Tubos Reunidos, S.A. and subsidiaries. Audit Report, Consolidated annual accounts as at 31 December 2008 and Directors Report for 2008

Transcription

1 Tubos Reunidos, S.A. and subsidiaries Audit Report, Consolidated annual accounts as at 31 December 2008 and Directors Report for 2008

2 PricewaterhouseCoopers Auditores, S.L. Edificio Sota Gran Vía, 45 6º Bilbao España Tel Fax Free translation of the auditor s report on the consolidated annual accounts originally issued in Spanish. In the event of a discrepancy, the Spanish language version prevails AUDITOR S REPORT OF THE CONSOLIDATED ANNUAL ACCOUNTS To the shareholders of Tubos Reunidos, S.A. We have audited the consolidated annual accounts of Tubos Reunidos, S.A. (Parent company) and its subsidiaries (the Group), consisting of the consolidated balance sheet as at 31 December 2008, the consolidated income statement, the consolidated statement of changes in equity, the consolidated cash flow statement and the related notes to the consolidated annual accounts for the year then ended, the preparation of which is the responsibility of the Directors of the Parent Company. Our responsibility is to express an opinion on the consolidated annual accounts taken as a whole, based on the work performed in accordance with auditing standards generally accepted in Spain, which require the examination, on a test basis, of evidence supporting the consolidated annual accounts and an evaluation of their overall presentation, the accounting principles applied and the estimates made. For comparative purposes and in accordance with Spanish Corporate Law, the Parent Company s Directors have presented, for each item in the consolidated balance sheet, the consolidated income statement, the consolidated statement of changes in equity, the consolidated cash flow statement and the related notes to the consolidated annual accounts, the corresponding amounts for the previous year as well as the amounts for Our opinion refers solely to the 2008 consolidated annual accounts. On 7 April 2008 we issued our audit report on the consolidated annual accounts for 2007 in which we expressed an unqualified opinion. In our opinion, the accompanying consolidated annual accounts for 2008 present fairly, in all material respects, the consolidated financial position of Tubos Reunidos, S.A. and its subsidiaries as at 31 December 2008 and the consolidated results of their operations, changes in consolidated net equity and consolidated cash flows for the year then ended and contain all the information necessary for their interpretation and comprehension in accordance with International Financial Reporting Standards adopted by the European Union, applied on a basis consistent with the preceding year. The accompanying consolidated Directors' Report for 2008 contains the information that the Parent Company's Directors consider relevant to the Group's position, the evolution of its business and other matters and does not form an integral part of the consolidated annual accounts. We have verified that the accounting information contained in the aforementioned Directors' Report coincides with that of the consolidated annual accounts for Our work as auditors is limited to checking the consolidated Directors' Report within the scope already mentioned in this paragraph and it does not include a review of information other than that obtained from the accounting records of Tubos Reunidos, S.A. and its subsidiaries. PricewaterhouseCoopers Auditores, S.L. Original in Spanish signed by Francisco Javier Domingo Audit Partner 27 February 2009 PricewaterhouseCoopers Auditores, S.L. R. M. Madrid, hoja , folio 75, tomo 9.267, libro 8.054, sección 3ª Inscrita en el R.O.A.C. con el número S0242 CIF: B

3 The Directors of the Company "TUBOS REUNIDOS, S.A. holding tax identification number A - 48/ and domiciled in Amurrio (Álava), in accordance with Article 171 of the Spanish Companies Act hereby prepare the annual accounts and Directors Report for TUBOS REUNIDOS, S.A. AND SUBSIDIARIES for 2008, as follows: Consolidated Annual Accounts: Contents: Two (2) pages of official stationary numbered 0J and 0J Consolidated balance sheets: One (1) page of official stationary numbered 0J Consolidated Income Statements: One (1) page of official stationary numbered 0J Consolidated statement of changes in equity: One (1) page of official stationary numbered 0J Consolidated cash flow statements: One (1) page of official stationary numbered 0J Consolidated notes to the annual accounts: Written on ninety-five (95) pages of official stationary, numbered 0J through 0J Directors report: Written on eight (8) pages of official stationary, numbered 0J through 0J , together with the Annual Corporate Governance Report (ACGR): Written on fifty four (54) pages of official stationary, numbered 0J through 0J The Company's Directors state that, to the best of their knowledge, the annual accounts prepared in accordance with applicable accounting standards present a true and fair view of the Company's equity, financial situation and the results obtained by the Company and the companies included in consolidation taken as a whole, and that the Directors Report includes a faithful analysis of the business results and development and the position of the Company and its consolidated group taken as a whole, together with the description of the main risks and uncertainties faced. For all appropriate purposes and as an introduction to the aforementioned accounts and report, this document is hereby signed by: Mr. Pedro Abásolo Albóniga (Chairman) Mr. F. Javier Déniz Hernández (CEO) Mr. Emilio Ybarra Aznar (Vice-Chairman) Mr. Pello Basurco Aboitiz Mr. Alberto Delclaux de la Sota Mr. Francisco Esteve Romero Mr. Joaquín Gómez de Olea Mr. Juan José Iribecampos Zubia Mr. Enrique Portocarrero Zorrilla Lequerica Mr. Luis Maria Uribarren Axpe Ms. Leticia Zorrilla de Lequerica Amurrio (Alava), 25 February 2009

4 TUBOS REUNIDOS, S.A. AND SUBSIDIARIES Consolidated Annual Accounts and Consolidated Directors' Report for the year ended 31 December 2008

5 Contents of the Consolidated Annual Accounts for Tubos Reunidos, S.A. and Subsidiaries Note Page CONSOLIDATED BALANCE SHEET CONSOLIDATED INCOME STATEMENTS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES TO THE CONSOLIDATED ANNUAL ACCOUNTS 1 General information 1 2 Summary of the main accounting policies Basis of presentation Basis of consolidation Segment reporting Foreign currency transactions Property, plant and equipment Investment properties Intangible assets Losses due to impairment of assets Financial assets Derivative financial instruments and hedging Inventories Trade receivables Cash and cash equivalents Share capital Trade payables Borrowings Taxes Employee benefits Provisions Revenue recognition Leases Non-current assets held for sale Dividend payment Environment Current and non-current balances 36 3 Financial risk management Financial risk factors Accounting for derivative financial instruments and hedging activities Fair value estimation Capital risk management 42 4 Critical accounting estimates and judgments Critical accounting estimates and assumptions Critical judgments in applying the entity s accounting policies 45 5 Segment reporting 45 6 Property, plant and equipment 50 7 Intangible assets 54 8 Investment properties 56 9 Non-current financial assets Shareholdings in Group companies Shareholdings recorded using the equity method Available-for-sale financial assets Credit quality of financial assets Derivative financial instruments 60 1

6 Note Page 11 Deferred tax assets Inventories Trade and other receivables Other current financial assets Cash and cash equivalents Capital and share premium Reserves and retained earnings Minority interests Deferred income Payables Borrowings Deferred taxes Retirement benefit commitments Provisions Operating revenues Other revenues Employee benefit expenses Other expenses Other net gains/(losses) Financial income and expense Income tax Earnings per share Dividends per share Cash generated from operations Contingencies Commitments Related-party transactions Other information 94 DIRECTORS' REPORT FOR

7 CONSOLIDATED BALANCE SHEETS AT 31 DECEMBER 2008 AND 2007 ASSETS Note Property, plant and equipment 6 309, ,770 Other intangible assets 7 3,854 1,415 Investment properties 8 8,607 - Non-current financial assets 9 13,341 20,288 Deferred tax assets 11/22 13,168 12,924 NON-CURRENT ASSETS 348, ,397 Inventories , ,369 Trade and other receivables , ,821 Current tax assets - 6,685 9,061 Other current assets Other current financial assets 14 32, ,065 Cash and other cash equivalents 15 18,993 10,637 CURRENT ASSETS 401, ,016 TOTAL ASSETS 749, ,413 LIABILITIES AND EQUITY Share capital 16 17,468 20,493 Share premium account Other reserves 17 51,208 51,208 Retained earnings , ,679 Cumulative exchange differences 17 (1,991) (2,170) Less: Treasury shares 16 (2,343) - Less: Interim dividend 17 (12,170) (14,427) EQUITY ATTRIBUTED TO HOLDERS OF EQUITY INSTRUMENTS IN THE PARENT 231, ,170 Minority interests 18 8,138 8,319 NET EQUITY 239, ,489 DEFERRED INCOME 19 47,984 47,650 Borrowings ,285 70,375 Deferred tax liabilities 22 23,118 22,638 Provisions 24 20,664 23,822 Other non-current liabilities 20 20,118 13,034 NON-CURRENT LIABILITIES 199, ,869 Borrowings 21 80,955 75,791 Trade and other payables , ,855 Current tax liabilities - 33,703 20,759 Derivative financial instruments 10 11,005 - Other current liabilities CURRENT LIABILITIES 262, ,405 TOTAL LIABILITIES AND EQUITY 749, ,413 The notes on pages 1 to 95 are an integral part of these consolidated annual accounts

8 CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2008 AND 2007 Note Net turnover , ,208 Other income 26 10,024 4,567 Changes in inventories of finished goods and work in progress 12 15,426 12,755 Supplies 12 (369,197) (300,934) Employee benefit expenses 27 (118,514) (111,239) Amortization 6/7/9 (21,242) (19,345) Other expenses 28 (114,133) (96,719) Other net gains/(losses) 29 1,167 (3,350) OPERATING PROFIT 131, ,943 Financial income 30 1,124 4,592 Financial expenses 30 (14,574) (9,277) Exchange differences (net) 30 (5,423) (4,764) Result on changes in fair value of financial instruments 30 (3,140) 734 Impairment and results obtained from disposal of financial instruments Stake in profits obtained by associated companies and combined businesses consolidated using the equity method 9 13 (28) PROFIT BEFORE TAX FROM CONTINUING OPERATIONS 109, ,200 Income tax expense 31 (28,104) (28,530) PROFIT FOR THE YEAR 81,796 85,670 Minority interests (569) PROFIT ATTRIBUTABLE TO HOLDERS OF PARENT EQUITY INSTRUMENTS 81,846 85,101 Earnings per share attributable to Company shareholders during the year ( expressed in euros per share) Year ended 31 December Note Basic 32 0,466 0,415 - Diluted 32 0,466 0,415 The notes on pages 1 to 95 are an integral part of these consolidated annual accounts

9 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEARS ENDED 31 DECEMBER 2008 AND 2007 Share capital (Note 16) Treasury shares (Note 16) Attributable to the Company s shareholders Share premium (Note 16) Revaluation reserves and other reserves (Note 17) Accumulated exchange differences (Note 17) Retained earnings (Note 17) Interim dividend for the year (Note 17) Minority interests (Note 18) Total equity Balance at 31 December , ,208 (1,885) 222,948 (5,635) 7, ,505 Distribution of 2006 profits - Dividends (15,370) 5,635 (239) (9,974) Interim dividend (14,427) - (14,427) Other movements (285) (285) Profit for , ,670 Balance at 31 December , ,208 (2,170) 292,679 (14,427) 8, ,489 Purchases of treasury shares - (172,343) (172,343) Share capital reduction (3,025) 170, (166,975) Distribution of 2007 profits - Dividends (28,402) 14,427 (131) (14,106) Interim dividend (12,170) - (12,170) Other movements Profit for ,846 - (50) 81,796 Balance at 31 December ,468 (2,343) ,208 (1,991) 179,148 (12,170) 8, ,845 The notes on pages 1 to 95 are an integral part of these consolidated annual accounts

10 CONSOLIDATED CASH FLOW STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2008 AND 2007 Cash flows from operating activities Year ended 31 December Notes Cash generated from operations ,235 29,836 Interest paid - (13,282) (9,277) Taxes paid - (7,213) - Net cash generated from operating activities 167,740 20,559 Cash flows from investing activities Payables due to the acquisition of assets 20 10,366 5,258 Acquisition of property, plant and equipment 6 (37,418) (37,710) Revenues from sale of property, plant and equipment ,822 Acquisition of intangible assets 7 (1,052) (804) Acquisition of investment properties 8 (8,910) - Disposals of available-for-sale financial assets 6,965 2,296 Net cash used in investing activities (29,547) (28,138) Cash flows from financing activities Acquisition and write-off of treasury shares 16 (172,343) - Additions of outside resources received to acquire treasury shares 16 95,000 - Draw down of outside resources 21 (26,218) 29,438 Dividends paid to the Company s shareholders 17 (26,145) (24,162) Dividends paid to minority interests 18 (131) (239) Net cash used in financing activities (129,837) 5,037 Net (decrease)/increase in cash and cash equivalents 8,356 (2,542) Cash and bank overdrafts at beginning of the year 15 10,637 13,179 Cash and bank overdrafts at the end of the year 15 18,993 10,637 The notes on pages 1 to 95 are an integral part of these consolidated annual accounts

11 1. General information a) Composition of the Group and its Activities Tubos Reunidos, S.A. (T.R.), engages in the manufacture of seamless steel pipes. Its registered address for corporate and tax purposes is located in Amurrio (Alava), together with its only production center. The company is the parent of a group consisting of several companies (see accompanying table) that engage in activities in the seamless pipe, distribution, automotive and other industries. The list of subsidiaries, all of which are consolidated using the full consolidation method, as the Company has a majority stake and control in all cases, is as follows: Company and registered address Activity % Owned by the group company: Auditor Productos Tubulares, S.A.U. Valle de Trápaga (Vizcaya) (PT) Almacenes Metalúrgicos, S.A. (ALMESA) Güeñes (Vizcaya) T.R. Aplicaciones Tubulares de Andalucía, S.A. (TRANDSA) Chiclana (Cádiz) Industria Auxiliar Alavesa, S.A. (INAUXA) Amurrio (Alava) Aceros Calibrados, S.A. (ACECSA) Pamplona (Navarra) T.R. Comercial, S.A. Amurrio (Alava) Aplicaciones Tubulares, S.L. Bilbao (Vizcaya) T.R. América, Inc. Houston (Texas) Depósitos Tubos Reunidos-Lentz, T.R. Lentz, S.A. (TR-Lentz) Comunión (Alava) Aplicaciones Tubulares, C.A. (ATUCA) Edo. Miranda (Venezuela) Clima, S.A.U. (CLIMA) Bilbao Profesionales de Calefacción y Saneamiento, S.L. (PROCALSA) Barcelona Almesa Internet, S.A. Güeñes (Vizcaya) Macrofluidos, S.A. Oporto (Portugal) Industrial 100 T.R. SCD Trading 100 T.R. PwC Industrial 100 T.R. PwC Industrial 62,5 T.R. PwC Industrial 100 T.R. - Trading 100 T.R. - Dormant 100 T.R. - Trading 100 T.R. - Industrial 50 T.R. Attest Trading 100 T.R. - Holding company 100 T.R. - Trading 100 Almesa PwC Holding company 100 Almesa - Trading 100 Almesa - 1

12 In 2008 the shareholding (100%) in Agrelo, S.L. was acquired through its subsidiary Almacenes Metalúrgicos, S.A., for a total cost of 0.9 million. This company engages in the marketing of pipes and related products in the construction industry and is located in La Coruña, it is not included within the scope of consolidation due to its low relative importance (Note 9). The value of the interest held in these companies is recorded by Tubos Reunidos, S.A. at the net amount of 22.4 million (2007: 22.4 million) and by Almacenes Metalúrgicos, S.A. at the next amount of 7.2 million (2007: 6.3 million). The list of companies associated with the Group, all of which are consolidated using the equity method (Note 9), is as follows: Company and registered address Activity % Owned by the group company: Landais Outsourcing, S.L. (Vizcaya) Computer services 30 P.T. Cash Sallen Business, S.L. (Madrid) R&D 25 P.T. Perimetral Sallen Technologies, S.L. (Madrid) R&D 25 P.T. A subsidiary of Almesa with a net carrying value of 145 thousand (2006: 145 thousand) is excluded from consolidation due to the fact that it has little significance for the consolidated annual accounts (Note 9). The companies that were not consolidated in 2008 and 2007 do not carry out relevant activity levels with respect to the consolidated figures and do not record any significant payables, liabilities or contingencies at the Group level. The annual accounts for 2007 were prepared by the Company's Board of Directors on 27 February 2008 and were approved by shareholders at a General Meeting held on 25 June The annual accounts for 2008 have been prepared by the Board of Directors on 25 February 2009 and have yet to be approved by shareholders at a General Meeting. However, Management understands that they will be approved without modification. 2

13 b) Merger project At the meeting held on 7 May 2008 the Board of Directors of the Parent Company approved the merger project involving Tubos Reunidos, S.A. and Larreder, S.L.U. (Condesa Group). This Merger Project establishes the merger of Larreder, S.L.U. (Target Company) into Tubos Reunidos, S.A. (Acquiring Company and parent of Tubos Reunidos Group), through the dissolution without liquidation of the former and the transfer of all of the target company's equity to the Acquiring Company and the universal acquisition of all of its assets and liabilities, including all rights and obligations, relating to the Target Company. The Company reported the suspension of the aforementioned merger process to the Spanish Stock Market Commission as a relevant event on 26 November 2008, in accordance with the agreement reached by both parties. 2. Summary of the main accounting policies The main accounting policies adopted when preparing these consolidated annual accounts are described below. These policies have been applied consistently in all years presented in these consolidated annual accounts. 2.1 Basis of presentation The Group s consolidated financial statements at 31 December 2008 have been drawn up in accordance with the International Financial Reporting Standards adopted for use in the European Union (IFRS-EU) and approved under European Commission Regulations in force at 31 December The consolidated annual accounts have been prepared on a historical cost basis, as modified by the revaluation of available-for-sale financial assets and financial assets and liabilities (including derivatives) at fair value with changes in the income statement. 3

14 IFRS The preparation of consolidated annual accounts in conformity with IFRS-EU requires the use of certain critical accounting estimates. The application of IFRS also requires that management exercise judgment in the process of applying the Company s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in Note 4. a) Standards adopted early In 2007 the Group adopted IFRIC 11, IFRS 2 Group and the Treasury Share Transactions. This interpretation provides guidance to determine whether a share-based transaction involving an entity's own equity instruments or group companies must be recognized as an equity-settled or cash-settled transaction in the individual accounts of the parent company and group companies. The application of this interpretation has no effect on the Group s accounts. b) Rules, amendments and interpretations of rules entering into force in 2008 IAS 39 (Revised) Financial Instruments: Recognition and measurement and IFRS 7 (Amendment) Financial Instruments: Disclosures - Reclassification of financial instruments. These revisions allow for the reclassification, under exceptional circumstances (current financial crisis), the financial assets included under the category "held for trading" by deducting them from the category of "items stated at fair value through changes in profit and loss". The Company did not apply this measure in IFRIC 14, IAS 19 The limit on a defined benefit asset, minimum funding requirements and their interaction addresses the guidelines for evaluating the limit established by IAS 19 regarding the amount of a surplus that can be recognized as an asset. It also explains how the pension asset/liability may be affected by minimum financing obligations established by contract or by law. This interpretation does not have any effect on the Group's accounts, given that the Company has a financing deficit and it is not subject to minimum financing requirements. 4

15 c) Standards, amendments and interpretations that enter into force in 2008 but whose application does not have any effect on the Group's accounts. The following interpretation (which has not yet been adopted by the European Union) of existing standards is mandatory for years commencing as from 1 January 2008, although it has no effect on the Group's operations: IFRIC 12, Service Concession Agreements" d) Rules, amendments and interpretations of existing standards that have not yet entered into force and which the Group has not adopted early. At the date these accounts were prepared, the IASB had published the interpretations set out below which, except in the case of IFRS-EU 8, have not yet been approved by the European Union. These interpretations are of mandatory compliance in all years starting as from 1 January 2009 and subsequent years, although the Group has not adopted them: IAS 23 (Revised), Borrowing costs (in force as from 1 January 2009). This Standard requires companies to capitalize borrowing costs that are directly attributable to the acquisition, construction, production of a qualified asset (any which necessarily requires a substantial period of time before being ready for use or for sale) as part of the cost of the asset. The option to recognize borrowing costs immediately as an expose of the period is eliminated. The Group will apply the revised IAS 23 as from 1 January 2009, although at the moment the Group is still analyzing its effects. IAS 1 (Revised), Presentation of financial statements" (in force as from 1 January 2009). This revised standard prohibits the presentation of income and expense items (i.e. changes in equity due to transactions with non-shareholder third parties) in the statement of changes in equity and requires the changes in equity due to transactions with non-shareholder third parties be presented separate from changes in equity due to transactions with shareholders. All changes in equity due to transactions with nonshareholders third parties must be presented in an income statement, although companies may choose to present a single statement (statement of total revenues) or two statements (an income statement and a statement of total revenues). When a company re-expresses or reclassifies the comparative information it must present a balance sheet re-expressed at the beginning of the comparative period, in addition to the balance sheet at the end of the current year and the comparative period. The Group will apply IAS 1 (Revised) as from 1 January It is likely that both the income statement and the statement of total revenues will be presented as income statements. IFRS 2 (Revised) Share-based payments (in force as from 1 January 2009). This amendment addresses the conditions for the irrevocable nature of the granting of rights and cancellations. It clarifies that only service and performance conditions may be considered to be concession conditions. Other characteristics of share-based payments are not considered to be concession conditions, but rather they must be included in the calculation of fair value at the concession date in transactions with employees and third-parties that render similar services, such that they have no effect on the number of awards that are expected to consolidate or the subsequent valuation at the concession 5

16 date. All cancellations initiated by the company and by third-parties must receive the same accounting treatment. The Group will apply IFRS 2 (Revised) as from 1 January It is not expected to have a significant effect on the Group's financial statements. IAS 32 (Revised) Financial Instruments: Presentation and IAS 1 (Revised) Presentation of financial statements"-"puttable instruments and obligations arising on liquidation" (in force as from and January 2009). These amendments require companies to reclassify financial instruments that may be surrendered and instruments (or their components) that give rise to a company obligation to provide a third-party with a fraction of its net assets in the event of equity liquidation, provided that the instrument has certain characteristics and meets certain conditions. The Group will apply IAS 32 and IAS 1 (Revised) as from 1 January 2009 although they are not expected to have any effect on the financial statements. IFRS 1 (Revised) "First-time adoption of IFRS and IAS 27 "Consolidated and separate financial statements" (in force as from 1 January 2009). The amended standard allows first-time adopters to use the fair value or the carrying value resulting from applying the above accounting principles as an attributed cost of investments in subsidiaries, combined businesses and associated companies in the separate financial statements. The revision also eliminates the definition of the cost method from IAS 27 and replaces it with the requirement to present dividends as revenues in the separate financial statements for the investor. This revision does not have any effect on the Group's financial statements. IAS 27 (Revised), Consolidated and separate financial statements" (in force as from 1 July 2009). The revised standard requires that all transactions with minority shareholders be recorded under equity, provided that there are no changes in control, such that these transactions no longer have an effect on goodwill and do not lead to any profit or loss. The revision also covers the accounting treatment to be applied when control is lost. Any minority shareholding maintained must again be measured at fair value and the effect recorded in the income statement. The Group will apply IAS 27 (Revised) on a prospective basis to transactions with minority shareholders as from 1 January

17 IFRS 3 (Revised) "Business combinations" (in force as from 1 July 2009). The revised standard maintains the acquisition method for business combinations, although significant changes are introduced. For example, all payments are recognized at fair value at the date of acquisition, and the contingent payments that are classified as liabilities are measured at each closing date at fair value, and all changes are recorded in the income statement. An accounting policy option is introduced at the business combination level, consisting of measuring minority shareholdings at fair value or the proportional value of the net assets and liabilities recorded by the acquired company. All transaction costs are taken to expenses. The Group will apply IFRS 3 (Revised) on a prospective basis to all business combinations as from 1 January IFRS 1 (Revised) "First-time adoption of IFRS" (in force as from 1 January 2009). As part of its annual improvement project, in 2007 the Board proposed to revise IFRS 1 to make it more understandable for users and design it such that it can better accommodate future changes. In this version, revised in November 2008, the previous version is essentially maintained but within a modified structure. This revised standard has yet to be adopted by the European Union. IAS 39 (Revised) "Items that may be designated as hedges" (in force as from 1 July 2009). This revision introduces two significant changes when it prohibits designating inflation as a component that may be hedge on a fixed-rate debt and including the temporary value in the hedged risk when options are designated to be hedges. This revised standard has yet to be adopted by the European Union. Improvement project published by the IASB in May 2008, which was adopted by the European Union in January 2009 and affects the following standards and interpretations. 7

18 - IFRS 5 (Revised) Non-current assets held for sale and discontinued operations" (and relating to the revision of IFRS 1 "First time adoption of IFRS") (in force as from 1 July 2009). This revision clarifies that all assets and liabilities at a subsidiary must be classified as held for sale if control over the subsidiary is lost as a result of a partial plan covering its sale. In the event that it meets the conditions to be considered a discontinued operation, the relevant breakdowns regarding the subsidiary must be included. As a result, IFRS 1 has also been adapted to take into account this revision, such that its application is prospective as from the date of transition to IFRS. The Group will adopt IFRS 5 (Revised) on a prospective basis with respect to all partial sales of subsidiaries that take place as from 1 January IAS 23 (Revised), Borrowing costs (in force as from 1 January 2009). The definition of borrowing costs has been revised so that interest is calculated in accordance with the effective interest rate defined under IAS 39 (Financial Instruments: Recognition and measurement". This eliminates the inconsistent terminology between IAS 39 and IAS 23. The Group will apply IAS 23 (Revised) on a prospective basis with respect to the borrowing costs associated with qualifying assets as from 1 January IAS 28 (Revised) "Investments in associates" (and the relevant amendments to IAS 32 "Financial instruments: Presentation" and IFRS 7: Financial instruments: Disclosures") (in force as from 1 January 2009). An investment in an associate is considered to be a separate asset for the purposes of calculating value impairment. Any impairment loss is not attributed to specific assets included under the investment, for example, goodwill. Any reversal of impairment losses are recognized as an adjustment to the investment balance to the extent that the recoverable amount of the investment has increased. The Group will apply IAS 28 (Revised) to the impairment tests applied to investments in subsidiaries and related impairment losses as from 1 January

19 - IAS 36 (Revised), Asset impairment (in force as from 1 January 2009). In cases where fair value, less selling costs, is calculated based on discounted cash flows equivalent breakdowns of value-in-use calculations must be presented. The Group will apply IAS 36 (Revised) and will present, if appropriate, the breakdowns required for impairment tests as from 1 January IAS 38 (Revised), Intangible assets (in force as from 1 January 2009). An interim payment may only be recognized when made as a prepayment to obtain a right to access certain assets or services. For this reason, the expense for sending catalogs is recorded at the time that they become available and not at the time they are distributed to customers, which the policy currently applied. The Group will start to apply IAS 38 (Revised) as from 1 January 2009, although it is believed that this revision will not affect the Group's operations. - IAS 19 (Revised), Employee compensation (in force as from 1 January 2009). - This revision clarifies that improvements to a plan that give rise to a change to the extent that the promised benefits will be affected by future salary increases and be considered a reduction, whereas revisions that give rise to a change in benefits attributable to past services give rise to a negative past service costs, provided that there is a decrease in the present value of the defined benefit obligation. - The definition for yields given by assets linked to the plan has been modified to indicate that plan administration costs are deducted from the calculation of the yield from linked assets only to the extent that those costs have been excluded from the measurement of the defined benefit obligation. - The distinction between short and long-term employee benefits is based on whether or not the benefits will be settled within 12 months following the date on which the services have been rendered, or after that time. - IAS 37 Provisions, contingent assets and liabilities" requires that contingent liabilities be broken down, and not only recognized, in the financial statements. IAS 19 has been revised in line with this standard. 9

20 The Group will apply IAS 19 (Revised) as from 1 January 2009, although currently it has no employee compensation plans of this type. - IAS 39 (Revised) Financial Instruments: Recognition and measurement" (in force as from 1 January 2009): - This revision clarifies that it is possible that there may be movements towards and from the category of financial assets at fair value through changes in profit and loss in cases in which a derivative starts (or ends) being classified as a hedging instrument in a hedge for cash flow or net investments. - The definition of a financial asset or liability at fair value through changes in profit and loss also changes, to the extent that they refer to items held for trading. A financial asset or liability that forms part of a financial instrument portfolio that is managed together, and for which there is evidence of a recent short-term profit, is included in that portfolio as from initial recognition. - The current guidelines for designating and documenting hedging relationships stipulate that a hedging instrument must involve a third-party outside the unit that is presenting financial information and uses as an example a company segment. This means that in order to apply hedge accounting at the segment level, the segment must meet hedge accounting requirements. The revision eliminates examples of segments to make them coherent with IFRS 8 "Operating segments" which requires that segment reporting be based on the information presented to the members of management responsible for taking decisions. For the purposes of segment reporting, currently each subsidiary designates the cash contracts held with the group to hedge cash flows such that this hedge is presented in the segment to which the hedged item pertains. This presentation is coherent with the information managed at the decision-taking level (see Note 3.1). After the revision enters into force, the hedge will continue to be in effect and will be reflected in the segment to which the hedged item pertains (Information supplied to members of management that take decisions), although the Group will not formally document or test this hedging relationship. 10

21 - When a debt instrument is again measured, once the hedge accounting at fair value has ceased, the revision clarifies that the revised effective interest rate method must be used The Group will apply IAS 39 (Revised) as from 1 January Its application is not expected to have any effect on the Group s income statement. - IAS 1 (Revised), Presentation of financial statements" (in force as from 1 January 2009). This revision clarifies that some, and not all, financial instruments classified as held for trading, in accordance with IAS 39 "Financial instruments: Recognition and measurement" are examples of current assets and liabilities, respectively. The Group will apply this revision as from 1 January 2009 and it is not expected to have any effect on its financial statements. - Other minor changes to IFRS 7 Financial instruments: Disclosures, IAS 8 Accounting policies, changes in accounting estimates and errors, IAS 10 Events after the reporting period, IAS 18 Revenue and IAS 34 Interim financial reporting, are not likely to have an effect on the Group s financial statements and have not been analyzed in detail. IFRIC 16 Hedges of a net investment in a foreign operation" (in force as from 1 October 2008). This interpretation addresses the accounting treatment to be applied to hedges of a net investment, including the fact that the hedge of the net investment relates to differences in the functional currency and not presentation, as well as the fact that the hedging instrument may be maintained anywhere within the Group. The requirements of IAS 21 "Effects of changes in foreign exchange rates" are applicable to the hedged item. The Group will apply IFRIC 16 as from 1 January It is not expected to have any material effect on the Group's financial statements. 11

22 IFRS 8 "Operating Segments", is mandatory for years commencing as from 1 January IFRS 8 replaces IAS 14 and unifies the requirements for presenting financial information by segments with the US standard SFAS 131 "Disclosures about segments of an enterprise and related information". The new Standard requires a management approach under which segment information is presented on the same basis as which it is used for internal purposes. The Group will apply IFRS 8 as from 1 January The expected impact of this standard is still being evaluated in detail by Management, although the number of segments being reported is not expected to change, presenting the information in line with the internal information prepared and supplied to decision-making bodies. IFRIC 17 Distributions of non-cash assets to owners This interpretation addresses how distributions of non-cash assets should be measured when a company distributes dividends to shareholders. This interpretation demands that interim dividends be recorded when they have been appropriately authorized, the dividend must be measured at the fair value of the net assets to be distributed and the difference between the fair value of the dividend paid and the carrying value of the net assets distributed must be recognized in the income statement. This interpretation is applicable on a prospective for all years starting as from 1 July 2009 and has yet to be adopted by the European Union. IAS 27 (revised in May 2008) and IFRS 1 Cost of investing in a subsidiary, a combined business and an associate, allowing first-time adopters of IFRS to apply fair value or carrying value determined under the preceding system to measure the initial cost of investments in subsidiaries, combined businesses and associates in separate financial statements. The revision also eliminates the definition of the cost method from IAS 27 and replaces it with the requirement to present dividends as revenues in the separate financial statements for the investor. This modification has no effect on the Group. 12

23 e) Standards, amendments and interpretations of existing standards that have not yet entered into force and which are not relevant to the Group's operations. At the date these accounts were prepared, the IASB had published the interpretations listed below, which are mandatory for all years starting as from 1 January 2008 but which are not relevant within the context of the Group's activities: IFRIC 13, Customer loyalty programs" (in force as from 1 July 2008). IFRIC 13 states that in those cases in which assets or services are rendered together with a loyalty incentives (for example, loyalty points or free products), the agreement is considered to be a multiple item contract and the amount received or to be received from the customer must be attributed among the components on a fair value basis. IFRIC 13 is not relevant for the Group's operations given that none of the Group's companies have customer loyalty programs. The revisions listed below relate to the improvement project published by the IASB in May 2008 and were adopted by the European Union in January 2009: - IAS 16 (Revision) Property, plant and equipment" (and the relevant revision of IAS 7 "Cash flow statement") (in force as from 1 January 2009). Those companies whose primary activity consists of leasing and subsequently selling assets will present the amount received from those sales as revenues and assets must be reclassified to inventories at the time that the asset becomes held-for-sale. As a result, IAS 7 is amended indicating that cash flows that derive from the acquisition, rental and sale of those assets will be classified as cash flows from operating activities. This revision will not have any impact on the Group's activities given that no group company engages in the rental and sale of assets. - IAS 27 (Revised), Consolidated and separate financial statements" (in force as from 1 January 2009). In those cases in which an investment in a subsidiary is accounted for in accordance with IAS 39 Financial instruments: Recognition and measurement, are classified as held-for-sale in accordance with the IFRS 5 " Noncurrent assets held-for-sale and discontinued operations, and will continue to be subject to IAS 39. This revision will not have any impact on the Group given that it applies the policy of accounting for investments in subsidiaries at cost in the separate financial statements. 13

24 - IAS 28 (Revised) "Investments in associates" (and the relevant amendments to IAS 32 "Financial instruments: Presentation" and IFRS 7 "Financial instruments: Disclosures") (in force as from 1 January 2009). When an investment in an associate is accounted for in accordance with IAS 39 "Financial instruments: Recognition and measurement", only certain breakdowns established by IAS 28 must be included, in addition to the requirements of IAS 32 "Financial instruments: Presentation" and IFRS 7 "Financial instruments: Disclosures. This revision will not have any effect on the Group's operations, given that the Group's policy regarding investments in associates is that they are recognized in accordance with the equity method. - IAS 29 (Revised), Financial reporting in hyperinflationary economies" (in force as from 1 January 2009). The standard's guidelines are revised to clarify that certain assets and liabilities must be measured at fair value instead of at historic cost. This revision will not have any effect on the Group's operations, since no subsidiary or associate operates in hyperinflationary economies. - IAS 31 (Revised) "Interests in joint ventures" (and relevant amendments to IAS 32 and IFRS 7) (in force as from 1 January 2009). When an investment in a joint venture is recorded in accordance with IAS 39, only certain breakdowns established by IAS 31 are required, in addition to those required by IAS 32 "Financial instruments: Presentation" and IFRS 7 "Financial instruments: Disclosures. - IAS 38 (Revised), Intangible assets (in force as from 1 January 2009). This revision eliminates the mention of "on rare occasion, or perhaps never" to justify the use of a method that results in a depreciation rate that is lower than the result of applying the straight-line method. This revision will not have any effect on the Group's operations, given that all intangible assets are amortized in accordance with the straight-line method. 14

25 - IAS 40 (Revised) "Investment property" (and relevant amendments to IAS 16) (in force as from 1 January 2009). Properties that are under construction or under development for future use as investment properties are included within the scope of IAS 40. Therefore, when the fair value model is used, these properties must be measured at their fair value. However, when the fair value of investment properties under construction cannot be reliably determined, the property will be measured at cost until the date on which construction ends or the date on which the fair value may be reliably determined, if earlier. This revision will not have any effect on the Group's operations since investment properties are stated at cost. - IAS 41 (Revised), Agriculture (in force as from 1 January 2009). A market discount rate must be used in those cases in which the fair value is calculated based on discounted cash flows and the prohibition against considering biological transformation when calculating fair value is eliminated. This revision will not have any effect on the Group's operations given that it does not carry out any activities in the agricultural area. - IAS 20 (Provision) "Accounting for government grants and disclosure of government assistance" (in force as from 1 January 2009). The benefit of a loan at a lower-than-market rate granted by a public entity is measured at the difference between the carrying value in accordance with IAS 39 "Financial instruments: Recognition and measurement", and the amount received recognized in accordance with IAS Other minor revisions of IAS 20 "Accounting for government grants and disclosure of government assistance", IAS 29 "Financial reporting in hyperinflationary economies", IAS 40 "Investment properties" and IAS 41 "Agriculture", included in the IASB s improvement project in May 2008, do not have an effect on the Group's financial statements due to the reasons indicated above. 15

26 IFRIC 15 Agreements for the construction of real estate" (in force as from 1 January 2009). This interpretation addresses whether IAS 18 "Revenue" or IAS 11 "Construction contract" should be applied to certain transactions. It is likely that IAS 18 will be applicable to a larger number of transactions. This interpretation is not relevant to the Group's operations given that revenues are recorded in accordance with IAS 18 and not IAS 11. This interpretation has yet to be adopted by the European Union. After analyzing the new accounting standards and interpretations not yet adopted by the European Union to be applied in years commencing 1 January 2008 or afterwards, the Company does not expect them to have any significant effect on the consolidated annual accounts. 2.2 Basis of consolidation a) Subsidiaries Subsidiaries are all those companies where the Group is able to manage the financial and operations policies which are generally accompanied by a shareholding involving more than half of the voting rights. When evaluating whether the Group controls another company the existence and the effect of potential voting rights that may currently be exercised or converted are taken into consideration. Subsidiaries are consolidated as from the date on which control is transferred to the Group and they are excluded from consolidation on the date that control is no longer held. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. 16

27 The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. Acquisition cost is the fair value of the assets delivered, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus all costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group s share of the identifiable net assets acquired is recorded as goodwill. If the acquisition cost is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement. Inter-company transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. b) Minority transactions and interests The Group applies the policy of treating transactions with minority shareholdings as transactions with third parties outside the Group. The disposal of minority interests gives rise to gains and/or losses for the Group, which is recognized in the income statement. The acquisition of minority shareholdings gives rise to Goodwill, which is the difference between the price paid and the relevant proportion of the carrying value of the subsidiary s net assets. c) Associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for by the equity method of accounting and are initially recognized at cost. The Group s investment in associates includes, if applicable, Goodwill (net of any accumulated impairment loss) identified during the acquisition. Investments in associates are accounted for by the equity method of accounting and are initially recognized at cost. 17

28 The Group s share in the profits/(losses) that arise subsequent to the acquisition of Associates is recognized in the income statement and its share in movements in reserves taking place after the acquisition is recognized under reserves. The cumulative postacquisition movements are adjusted against the carrying amount of the investment. When the Group's share in the losses obtained by an associate is equal to or exceeds its shareholding, including any other unsecured receivables, the Group does not recognize any additional losses unless it has incurred obligations, or made payments, on behalf of the Associate. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group s interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. Gains or losses deriving from the dilution of associates are recognized in the income statement. d) Consolidated Annual Accounts Group Company annual accounts used in the consolidation process all relate to the period ended 31 December in each year. Note 1 provides details identifying each subsidiary and associate included within the scope of consolidation. 2.3 Segment reporting A business segment is a group of assets and transactions the aim of which are to supply products or services subject to risks and returns which differ from those of other business segments. A geographical segment aims to supply products or services in a specific economic environment subject to risks and returns which differ from those of other segments operating in different economic environments. Segment reporting by the Group is primarily by business and secondarily on a geographical basis (Note 5). 18