure requirements for total segment assets with total segment liabilities in interim financial statements. This clarification also ensures that interim disclosures are aligned with annual disclosures. These improvements are effective for annual periods beginning on or after 1 January

28 3 RISK MANAGEMENT 3.1 Risk factors The Group s activities expose it to a variety of financial risks: market risk (which includes currency risk, price risk and interest rate risk), credit risk, liquidity risk, insurance risk and non financial risks: operational risk and regulatory risk. The Group s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group s financial performance. The Group uses derivative financial instruments to economic hedge certain risk exposures. Risk management is carried out by management under policies approved by the Board of Directors. (a) Market risk Market risk is the potential adverse change in income or the value of net worth arising from movements in interest rates, exchange rates or other market prices. Market risk arises from the structure of the statement of financial position, the execution of interbank business and proprietary trading. The Group recognises that the effective management of market risk is essential to the maintenance of stable earnings, the preservation of shareholder value and the achievement of the Group s objectives. The Group has an effective hedging program in place to mitigate the exposure arising from movement in interest rates and exchange rates. The Group s exposure to market risk is governed by a policy approved by the Board of Directors and the immediate parent company, Dr. Ing.h.c.F.Porsche AG. This sets out the types of financial instruments which may be used to increase or reduce risk and the way in which risk is controlled. The principles established by these standards are implemented in order to be consistent with the global risk management systems of the group. The Group economic hedges interest rate risk and exchange rate risk on certain fixed interest rate investments using swaps, and forward exchange contracts. See Note 11 for more details. Currency risk The Group s reporting currency is euro. Loans to and deposits from group companies are denominated in the local currency of the counterparty. The currency exposure arising is reduced through the use of forward foreign currency contracts. At the year end, the Group s exposure to other currencies arising from group loans and deposits has been partially mitigated by the use of foreign currency forward contracts. The Group s exposure to other currencies has decreased during the year due to decrease in deposits from other group companies and redemption of Interest bearing loans and borrowings. Financial instruments (cash and cash equivalents, financial assets at fair value through profit or loss and loans and advances to related parties) include amounts denominated in foreign currencies. The Group attempts to reduce foreign exchange risk by holding assets and liabilities in currencies used by the intra-group entities with which it trades