You are here

Print page

Notes to the separate financial statements at 31 December 2016

1. General Information

Leonardo is a company limited by shares based in Rome (Italy), at Piazza Monte Grappa 4, and is listed on the Italian Stock Exchange (FTSE MIB).

The Company is a major Italian high technology organization operating in the Helicopters, Electronics, Defence and Security Systems and Aeronautics sectors.

2. Form, content and applicable accounting standards

In application of EC Regulation 1606/2002 of 19 July 2002, the financial statements at 31 December 2016 were prepared in accordance with the international accounting standards (IFRS) endorsed by the European Commission, supplemented by the relevant interpretations (Standing Interpretations Committee - SIC and International Financial Reporting Interpretations Committee - IFRIC) issued by the International Accounting Standard Board (IASB) and in force at the year-end.

The general principle used in preparing these separate financial statements is the historical cost method, except for those items that, in accordance with IFRS, are obligatory recognised at fair value, as indicated in the valuation criteria of each item.

The separate financial statements are composed of the separate income statement, the statement of comprehensive income, the statement of financial position, the statement of cash flows, the statement of changes in equity and the related notes to the financial statements.

In consideration of the significant values, the figures in these notes are shown in millions of euros unless otherwise indicated. Among the options permitted by IAS 1, the Company has chosen to present its balance sheet by separating current and non-current items and its income statement by the nature of the costs. Instead, the statement of cash flows was prepared using the indirect method.

The International Financial Reporting Standards (IFRS) used for preparing these separate financial statements, drawn up under the going-concern assumption, are the same that were used in the preparation of the separate financial statements at 31 December 2015 except for what indicated below (Note 4). Preparation of the separate financial statements required management to make certain estimates. The main areas affected by estimates or assumptions of particular importance or that have significant effects on the balances shown are described in Notes 4 to the Consolidated Financial Statements, to which reference is made.

The Board of Directors of 15 March 2017 resolved to submit to shareholders the draft financial statements at 31 December 2016, authorizing their circulation at the same date. The Board convened the Ordinary Shareholders’ Meeting for the approval thereof for 2, 3 and 16 May 2017, on first, second and third call, respectively

 The separate financial statements were prepared in accordance with IFRS and are subject to a statutory audit by KPMG S.p.A.

3. Accounting policies adopted

The accounting policies and criteria are the same adopted for the annual consolidated financial statements, to which reference is made, except for the recognition and measurement of equity investment in subsidiaries, jointly controlled companies and associates recognised at their purchase or incorporation cost. In case of any impairment losses their recoverability is verified through the comparison between their carrying amount and the higher of their value in use that is determined by discounting prospective cash flows, where applicable, of the equity investment and the assumed sales value which is determined on the basis of recent transactions or market multiples. The portion of losses exceeding the carrying amount is recognised in a specific provision under liabilities to the extent that the Company states the existence of legal or implicit obligations to cover such losses, which are in any case within the limits of the book equity. If the impaired investee shows a subsequent improvement in performance which leads to believe that the reasons for the impairment cease to exist, the equity investments are revalued to the extent of the impairment losses recognised in previous periods under “Adjustments to equity investments”. Dividends from subsidiaries and associates are recognised in the income statement in the year in which they are resolved.

Finally, with reference to transactions between entities under common control, which are not governed by IFRS, either from the point of view of the purchaser/assignee or from that of the seller/assignor, Leonardo, considering this, recognises such transactions recognising directly in equity any gain on the transfer or sale of its subsidiaries.

4. Effects of changes in accounting policies adopted

Starting from 1 January 2016 the Company has adopted the Amendment to IAS 16 “Property, plant and equipment” and to IAS 38 “Intangible assets” without any significant effect on this Annual Financial Report.

At the date of preparation of this report, the European Commission has endorsed certain standards and interpretations that are not compulsory which will be applied by the Group in the following financial periods. For a description of the main amendments and potential effects for the Company reference is made to Note 3.25 of the Consolidated Financial Statements.

5. Significant non-recurring events on transactions

On 1 January 2016 the operations became effective, which had involved the merger of OTO Melara S.p.A. and Whitehead Sistemi Subacquei S.p.A. by incorporation into Leonardo S.p.A. and the partial demerger of Alenia Aermacchi S.p.A., AgustaWestland S.p.A. and Selex ES S.p.A. in favour of Leonardo S.p.A. (including

in accounting and tax terms). In accordance with the new operational and organisational governance model of Leonardo, the direction and control are centralised, while business operations have been decentralised into seven divisions (Helicopters, Aircraft, Aerostructures, Airborne & Space Systems, Land & Naval Defence Electronics, Defence Systems, Security & Information Systems), which have been provided with powers and resources so as to ensure a complete end-to-end management of the related scope of business, with consequent full responsibility of the relevant income statement and which operate, together with DRS that is subject to a Proxy regime and the entities outside the One Company perimeter (mainly the JVs) within four sectors (Helicopters, Aeronautics, Electronics, Defence & Security Systems, Space) which are assigned coordination tasks and functions.

In accounting terms, the mergers and demergers, as these represent business combination under common control, were recognised in the separate financial statements of Leonardo according to the principle of “continuity of values”, making reference to the carrying amounts of merged assets and liabilities stated in the consolidated financial statements of Leonardo; therefore, no surplus values were entered upon the derecognition of equity investments against merged assets and liabilities, which had not already been entered in the consolidated financial statements. Accordingly, any possible deficit exceeding the amount stated in the Group’s financial statements was considered to be a lower surplus, as a reduction in equity.

In the case of demergers, the value of equity investments was allocated to the demerged companies, which continue to operate, in an amount corresponding to the net value of assets and liabilities that had not been transferred, consistenty with the “residual” nature of these items compared to the total value of said companies before the demerger: on the contrary, the complement was regarded as attributable to the demerged business unit and, therefore, it was included in the calculation of demerger surpluses and deficits.

As a whole, the five transactions generated a merger/demerger surplus, equal to €mil. 722, which is broken down as follows:

Demerger of SES Spa148
Demerger of AgustaWestland Spa940
Merger of Oto Melara Spa53
Merger of WASS Spa(7)
Demerger of Alenia Aermacchi Spa(412)
  
Net surplus722 

As a result of these transactions, Leonardo changed its structure profoundly – from being a holding company responsible for managing various operating companies that were separate legal entities to being a single company capable of combining manufacturing activities with the direction and control of its business through the abovementioned divisional organisation. This radical change also had significant and obvious effects on the financial statements: revenues passed from €mil. 54 in 2015 to €bil. 7.9 in 2016, with a consequent impact on any and all income statement, balance sheet and cash flow statement items. Where required to understand any changes in the balance sheet items, the value of assets and liabilities merged as at 1 January 2016 has been separately shown as “effect from Mergers/Demergers”, it being understood that in general a large amount of changes are attributable to said transactions. Likewise, the income statement items show a limited comparability; therefore, the related comments are focused on the most significant events that occurred in 2016 after the business combinations.

With reference to 2015, as detailed in the Annual Financial Report at 31 December 2015 to which reference should be made, it should be noted that on 2 November 2015 there was the completion of the closing of the sales in the Transportation sector to Hitachi. The transactions provided for the transfer to Hitachi of the investments held by Leonardo in Ansaldo STS (equal to 40% of the share capital) and AnsaldoBreda’s businesses in the rolling stock segment, excluding revamping activities that are of minor importance, which remained within AnsaldoBreda.

6. Significant post-balance sheet events

On 1 January 2017 the merger of Sirio Panel S.p.A., which was previously wholly owned, by incorporation into Leonardo S.p.a. became fully effective, in legal, accounting and tax terms in the full implementation of the new operational and organisational model adopted by the Group. Furthermore, at the beginning of 2017 Leonardo transferred its equity investments in AgustaWestland Ltd to Leonardo MW Ltd within the scope of the combination process of the operations conducted by Leonardo in the United Kingdom into a single legal entity; therefore, the equity investment was entered under “Non-current assets held for sale” in the financial statements at 31 December 2016.

In March 2017, at the end of the concentration process of the Group real estate holdings into Leonardo Global Solutions, the transfer of the real estate business of Leonardo to into Leonardo Global Solutions was approved, mainly composed of real assets (industrial complexes, buildings, real estate portions and land), as well as payables, receivables, legal relations in which the company is the plaintiff or the defendant, personnel and whatever related to these, excluding plants, machinery and anything in relation to production.

7. Intangible assets

 GoodwillDevelopment costsNon-recurring costsConcessions, licences and trademarksAcquired through business combinationsOther intangible assetsTotal
1 January 2015       
Cost---14-1024
Amortisation, depreciation and impairment losses---(13)-(6)(19)
Carrying amount---1-45
        
Investments---2-13
Sales---(1)--(1)
Depreciation---(1)-(2)(3)
31 December 2015---1-34
Broken down as follows:       
Cost---15-1126
Amortisation, depreciation and impairment losses---(14)-(8)(22)
Carrying amount---1-34
        
Effect from Mergers/Demergers7074381,33588611262,755
Investments-231434-15185
Depreciation-(50)(111)(26)(4)(29)(220)
Impairment losses-(3)(13)---(16)
Other changes--1426-(17)23
31 December 20167074081,3689357982,731
Broken down as follows:       
Cost8751,0931,958361964524,835
Amortisation, depreciation and impairment losses(168)(685)(590)(268)(39)(354)(2,104)
Carrying amount7074081,3689357982,731
        
31 December 2016       
Gross value  4,631    
Grants  3,263    

Goodwill

Goodwill is allocated to the Cash Generating Units (CGUs) or groups of CGUs concerned, which are determined with reference to the Group’s organisational, management and control structure at the reporting date coinciding, as is known, with the Group’s four business segments. At the recognition of the mergers and demergers described above, goodwill was allocated, in accordance with the principle of “continuity of values”, on the merged assets solely to the extent of the goodwill recognised in the consolidated financial statements, while that related to foreign equity investments was included in the value of the same equity investments.

The breakdown of goodwill recognised by segment at 31 December 2016 is as follows:

 31 December 201631 December 2015
Helicopters459-
Electronics, Defence & Security Systems188-
Aeronautics60-
 707-

At 31 December 2015 there was no value related to goodwill. There are no changes as regards the data comprising the branches included in the 3 sectors abovementioned.

The CGUs of the separate financial statements are the same as those identified in the consolidated financial statements, to which reference is made. Goodwill is tested for impairment in order to determine any possible loss in value, making reference to the CGU as a whole, including, in accordance with the organisational and operational model, the foreign equity investments falling within the scope of consolidation, which are then included and tested in the same year as the impairment. Therefore, only the equity investments that are not tested together with goodwill are subject to an impairment test separately, if required. For the sake of representation only, the financial assumptions and ratios detailed below are also provided for the equity investments subject to separate tests (the most significant of which is Meccanica Holdings USA Inc., a company that holds, among other things, the investment in DRS Technologies Inc.)

The test is done by individual CGU by comparing the carrying amount with the greater of the value in use of the CGU and amount recoverable by sale. In practice, the Group has established an operational hierarchy between calculating the fair value net transaction costs and value in use, where the value in use is estimated first, and then only after, if it is lower than the carrying value, is the fair value net of transaction costs determined. In particular, the value in use is measured by the unlevered discounting of the cash flows resulting from the Group’s five-year business plans prepared by the management of the CGU and incorporated into the plan approved by Leonardo’s Board of Directors, projected beyond the explicit time horizon covered by the plan according to the perpetuity growth method (terminal value), using growth rates (“g-rate”) no greater than those forecast for the markets in which the given CGU operates. The cash flows used were those provided for in the plans adjusted to exclude the effects of future business restructurings, not yet approved, or future investments for improving future performance. Specifically, these cash flows are those generated before financial expense and taxes, and include investments in capital assets and monetary changes in working capital, while excluding cash flows from financial management, extraordinary events or the payment of dividends. The related underlying macro-economic assumptions were made on the basis of external information sources, where available, while the profitability and growth estimates used in the plans were calculated by management based on past experience and expected developments in the Leonardo’s markets.

These cash flows are discounted on a weighted-average cost of capital (WACC) basis calculated using the Capital Asset Pricing Model method. The following factors were taken into account in calculating WACCs:

  • as risk-free rate, the 10- and 20-year gross yield of government bonds of the geographic market of the CGU was used. The drop in these rates justifies the overall decrease of WACCs compared with 2015. In order to evaluate the potential impacts deriving from the partial compensation for the effects of the ECB monetary policy on the Euro area rates, the following sensitivity analysis was developed;
  • the market premium was equal to 5.7%;
  • the sector beta, determined using data pertaining to our major competitors in each sector;
  • the cost of debt applicable to the Group, net of taxes;
  • the debt/equity ratio, determined using data pertaining to our major competitors in each sector.

On the contrary, the growth rates used to project the CGU’s cash flows beyond the explicit term of the plan were estimated by making reference to the growth assumptions of the individual sectors in which said CGUs operate. These assumptions are based on the internal processing of external sources, making reference to a period of time that is usually ten years. The g-rates used for the purposes of the impairment test were equal to 2%, consistently with the actions taken in previous financial years, even in the presence of higher expected growth rates in some sectors.

The mostly important assumptions for the purposes of estimating the cash flows used in determining the value in use are summarised below:

 HelicoptersElectronicsAeronautics
WACCXXX
g-rateXXX
ROS as per the planXXX
Flat trend in real terms of the Defence budget in domestic marketsXXX
Growth in production rates of mass production of particular importanceX X

In estimating these basic assumptions, the management made reference, in the case of external variables, to internal information processed on the basis of external surveys, as well as on its knowledge of the markets and of the specific contractual situations.

The following WACCs (after taxes) and (nominal) growth rates were used at 31 December 2016 and 2015:

 31 December 201631 December 2015 (*)
 Waccg-rateWaccg-rate
Helicopters7.6%2%8.7%2%
Electronics, Defence & Security Systems5.5%2%7.8%2%
Aeronautics5.9%2%7.2%2%

(*) Data referred to impairment tests performed in 2015 solely on the value of the equity investments

Testing revealed no signs of impairment. We note that the performance of the Electronics, Defence and Security Systems sector was subject to impairment test in the 2011 and 2012 consolidated financial statements, with particular reference to DRS through the equity investments in Meccanica Holdings USA. Sensitivity analysis was conducted on these results, making reference to the assumptions for which it is reasonably possible that a change in the same may significantly modify the results of the test. The wide positive margins recorded are such that they may not be significantly modified by any changes in the assumptions described above. For information purposes, below are reported the results. The table below highlights the headroom in the base scenario, with reference to the goodwill value, compared with the following sensitivity analyses: (i) increase by 50 basis points in the interest rate used to discount cash flows across all the CGUs, other conditions being equal; (ii) reduction by 50 basis points in the growth rate used in calculating the terminal value, other conditions being equal; (iii) reduction by half point in the operating profitability applied to the terminal value, other conditions being equal.

 Margin (base case)Margin post sensitivity
  Waccg-rateROS TV
Helicopters3,8723,3463,4373,856
Elettronics, Defence & Security Systems6,9265,7365,8845,759
Aeronautics12,40111,11611,27010,824

In order to evaluate the possible effects of an increase in the risk-free rates of the Euro area, a sensitivity analysis was developed, as previously said, considering an increase in rates equal to 100 basis points using the following WACCs: Helicopters 8.6%, Electronics, Defence and Security Systems 6.5% and Aeronautics 6.9%. Within this scenario, the margins of the 3 CGUs decreased by about 15% although remaining significantly positive (in detail: Helicopters €mil. 2,902, Electronics, Defence and Security Systems €mil. 4,810 and Aeronautics €mil. 10,097).

Other intangible assets

In addition to the net effect of investments, “development costs” rose due also as a result of the concentration process, especially in the Helicopters (€mil. 6) and Electronics, Defence and Security Systems (€mil. 17) sectors, and of the amortisation for the year. Investments attributable to “non-recurring costs” related to the Helicopters (€mil. 74) sector, to programmes concerning aircraft (€mil. 42) and to programmes of the Electronics, Defence and Security Systems sector (€mil. 27). As regards programmes that benefit from the provisions of Law 808/85 and that are classified as functional to national security, the portion of capitalised non-recurring costs, pending the fulfilment of the legal requirements for the classification under receivables, is separately disclosed under other non-current assets (Note 10). Receivables for grants assessed by the grantor in relation to capitalised costs (shown here net of the related grants) are illustrated in Note 26.

Total research and development costs, including also “development” and “non-recurring costs” just mentioned, amount to €mil. 982, of which €mil. 123 expensed.

“Other” mainly includes software, which is amortised over a 3 to 5 year period, and intangible assets in progress and advances.

Commitments are in place for the purchase of intangible assets for €mil. 5 (€mil. 0 at 31 December 2015).

8. Property, plant and equipment and investment property

 Property, plant and equipment 
 Land and buildingsPlant and machineryEquipmentOther tangible assetsTotalInvestment property
1 January 2015      
Cost957117120201
Amortisation, depreciation and impairment losses(53)(6)(1)(13)(73)(95)
Carrying amount421-447106
       
Investments---33-
Depreciation(2)--(1)(3)(5)
Other changes-1-(1)-1
31 December 2015402-547102
Broken down as follows:      
Cost957-17119201
Amortisation, depreciation and impairment losses(55)(5)-(12)(72)(99)
Carrying amount402-547102
       
Effect from Mergers/Demergers1333536602181,364-
Investments284754111-
Sales--(1)(1)(2)-
Depreciation(14)(61)(143)(22)(240)(1)
Other changes106578(91)80(94)
31 December 20162673595711631,3607
Broken down as follows:      
Cost4781,2041,6562,2895,62723
Amortisation, depreciation and impairment losses(211)(845)(1,085)(2,126)(4,267)(16)
Carrying amount2673595711631,3607

Property, plant and equipment showed a decrease, excluding the effect of the abovementioned mergers and demergers at 1 January 2016, as a result of the depreciation for the period, which was only partially offset by investments, attributable in particular to the sectors of Aeronautics (€mil. 61), Helicopters (€mil. 11) and Electronics, Defence & Security Systems (€mil. 26).

The item “Investment Property”, which includes the value of land, as well as of civil and industrial buildings, that are mainly leased to Group companies, showed a considerable decrease as a result of the mergers and demergers, which led Leonardo to act both as lessor and lessee. Therefore, said value was largely reclassified as a result of the concentration among property, plant and equipment that are owned and those that are used by Leonardo.

Moreover, purchase commitments of property, plant and equipment are recorded in the amount of €mil. 72 (€mil. 3 at 31 December 2015).

9. Equity investments

 20162015
 Equity investmentsRisk provisionsTotalEquity investmentsRisk provisionsTotal
1 January7,387(170)7,2177,494(57)7,437
Acquisitions/subscriptions4317021319257249
Effect from Mergers/Demergers(495)(3)(498)---
Reclassifications in assets/liabilities held for sale(1,151)-(1,151)---
Impairment losses(136)(53)(189)(231)(170)(401)
Disposals(5)-(5)(71)-(71)
Other changes(2)-(2)3-3
31 December5,641(56)5,5857,387(170)7,217

Appendices no. 1 and 2 to these Notes provide, respectively, the changes that occurred in the year and detailed information on equity investments showing the total of assets and liabilities, as required by IFRS 12.

If the relevant conditions are fulfilled, the carrying amount of equity investments is tested for impairment in order to determine any possible loss in value. As mentioned, the carrying amount of equity investments is mainly tested by making reference to the relevant divisions as a whole; for any information on the procedures for the performance of tests and any related information, reference should then be made to Note 7.

Among the changes that occurred during the period were the following movements:

  • the derecognition of equity investments falling within the scope of the mergers or attributable to the demerged business units within the demergers, for a total amount of €mil. 4,426;
  • the recognition of new equity investments of the companies and merged business units for €mil. 3,931 and of provisions for risks on equity investments for €mil. 3;
  • the reclassification, under “Non-current assets held for sale”, involving the equity investment in AgustaWestland Ltd, which was transferred to Leonardo MW within the One Company process in the United Kingdom (€mil. 1,109) at the beginning of 2017, as well as other international investments of minor importance (equity investments of €mil. 42 and provisions for risks on equity investments of €mil. 6), which were transferred to AgustaWestland Holdings Ltd (Note 6) at the beginning of 2017;
  • actions regarding the equity investments, equal to €mil. 213, mainly relating to AnsaldoBreda S.p.A., which were taken partly in consideration of the use of the provision for risks set aside at 31 December 2015 and partly against the adjustment to the carrying amount of the equity investments;
  • the write-downs for the period, mainly relating to AnsaldoBreda S.p.A. (€mil. 22), Selex Es S.p.A. (€mil. 54), AgustaWestland S.p.A. (€mil. 57), So.ge.Pa. S.p.A. (€mil. 12) and Avio S.p.A. (€mil. 31). The latter write-down was required in order to adjust the carrying amount at the value attributed to Avio within the scope of the transaction with Space 2, which is described in the section on “Industrial Transactions”. The write-downs were required against the losses recognised by the investees during the reporting period considering that the residual assets are still managed by the investees. These write-downs led to an overall reduction in the carrying amount of the equity investments for €mil. 136 and €mil. 53, against the negative equity of AgustaWestland S.p.A. and were offset by accruals to the provision for risks.

Finally, below is presented a comparison of the book value and the average market price of the listed shares of Eurotech SpA in December 2016:

Listed companyNumber of shares heldStock Exchange ValueBook ValueDifference Unit
in €
Difference Total
in €mil.
Unit €Total €mil.Unit €Total €mil.
Eurotech SpA3.936.4611,40061,46960,07-

10. Receivables and other non-current assets

 31 December 201631 December 2015
Financing to third parties11
Non current financial receivables from Superjet65-
Deferred grants under Law no. 808/8552-
Related parties receivables (Note 32)68105
Other non-current receivables10-
Non-current receivables196106
   
Prepayments - non-current portion8-
Non-recurring costs pending under Law no. 808/198575-
Other non current assets-11
Fair value of the residual portion in portfolio of Ansaldo Energia-131
Non-current assets83142

Non-current receivables showed an increase of €mil. 90, mainly as a result of the business combinations (€mil. 72). The item at 31 December 2016 also included the non-current portion (€mil. 65) of the receivable claimed from SuperJet S.p.A., arising from the 4-year repayment plan agreed with the acquirer within the reorganisation of Leonardo’s participation in this programme.

Non-current assets showed a decrease of €mil. 59, mainly as a result of the reclassification of the fair value of the remaining equity investment in Ansaldo Energia (€mil. 131 at 31 December 2015) to current assets, net of any increase attributable to business combinations (€mil. 88 at 1 January 2016).

11. Inventories

 31 December 201631 December 2015
Raw materials, supplies and consumables1,254-
Work in progress and semi-finished goods990-
Finished goods and merchandise25-
Advances to suppliers651-
 2,920-

Advances to suppliers mainly related to programmes concerning aircraft (mainly C27J, B787, EFA and ATR) and, to a lesser extent, helicopters and Electronics.

Provisions for write-down are entered against the various categories of inventories to cover any obsolescence, slow-moving items or if the entry value is higher than net realisable value, for a total amount of €mil. 471.

12. Contract work in progress and progress payments and advances from customers

 31 December 201631 December 2015
Contract work in progress (gross)3,191-
Final losses (positive wip)(40)-
Progress payments and advances from customers(1,084)-
Contract work in progress (net)2,067-
   
Progress payments and advances from customers (gross)4,614-
Contract work in progress(141)-
Final losses (negative wip)471-
Progress payments and advances from customers (net)4,944-
   
Net value(2,877)-

“Contract work in progress” is recognised as an asset net of the relative advances if, based on an analysis carried out on a contract-by-contract basis, the gross amount of work in progress exceeds advances from customers. It is recognised as a liability if advances from customers exceed the relevant work in progress. This offsetting is performed only with regard to work in progress and not to inventories or other assets. If the progress payments and advances from customers have not been collected at the reporting date, the corresponding amount is recognised as a receivable from customers.

Below is a breakdown of the net balance of contract work in progress and progress payments and advances from customers:

 31 December 201631 December 2015
Cost incurred and margins recognised, net of losses3,109-
Advances(5,986)-
Net value(2,877)-

13. Trade and financial receivables

 31 December 201631 December 2015
 TradeFinancialTradeFinancial
Receivables1,7752916-
Cumulative impairments(164)(2)(14)-
Related parties current receivables (Note 32)1,226326912,558
 2,837353932,558

Trade receivables increased as a result of the centralisation process and of the usual business trend of the period. On the contrary, loans and receivables decreased as a result of the write-off of the parent company’s receivables from the business units and companies merged.

Trade receivables include €mil. 38 for receivables from Sukhoi and Superjet which will be collected beyond 12 months, in accordance with the repayment and rescheduling plan defined during the sale of the Superjet Russian business.

The composition of assets by currency and geographical area is shown in Appendices nos. 5 and 6 to these Notes. The ageing of receivables together with an analysis of how the Company manages credit risk is reported under Note 33.

14. Income tax receivables and payables

Receivables (€mil. 100) mainly relate to IRES receivables for which a request for refund has been claimed (€mil. 98 at 31 December 2015), while payables are mainly related to IRES and IRAP taxes to be paid. The changes during the year and the composition of assets and liabilities by maturity, currency and geographical area are shown in Appendices nos. 5, 6, 9 and 10 to these Notes.

15. Other current assets

 31 December 201631 December 2015
Derivatives152415
Prepaid expenses - current portion325
Receivables for grants98-
Receivables from employees and social security institutions501
Indirect tax receivables32116
Deferred receivables under Law no. 808/19852-
Other related parties receivables (Note 32)5133
Fair value of the residual portion in portfolio of Ansaldo Energia138-
Other assets824
 637574

This item includes the fair value of 15% of the share capital of Ansaldo Energia and of the related put&call options, which will be sold upon the exercise of these options, by the parties, at a pre-arranged price of €mil. 117, in respect of which capitalised interest accrues at a yearly 6% rate (total €mil. 138 at 31 December 2016). In particular, Leonardo can exercise its put option between 30 June and 31 December 2017, while the call option of FSI is exercisable in the same period or before if some conditions occur. Considering that the expiry date of the options is nearing, the item was reclassified under current assets.

“Indirect tax receivables”, equal to €mil. 32 (€mil. 116 at 31 December 2015), mainly represent VAT receivables transferred from companies participating in the Group VAT mechanism. The changes during the year and the composition of assets by maturity, currency and geographical area are shown in Appendices nos. 5 and 6 to these Notes.

The table below provides the breakdown of derivatives.

 31 December 201631 December 2015
 AssetsLiabilitiesAssetsLiabilities
Forward forex instruments150274412411
Derivatives covering debt items135114
Interest rate swaps2423
 153313415428

 Fair value at
 31 December 201631 December 2015
 AssetsLiabilitiesNetAssetsLiabilitiesNet
Interest-rate swaps      
Trading2(3)(1)2(3)(1)
Fair value hedge------
Cash flow hedge-(1)(1)---
       
Currency forward/swap/options      
Trading41(41)-411(411)-
Fair-value hedges1(37)(36)1(14)(13)
Cash-flow hedges109(231)(122)1-1
        

The cash flow hedge is the forward instrument hedging trade items denominated in foreign currency. Such item was not present last year since Leonardo, before the merger and acquisition transactions, did not carry out any trading activity.

Vice versa, the fair value hedge is the forward instrument hedging deposits and loans made in pound sterling and US dollars that fall under the Group’s financial centralisation, with reference to financial activities for the companies not falling under the One Company scope: the changes in fair value directly offset the realignment of the exchange rates applicable to loans and deposits.

Finally, trading forward instruments refer to transactions that the Leonardo Group finance department carries out with banks acting in the interest of the fully owned subsidiaries; these transactions are transferred to the Group companies that incur the related costs on a mirror-like basis.

The “interest rate swaps” with a total notional value of €mil. 400, classified as trading instruments, were placed into effect to pursue the management objectives of hedging part of the bonds issued by Leonardo and the Group companies. The impact on the income statement is described in the section on Financial Risk Management (Note 33).

The portion of the changes that had an impact on the income statement is described in Note 29.

16. Cash and cash equivalents

The balance of “Cash and cash equivalents” at the end of the year, equal to €mil. 1,747 (€mil. 1,365 at 31 December 2015), was mainly the result of net cash flows realised by the Company’s Divisions during the year. Cash and cash equivalents at 31 December 2016 include €mil. 6 of term deposits (0 at 31 December 2015).

17. Non curernt assets held for sale

This item includes at 31 December 2016 the following equity investments: AgustaWestland Ltd (€mil. 1,109), Agusta Aerospace Services SA (€mil. 21), AgustaWestland do Brasil (€mil. 8) and AgustaWestland Malaysia (€mil. 13).

In particular, AgustaWestland Ltd was sold at the beginning of 2017 to Leonardo MW within the One Company process in UK, while the other equity investments (together with AgustaWestland Australia, with a carrying amount equal to zero) were jointly sold at the beginning of 2017 to AgustaWestland Holdings Ltd. The sales were carried out, in both cases, at a value higher than the carrying amount.

18. Equity

The equity broken down by available and distributable reserves is shown in Appendix no. 7 to these Notes.

The composition of the share capital is as follows:

 Number of
ordinary shares
Par valueTreasury sharesCosts incurred
(net of tax effect)
Total
Outstanding shares578,150,3952,544-(19)2,525
Treasury shares(232,450)-(3)-(3)
31 December 2015577,917,9452,544(3)(19)2,522
      
Repurchase of treasury shares net of the portion sold(3,506,246)-(31)-(31)
31 December 2016574,411,6992,544(34)(19)2,491
      
Broken down as follows:     
Outstanding shares578,150,3952,544 (19)2,525
Treasury shares(3,738,696) (34) (34)

The share capital, fully subscribed and paid-up, is divided into 578,150,395 ordinary shares with a par value of € 4.40 each, including 3,738,696 treasury shares.

At 31 December 2016 the Ministry of Economy and Finance owned around 30.204% of the share capital.

The cash flow hedge reserve includes changes in fair value of derivatives used by the Group to hedge its exposure to currency net of the effect of deferred taxes until the moment in which the “underlying position” is recognised in the income statement. When this condition is met, the reserve is recognised in the income statement to offset the economic effects of the hedged transaction.

The revaluation reserve includes the effects of the valuation of actuarial gains and losses with reference to severance pay.

19. Loans and borrowings

 31 December 201631 December 2015
 Non-currentCurrentTotalNon-currentCurrentTotal
Bonds2,6606033,2633,243823,325
Bank loans and borrowings2385829627851329
Related parties loans and borrowings (Note 32)-1,6641,664-2,9832,983
Other loans and borrowings334679---
 2,9312,3715,3023,5213,1166,637

Bonds

Below are the bonded loans in place and listed on the Luxembourg Stock Exchange:

Year of issueMaturityCurrencyOutstanding nominal amount (mil.) Annual coupon  Type of offer
200320185005,750%(1)European institutional
200520255004,875% European institutional
20092019GBP3198,000%(2) (3)European institutional
200920225555,250%(3)European institutional
201220175214,375%(3)European institutional
201320217394,500%(3)European institutional

(1) Rate derivative transactions were made on these bonds and led the effective cost of the loan to a fixed rate better than the coupon and corresponding to an average of some 5.6%.
(2)The proceeds of the issue were translated into euros and the exchange-rate risk arising from the transaction was fully hedged.
(3) Nominal amounts decreased compared to the value of the original issues following the buy-back transactions.

The main clauses that regulate the Group’s payables are reported in the section “Financial Transactions” of the Report on Operations. Changes in loans and borrowings are as follows:

 1 January 2016IssuesRepayments/Payment of couponsEffect from mergers/demergersOther net increase/(decrease)Exchange differences and other movements31 December 2016
Bonds3,325-(173)-173(62)3,263
Bank loans and borrowings329-(48)59(44)-296
Related-parties loans and borrowings2,983--(1,048)(271)-1,664
Other loans and borrowings---93(14)-79
 6,637- (221)(896)(156)(62)5,302

 1 January 2015IssuesRepayments/Payment of couponsEffect from mergers/demergersOther net increase/ (decrease)Exchange differences and other movements31 December 2015
Bonds2,130-(655)-1,813373,325
Bank loans and borrowings374-(45)---329
Related-parties loans and borrowings4,523---(1,540)-2,983
Other loans and borrowings-------
 7,027- (700)- 273376,637

Bank loans and borrowings

The item mainly includes the 12-year loan signed with the European Investment Bank (EIB) in 2009 (€mil. 280 at 31 December 2016 compared to €mil. 327 at 31 December 2015) to finance development in the Aeronautics segment. As provided in the loan agreement, €mil. 300 of the loan was originally used at a fixed rate of 3.45% and for €mil. 200 at a floating rate equal to the 6-month Euribor plus a margin of 79.4 basis points. The fixed-rate tranche is repaid in 11 annual instalments with a fixed principal repayment component, while the floating-rate tranche is repaid in 21 6-month instalments, also with a fixed principal repayment component. During the year €mil. 47 was repaid, as in 2015.

Related-party loans and borrowings

Loans and borrowings decrease as a result of the write-off of the Parent Company’s payables to the companies and business units merged. 

Other borrowings

The item includes the residual balance of subsidised loans, related to programmes and projects of the companies and business units merged.

Exposure to changes in interest rates of the financial liabilities is as follows:

31 December 2016

 BondsBank loans and borrowingsRelated-party loans and borrowingsOther loans and borrowingsTotal
floatingfixedfloatingfixedfloatingfixedfloatingfixedfloatingfixed
Within 1 year-60328301,664-46-1,738633
2 to 5 years-1,60882109--2811101,718
Beyond 5 years-1,0522027--4-241,079
Total- 3,2631301661,664- 7811,8723,430

31 December 2015

 BondsBank loans and borrowingsRelated-partiy loans and borrowingsOther loans and borrowingsTotale
floatingfixedfloatingfixedfloatingfixedfloatingfixedfloatingfixed
Within 1 year-8221302,983---3,004112
2 to 5 years-1,45376109----761,562
Beyond 5 years-1,7903855----381,845
Total- 3,3251351942,983- - - 3,1183,519

Below is the financial information required under CONSOB communication DEM/6064293 of 28 July 2006:

 31 December 2016Of which with
related parties
31 December 2015Of which with
related parties
Liquidity (1,747) (1,365) 
     
Current loans and receivables(353)(326)(2,558)(2,558)
     
Current bank loans and borrowings58 51 
Current portion of non-current loans and borrowings603 82 
Other current loans and borrowings1,7101,6642,9832,983
Current financial debt2,371 3,116 
     
Net current financial debt (funds)271 (807) 
     
Non-current bank loans and borrowings238 278 
Bonds issued2,660 3,243 
Other non-current loans and borrowings33 - 
Non-current financial debt2,931 3,521 
     
Net financial debt3,202 2,714 
     

The reconciliation between Net Financial Debt and Group Net Debt, used as KPI, is as follows:

 Note31 December 201631 December 2015
Net financial debt com. CONSOB no. DEM/6064293 3,2022,714
Fair value of the residual portion in portfolio of Ansaldo Energia15(138)(131)
Hedging derivatives in respect of debt items153513
Non current financial receivables from Group's consolidated entities32(15)-
Non current financial receivables from Superjet10(65)-
Net debt (KPI) 3,0192,596

The main clauses that regulate the Leonardo’s payables are reported in the section “Industrial and financial transactions” of the Report on Operations.

20. Provisions for risks and charges and contingent liabilities

 Guarantees givenRestructuringPenaltiesProduct guaranteesOther provisionsTotal
1 January 2015      
Current----9797
Non current1238--15146
 1238- - 112243
Allocations----205205
Uses(1)(1)--(68)(70)
Reversals-(5)---(5)
Other changes1---12
31 December 20151232- - 250375
Broken down as follows:      
Current----226226
Non-current1232--24149
 1232- - 250375
Effect from mergers/demergers191513801135431,206
Allocations1212739211299
Uses(2)(33)(64)(10)(189)(298)
Reversals--(19)(22)(102)(143)
Other changes(1)(9)(179)-78(111)
31 December 20161401321451207911,328
Broken down as follows:      
Current99471957297519
Non-current418512663494809
 1401321451207911,328

The “Other provisions for risks and charges” mainly include.

  • the provision for contractual risks and charges of €mil. 475, mainly related to the Aeronautics sector;
  • the provision for risks on equity investments of €mil. 56 (€mil. 170 at 31 December 2015), which mainly includes the accruals for losses exceeding the carrying amounts of the AgustaWestland SpA equity investment (for the changes in the provision for risks on equity investments reference is made to Note 9);
  • the provision for tax risks of €mil. 40 (€mil. 22 at 31 December 2015)
  • the provision for litigation with employees and former employees of €mil. 34 (€mil. 17 at 31 December 2015);
  • the provision for litigation underway of €mil. 6 (€mil. 4 at 31 December 2015).

With regard to risks, below is a summary of the criminal proceedings that are currently underway against Leonardo, as well as certain former directors and executives, concerning acts committed during the performance of their duties, with specific reference to the events that occurred in 2016 and in early 2017:

  • criminal proceedings are pending before the Court of Rome against the former Commercial Director of Leonardo, for the crime under Articles110, 319, 319-bis, 320, 321 and 322-bis of the Italian Criminal Code, concerning the supply contracts signed in 2010 by AgustaWestland, Selex Sistemi Integrati and Telespazio Argentina with the Government of Panama. The proceedings are now in the trial phase. In relation to this case, criminal proceedings are also pending before the Public Prosecutor’s Office of Rome against Leonardo S.p.A. for administrative violations pursuant to Article 25 of Legislative Decree 231/2001, for crimes under Articles 321 and 322-bis of the Italian Criminal Code attributed to the then Commercial Director of the Company, in the context of the abovementioned criminal proceeding;
  • criminal proceedings are pending before the Court of Rome against one former executive, three former Directors and an executive of Leonardo, for crimes under Article 110 of the Italian Criminal Code and Article 5 of Legislative Decree 74/2000 in relation to the position as director held in the then Finmeccanica Finance SA, as well as against various employees and executives of the company, for the crime under Articles 110, 646 and 61 no.11 of the Italian Criminal Code in relation, inter alia, to personal loans requested to the company in the period 2008-2014;
  • with reference to the immediate trial before the Court of Busto Arsizio in relation to the supply of 12 AW 101 VIP/VVIP helicopters to the Indian Government, it should be noted that on 9 October 2014 the Court sentenced the former Chairman and Chief Executive Officer of Leonardo S.p.a. (in relation to the position held in AgustaWestland) and the former Chief Executive Officer of AgustaWestland S.p.A. to a prison term of two years for having committed crimes under Article 2 of Legislative Decree 74/2000 (having submitted fraudulent tax returns using invoices or other documents from non-existent transactions) – limited to the May 2009 – June 2010 tax period, and ordering that the amount equivalent to such non-payment of taxes (on a taxable income of €mil. 3.4) be confiscated from AgustaWestland S.p.A., considered in determining the provisions for risks. In the same decision, the Court found the defendants not guilty of having committed the crimes under Articles 110, 112, paragraph 1, 319, 321 and 322-bis, paragraph 2(2) of the Italian Criminal Code (corruption of foreign public officials), due to lack of evidence. The decision is being appealed against.
    On 7 April 2016, the Milan Court of Appeal sentenced the former Chairman and Chief Executive Officer of Leonardo to four years and six months of imprisonment, and the former Chief Executive Officer of AgustaWestland S.p.A. to four years of imprisonment, for crimes under Articles 110, 112, paragraph 1, 318, 321 and 322-bis, paragraph 2(2) of the Italian Criminal Code and Article 2 of Legislative Decree 74/2000. On 16 December 2016 the Supreme Court repealed the judgment appealed against and referred it to another division of the Milan Court of Appeal for consideration of new proceedings.
    In respect of these companies, it is recalled that on 25 July 2014, pursuant to Article 58 of Legislative Decree 231/2001, the Public Prosecutor dismissed the proceedings against Leonardo, holding groundless, following the conclusion of investigations, the Company’s involvement from both a factual and legal point of view. The Prosecutor also acknowledged that since 2003 the Company has adopted, actually implemented and regularly updated an Organisational, Management and Control Model that is conceptually suitable to prevent offences like the one in question and is also focused on compliance processes as to guarantee adequate standards of fairness and ethical conduct. In addition, on 28 August 2014 the Judge for Preliminary Investigations (GIP, Giudice delle Indagini Preliminari) of the Court of Busto Arsizio – in granting the motions put forth by the companies – imposed administrative penalties pursuant to Article 63 of Legislative Decree 231/2001 and Article 444 and ff. of the Italian Code of Criminal Procedure, amounting to €80,000 for AgustaWestland S.p.A. and €300,000 for AgustaWestland Ltd, and ordered the confiscation of the equivalent of €mil. 7.5;
    The Indian Authorities also started their own criminal investigations in late February 2013 into this matter, which are still underway;
  • preliminary investigations are being conducted in relation to the criminal proceedings pending with the Public Prosecutor’s Office of Busto Arsizio, against two former chief executive officers of AgustaWestland S.p.A., for crimes under Article 2 of Legislative Decree 74/2000, Articles 81 and 110 of the Italian Criminal Code and Articles 322-bis, 81 and 110 of the Italian Criminal Code, as well as against a former executive of the company, for crimes under Article 2 of Legislative Decree 74/2000 and Articles 81 and 110 of the Italian Criminal Code. In relation to this investigation, on 23 April 2015 some search warrants were executed at the Cascina Costa office of AgustaWestland S.p.A., in order to collect contract, accounting and non-accounting documents relating to the relationships maintained by AgustaWestland S.p.A. with some companies incorporated under Italian and foreign law. Within these proceedings, the notice of conclusion of the preliminary investigations was served in April 2016, limited to the offence under Article 2 of Legislative Decree 74/2000, against two former chief executive officers and a former executive of AgustaWestland S.p.A., regarding relationship with a foreign company. In the context of these proceedings, an executive of the company was also under investigation, but the proceedings against him have been subsequently dismissed;
  • criminal proceedings are pending before the Court of Rome concerning the informal tender for awarding a contract in the ICT area for operational, contract management and procurement services launched by the Prime Minister’s Office in 2010 and awarded to a temporary business combine (RTI, Raggruppamento Temporaneo di Imprese) established by Selex Service Management and a company outside the Leonardo Group.
    On 1 July 2015 the Judge for Preliminary Hearings (GUP, Giudice dell’Udienza Preliminare) ordered the committal for trial of the former Chairman and Chief Executive Officer of Leonardo, for crimes under Articles 81-paragraph 2, 110, 326, 353, paragraphs 1 and 2, of the Italian Criminal Code, and of the former Chief Executive Officer of Selex Service Management for crimes under Articles 110, 319 and 321 of the Italian Criminal Code and Articles 81-paragraph 2, 110, 326, 353, paragraphs 1 and 2, of the Italian Criminal Code, as well as of Selex Service Management itself for violations under Article 25 of Legislative Decree 231/2001. Leonardo brought a civil action as an aggrieved party. The proceedings are now in the trial phase.
    In relation to these proceedings, the former Chief Operations Officer of Selex Service Management and former External Relations Officer of Leonardo were also charged with crimes under Articles 81-paragraph 2, 110, 326, 353, paragraphs 1 and 2, of the Italian Criminal Code. The former COO was acquitted and the former External Relations Officer of Leonardo was found guilty pursuant to Article 444 and ff. of the Italian Code of Criminal Procedure;
  • criminal proceedings are being conducted by the Turin Public Prosecutor’s Office concerning the provision of helicopters to the armed forces, police and other government entities on the part of AgustaWestland, involving certain directors of Leonardo (serving from 1994 to 1998) and certain directors of AgustaWestland (serving from 1999 to 2014) with respect to crimes under Article 449 of the Italian Criminal Code for violation of the regulations on the use of asbestos;
  • criminal proceedings are pending before the Court of Milan involving certain directors of the then-Breda Termomeccanica S.p.A., subsequently Ansaldo S.p.A., who served during the period from 1973 to 1985, charged with having committed the crimes under Article 589, paragraphs 1, 2 and 3, Article 40, paragraph 2, Article 41, paragraph 1, of the Italian Criminal Code, Article 2087 of the Italian Civil Code and Article 590, paragraphs 1, 2, 3, 4 and 5, of the Italian Criminal Code, for violation of the rules governing the prevention of occupational diseases.
    Leonardo, following service of civil summons issued by the Court at the request of the civil-action parties, entered appearance in the civil action. The proceedings are now in the trial phase;

Based upon the information gathered and the results of the analysis carried out so far, the Directors did not allocate any specific provisions beyond those indicated in the rest of the paragraph. Any negative developments - which cannot be foreseen, nor determined to date - arising from any internal investigations or judicial investigations being conducted, will be subject to consistent assessment for the purposes of provisions (if any).

With regard to the provisions for civil, tax and administrative disputes, it is underlined that the Leonardo’s operations regard industries and markets where many disputes, both as petitioner and plaintiff, are settled only after a considerable period of time, especially in cases where the customer is a government entity. Pursuant to the IFRSs, provisions have only been set aside for risks that are probable and for which the amount can be determined. No specific provisions have been set aside for certain disputes in which the Company is defendant as these disputes are reasonably expected to be settled, based on current knowledge, satisfactorily and without significantly impacting the Company. Of particular note are the following disputes:

  • the dispute in which Leonardo is defendant in relation to contractual commitments undertaken at the time of the transfer of the former subsidiary Finmilano S.p.A. to Banca di Roma (now UniCredit Group), arising from an assessment report issued to Finmilano S.p.A. by the Rome Direct Taxation Office, which disallowed the tax deductibility of the capital loss arising from the factoring without recourse of a receivable subject to deferred collection for an amount lower than its nominal amount. At present, after alternating outcomes in the various degrees of adjudication, which were mainly unfavourable for the Company and after numerous adjournments, we are waiting for the appeal to be discussed before the Supreme Court. Leonardo does not currently expect it will incur significant losses in this respect;
  • the litigation brought by Reid against Leonardo and Alenia Space (then ALS S.p.A., now SOGEPA S.p.A.) before the Court of Texas in 2001, whereby Reid claimed that the former Finmeccanica-Space Division failed to meet its obligations under the contract for the implementation of the Gorizont satellite programme. The dispute was settled in favour of the Group due to the lack of jurisdiction of the Court appealed to. On 11 May 2007, Reid served a compliant on Leonardo and SOGEPA, whereby it brought new proceedings before the Court of Chancery in Delaware. In the new proceedings Reid once again submitted the same claims for damages as those included in the papers of the previous case developed before the Court of Texas, without, however, quantifying the amount of the alleged damage.
    In appearing before the Court, Leonardo filed a Motion to Dismiss, asserting that the case was time-barred, the statute of limitation had run out and the Court of Delaware did not have jurisdiction. On 27 March 2008, the Court issued an order which rejected the plaintiff’s claim as the case was time-barred. The opposite party challenged this decision before the Supreme Court of Delaware, which issued a decision on 9 April 2009, granting the motion and referring the case to the Court of Chancery for a decision on the other objection raised by Leonardo and SOGEPA concerning the lack of jurisdiction of the Court of Delaware. Therefore, the discovery phase commenced, during which the witnesses requested by Reid were deposed. The preliminary investigations were completed in December 2013 and on 20 November 2014 the Court issued its decision on the question of jurisdiction, rejecting the objection raised by Leonardo and SOGEPA. Therefore, the case is proceeding on the merits and the discovery phase is currently underway. However, it should be noted that the proceedings are still being held which have been brought by Leonardo and SOGEPA in Italy, aimed at establishing the inexistence of the opposite party’s claims concerning the facts and requests argued by Mr Dennis Reid before the Court of Delaware. More specifically, the appellate proceedings are still pending before the Rome Court of Appeal and are in their initial phase;
  • the litigation brought before the Santa Maria Capua Vetere Court in February 2011 by G.M.R. S.p.A., as the sole shareholder of Firema Trasporti against Leonardo and AnsaldoBreda, was settled with a ruling stating the lack of jurisdiction in favour of the Court of Naples. On 28 April 2015 the suit was dismissed following the failure by GMR to reinstate the action in accordance with the time limits prescribed by law. On 23 June 2015, GMR then served a new writ of summons before the Court of Naples, whereby it once again submitted the same claims as those brought in the previous proceedings. More specifically, according to the plaintiff company, during the period in which Leonardo held an investment in Firema Trasporti (from 1993 to 2005), its management and coordination were carried out to the detriment of the company itself and in the sole interest of the Leonardo Group. Moreover, even after the sale of the investment by Leonardo, Firema Trasporti was allegedly de facto subjected to an abuse of economic dependence from the abovementioned Group in performing the various agreements existing with AnsaldoBreda. Leonardo and AnsaldoBreda appeared before the court requesting that, on the merits, the plaintiff’s claims be dismissed as clearly groundless, as a result of the non-fulfilment of any and all conditions required by law as requirements to bring an action against directors pursuant to Article 2497 of the Italian Civil Code. Moreover, the aforesaid companies also asked the Court to preliminarily hand down a ruling based on the principle of lis alibi pendens (i.e. the suit was pending elsewhere and then the claim was precluded) within these new proceedings with respect to the pending proceedings, between the same parties, before the Naples Court of Appeal. The proceedings described above are still underway and are still in a phase of preliminary discussion.
    It is also recalled that Giorgio and Gianfranco Fiore also brought a third-party action against Leonardo and AnsaldoBreda within the proceedings brought by Firema Trasporti under Extraordinary Administration before the Court of Naples, against the engineers themselves and a number of other defendants. By an order dated 18 November 2014, the Court of Naples declared that both the claims submitted by Giorgio and Gianfranco Fiore against Leonardo and AnsaldoBreda and those submitted by G.M.R. (the third-party that voluntarily intervened in the proceedings in question) were inadmissible; accordingly, the Court ordered that Leonardo, AnsaldoBreda and G.M.R. be dropped from action. On 2 March 2015 G.M.R. filed an appeal before the Naples Court of Appeal against this order. Leonardo and AnsaldoBreda formally entered appearance; at present the appellate proceedings are under the decision phase. While pending the aforesaid appellate proceedings, the judge responsible for preliminary investigations was replaced in the action brought by Firema before the Court of Naples; on 17 June 2015 the new judge reversed the previous ruling (with the related declarations of claim preclusion and removal from the lawsuit) and ordered the resumption of the discussion of the case, which is still underway.
  • the proceedings brought before the Court of Rome on 4 March 2013 by Mr Pio Maria Deiana, on his own account and in his capacity as Director of Janua Dei S.r.l. and of Società Progetto Cina S.r.l. against Leonardo in order to ask the Court to rule the invalidity of the settlement agreement signed in December 2000 by the aforesaid companies and the then-Ansaldo Industria (a company which was a subsidiary of Leonardo until 2004 and which is now cancelled from the Register of Companies). The aforementioned agreement had settled, by way of conciliation, the action brought before the Court of Genoa in 1998 in order to ask the Court to find Ansaldo Industria liable for breach of contract with regard to the agreements for commercial cooperation in the construction of a waste disposal and cogeneration plant in China, which then was not built.
    As stated by the plaintiffs in the writ of summons, the above-mentioned settlement agreement was concluded based on unfair conditions, thus taking advantage of the distress of Mr Deiana and of the economic dependence of the plaintiff companies with respect to Ansaldo Industria. The claim was submitted against Leonardo, invoking the latter’s general liability arising from the control exercised by it on Ansaldo Industria at the time of the events being disputed. The damages being sought, to be determined during the course of the proceedings, is estimated at €mil. 2,700. On 25 September 2013 Leonardo appeared before the Court, arguing, among other things, that it lacks the capacity to be sued and asking, on the merits, that the Court rejects the plaintiffs’ claims as they are entirely groundless in fact and in law. A minority shareholder of Società Progetto Cina S.r.l. and a minority shareholder of Janua Dei Italia S.r.l. intervened in the case, respectively, at the hearings of 14 May 2014 and 25 September 2014. The parties will be called upon to specify the conclusions that they intend to submit to the court during the next hearing to be held on 22 November 2017.

 21. Employee benefit obligations

 31 December 201631 December 2015
Severance pay provision3263
Defined contribution plans20-
 3463

The entire amount of the costs related to employee benefit obligations, equal to €mil.3 (0 in 2015) was recognised under financial expenses.

 31 December 201631 December 2015
Opening balance34
Costs of benefits paid- -
Net interest expense4-
Remeasurement8-
  - Actuarial losses/(gains) through equity - financial assumptions 8-
Effect from mergers/demergers358-
Benefits paid(27)(1)
Closing balance3463

The severance pay provision, amounting to €mil. 346, increased as a result of the new company’s structure. It should be noted that the portion of cost for the year relating to amounts transferred to pension funds or to a treasury fund managed by INPS is recognised according to the rules for defined-contribution plans, without any actuarial assessment.

The main actuarial assumptions used in the valuation of defined-benefit plans and of the portion of the severance pay provision that has maintained the nature of defined-benefit plan are as follows:

 31 December 201631 December 2015
Discount rate (annual)0.9%1.4%
Inflation rate1.5%1.8%

The sensitivity analysis for each significant actuarial assumption, which shows the effects on bonds in absolute value, is as follows:

 (€ thousands)31 December 201631 December 2015
-0.25%+0.25%-0.25%+0.25%
Discount rate (annual)6(6)--
Inflation rate(3)3--

The average duration of the severance pay is 9 years.

22. Other non current and current liabilities

 31 December 201631 December 2015
 Non-currentCurrentNon-currentCurrent
Employee obligations4522829
Deferred income12933997
Amounts due to social security institutions-144-11
Payables to MED (Law no. 808/1985)307106--
Payables to MED for monopoly costs (Law no. 808/1985)19331--
Other liabilities (Law no. 808/1985)187---
Indirect tax liabilities558-5
Derivatives-313-429
Other liabilities1138192
Other payables to related parties (Note 32)-391-646
 8771,6851101,109

Other liabilities increased mainly as a result of the recognition of the payables of the merged companies. In particular, the payables to the Ministry for Economic Development (MED) relate to monopoly costs accrued under Law 808/1985 on national security and similar projects, as well as payables for grants received from MED for the development of programmes not related to national security and similar projects eligible for benefits under Law 808/1985.

“Other liabilities (Law 808/1985)” include the difference between the monopoly costs charged for the national security programmes and the amount actually due based on agreed repayment ratios.

Payables to subsidiaries mainly arise from the Group VAT mechanism.

“Deferred income” specifically includes subsequent years rentals already collected in past years in relation to the agreements for the sale of “Ansaldo” trademark.

“Other payables” include, in particular, down payments received from customers for €mil. 87, penalties on programmes for €mil. 79 and payables for royalties amounting to €mil. 33.

23. Trade payables

 31 December 201631 December 2015
Suppliers1,95447
Trade payables to related parties (Note 32)61353
 2,567100

24. Guarantees and other commitments

Leases

The Company is party to a number of operating leases as both lessor and lessee primarily for the purposes of acquiring the use of plant and equipment. The non-cancellable minimum future payments relating to operating lease contracts and commitments taken (as lessor) with respect to financial leases are as follows:

 31 December 201631 December 2015
 Operating leaseFinancial leaseOperating leaseFinancial lease
 as lesseeas lessoras lesseeas lessoras lesseeas lessoras lesseeas lessor
Within 1 year4378-59-4
2 to 5 years12675-623-16
Beyond 5 years28----19-43
 1971413- 1151- 63

With regard to operating leases in which the Company is a lessee, commitments amounted to €mil. 152 with respect to subsidiaries and to €mil. 45 in respect of other parties, mainly for the lease of office space. For those leases in which the Company acts as lessor, commitments amounted to €mil. 14 (€mil. 50 at 31 December 2015) in respect to subsidiaries.

Guarantees

 31 December 201631 December 2015
Guarantees in favour of related parties (Note 32)5,26613,030
Guarantees in favour of third parties7,4401,467
Guarantees given to third parties2,9062,274
Other guarantees for Leonardo Commitments250170
Unsecured guarantees given15,86216,941

Specifically, these consist of:

  • counter-guarantees, totalling €mil. 8,589 (€mil. 8,233 at 31 December 2015), granted by Leonardo to third parties, banks in its own interest for €mil. 52 (€mil. 21 at 31 December 2015), in the interest of related parties for €mil. 1,097 (€mil. 6,745 at 31 December 2015) and in the interest of other companies for €mil. 7,440 (€mil. 1,467 at 31 December 2015).
  • direct commitments issued by Leonardo, amounting to €mil. 7,273 (€mil. 8,708 at 31 December 2015), in favour of lenders, the tax authorities and to customers (Parent Company Guarantee), in its own interest for €mil. 199 (€mil. 149 at 31 December 2015), in favour of related parties for €mil. 4,168 (€mil. 6,285 at 31 December 2015) and in favour of other companies for €mil. 2,906 (€mil. 2,274 at 31 December 2015).

In addition to the above commitments, the Company issued non-binding letters of patronage on behalf of subsidiaries and certain associates in support for their commercial activities.

25. Revenues

 20162015
Revenue from sales3,520-
Revenue from services1,9361
Change in work in progress(62)-
Revenue from related parties (Note 32)2,53153
 7,92554

The trends in revenue by business segment at a Group level are described in the Report on Operations. In comparison with the 2015 revenue, equal to about €bil. 8.1, that would have been recognised on a like-for-like basis, the 2016 revenue decreased by about 6%, in line with the trends described in the abovementioned Report on Operations.

Revenue was realised in the following geographical areas:

 20162015
Italy2,04454
United Kingdom504-
Rest of Europe2,762-
North America1,288-
Rest of the world1,327-
 7,92554

26. Other operating income/(expenses)

 20162015
 IncomeExpensesNetIncomeExpensesNet
Grants for research and development costs (*)21-21---
Other operating grants2-2---
Reversals (Accruals) to provisions for risks and final losses on orders and reversal of impairment of receivables224(223)1-(12)(12)
Exchange rate difference on operating items150(137)13---
Insurance reimbursements3-3---
Restructuring costs10(15)(5)---
Indirect taxes-(13)(13)-(6)(6)
Other operating income (expenses)23(27)(4)2(8)(6)
Other operating income (expenses) from related parties (Note 32)15(3)129(1)8
 448(418)3011(27)(16)

(*) To which receivables for grants assessed by the grantor in relation to capitalised costs of €mil 63 (0 at 31 December 2015), are added, plus the assessment of “Non-recurring costs pending under Law 808/1985” (Note 10) equal to €mil. 58 (0 at 31 December 2015).

Restructuring costs include both costs incurred and accruals to the “Restructuring provision”. Costs and accruals relating to personnel are found under personnel expense (Note 27).

27. Purchase and personnel expense

 20162015
   
Purchase of materials from third parties2,185-
Change in inventories of raw materials177-
Costs for purchases from related parties (Note 32)470-
Purchases2,832-
   
Services rendered by third parties1,9139
Costs of rents and operating leases1205
Royalties4-
Software fees21-
Rental fees9-
Services rendered by related parties (Note 32)44256
Services2,50970
   
Wages and salaries1,31543
Social security contributions38210
Costs related to defined-contribution plans872
Employee disputes35
Restructuring costs - net143
Other personnel expenses net of cost recovery10(11)
Personnel expenses1,81152
   
Change in finished goods, work in progress and semi-finished products143-
   
Internal work capitalised(298)-
   
Total purchases and personnel expenses6,997122

Restructuring costs (€mil. 14 in 2016) mainly refer to the Electronics, Defence and Security Systems (€mil. 5), and Aeronautics (€mil. 8) divisions, as a result of the reorganisation underway.

The average workforce, as a result of the abovementioned mergers and acquisitions, amounts to no. 27,124 units; the average workforce compared with the pro-forma data at 31 December 2015 significantly decreased (no. 650 units) mainly attributable to the Electronics, Defence and Security Systems (no. 273 units), Aeronautics (no. 290 units) and Helicopters (no. 106 units) sectors.

The figure of total workforce at 31 December 2016, compared to the pro-forma data at 31 December 2015 decreased by no. 586 units as a result of the streamlining and efficiency improvement processes mainly in the Electronics, Defence and Security Systems (no. 311 units) and Helicopters (no. 178 units) sectors. The figure related to the average workforce, unlike that of the total workforce, is affected by the presence of part-time employees, personnel that took extended leave, redundant staff and employees with solidarity contracts.

The workforce breakdown is as follows:

 Average WorkforceTotal Workforce
 31 December 201631 December 2015Change31 December 201631 December 2015Change
Senior managers (*)7068362370778629
Middle managers3,178853,0933,153893,064
Clerical employees16,36810616,26216,79911216,687
Manual labourers (**)6,872-6,8726,924-6,924
Total27,12427426,85027,58327927,304

(*) Includes pilots.
(**)Includes senior manual labours.

28. Amortisation, depreciation and impairment losses

 20162015
Amortisation of intangible assets 220 3
  Development costs68 - 
  Non-recurring costs93 - 
  Acquired through business combinations4 - 
  Concessions, licences and trademarks26 1 
  Other intangible assets29 2 
     
Depreciation of property, plant and equipment and investment properties (Note 8) 240 8
Impairment of operating receivables 18 -
Impairment of other assets 16 -
  494 11

29. Financial income and expense

 2016 2015
 IncomeExpensesNetIncomeExpensesNet
Interest to/from banks1(11)(10)1(13)(12)
Interest and other charges on bonds-(173)(173)-(184)(184)
Commissions2(22)(20)2(18)(16)
Dividends663-663381-381
Premiums (paid) received on IRS6(6)-6(6)-
Premiums (paid) received on forwards31(44)(13)6-6
Income and charges from equity investments and securities2(33)(31)703-703
Value adjustments on equity investments-(189)(189)-(401)(401)
Fair value gains (losses) through profit or loss38(11)271(1)-
Exchange rate differences314(308)6135(135)-
Financial income (expense) - related parties (Note 32)52(15)37104(27)77
Other financial income and expense15(66)(51)9(51)(42)
 1,124(878)2461,348(836)512

Net financial income showed a decrease of €mil. 266 compared to 2015. However, in 2015 this item included the net effect of the sales in the Transportation sector (i.e. a capital gain of €mil. 702 from the disposal of

Ansaldo STS and a write-down of €mil. 353 of the equity investment in AnsaldoBreda, also as a result of said transactions, with a net positive effect of €mil. 349). As a whole, financial income and costs recognised in 2016 showed the following changes compared to 2015:

  • dividends, net of write-downs, increased by about €mil. 140 (excluding the write-down of AnsaldoBreda carried out during 2015, as noted above) in 2016;
  • lower interest, mainly as a result of the buy-back carried out during 2015;
  • foreign exchange gains and gains from fair value of derivatives for a total amount of €mil. 33 in 2016 against zero in 2015, when Leonardo only operated in the market to repay its own debt or on behalf of its subsidiaries, passing on any effect.

Finally, we note that in 2015 financial expenses included costs for €mil.48 deriving from the buy-back plan.

Value adjustments to equity investments are described in Note 9.

Fair value results through profit or loss are as follows:

 20162015
 IncomeExpensesNetIncomeExpensesNet
Exchange rate swap1-11-1
Interest rate swaps-(1)(1)-(1)(1)
Ineffective portion of hedging swap37(10)27---
 38(11)271(1)-

30. Income taxes

Income taxes can be broken down as follows:

 20162015
IRES (35)-
IRAP(19)-
Benefit under consolidated tax mechanism-39
Tax related to previous periods382
Provisions for tax disputes(26)(18)
Deferred tax - net(58)4
 (100)27

In consideration of the changes in the company’s structure of Leonardo, which from an holding company became an operating company, in 2016 the Company showed tax profits with related recognition of income taxes (profit from national consolidated tax mechanism in 2015).

The accrual to provisions for tax disputes of €mil. 26 stems from the valuation of risks deriving from pending situations related to previous years.

Following is an analysis of the composition of the theoretical and effective tax rates for 2016 and 2015:

 20162015
Profit (loss) before income taxes709417
   
Tax rate14.1%6.5%
   
Theoretical tax(195)(115)
Permanent differences(10)179
Timing differences(12)(7)
Dividends127100
Revaluations of equity investments-(4)
Impairment of equity investments(52)(110)
IRAP tax(28)-
Net deferred tax assets58-
Tax provision(26)(18)
Previous years’ tax382
Total tax through profit or loss(100)27
   
Theoretical tax(27.5%)(27.5%)
Permanent differences not to reverse in subsequent years(1.4%)42.9%
Timing differences to reverse in subsequent years(1.7%)(1.6%)
Total dividends from profit or loss17.9%23.8%
Revaluations of equity investmentsn.a.(0.9%)
IRAP tax(4.0%)(26.3%)
Gains on equity investments(7.3%)n.a.
Net deferred tax assets8.2%n.a.
Tax provision(3.7%)(4.3%)
Current taxes of previous years5.4%0.4%
Total tax(14.1%)6.5%

The effective tax rate went from 6.5% in 2015 to 14.1% in 2016.

Deferred taxes and related receivables and payables at 31 December 2016 were the result of the following temporary differences:

 20162015
 Income statementIncome statement
 Financial incomeFinancial expensesNetFinancial incomeFinancial expensesNet
Deferred tax assets on tax losses50(63)(13)---
Property, plant and equipment and intangible assets3-3---
Financial assets and liabilities2(4)(2)---
Severance and retirement benefits-(1)(1)---
Provision for risks and impairment94(128)(34)---
Effect of change in tax rate1(8)(7)---
Other19(23)(4)4--
Deferred taxes recognised through profit or loss169(227)(58)4- -

 31 December 201631 December 2015
 Financial statementFinancial statement
 AssetsLiabilitiesNetAssetsLiabilitiesNet
Deferred tax assets on tax losses58-5833--
Property, plant and equipment and intangible assets39(53)(14)---
Severance and retirement benefits9(4)5---
Financial assets and liabilities------
Provision for risks and impairment490-4907--
Other40(32)8---
Offsetting------
Deferred taxes recognised through balance sheet636(89)54740- -
       
Cash-flow hedge derivatives28(1)27---
On actuarial gains and losses5(2)3---
Deferred taxes recognised through equity33(3)30- - -
 669(92)57740- -

31. Cash flows from operating activities

 20162015
Net result609444
Amortisation, depreciation and impairment losses49411
Income taxes100(27)
Net allocations to the provisions for risks and inventory write-downs12612
Net financial expense /(income)(246)(512)
Other non-monetary items322
 1,115(70)

The changes in other operating assets and liabilities are as follows:

 20162015
Inventories130-
Contract work in progress and progress payments and advances from customers350-
Trade receivables and payables(796)(1)
Change in trade receivables/payables, work in progress/progress payments and inventories(316)(1)

   20162015
Payment of pension plans(28)-
Changes in provisions for risks and other operating items(18)166
Change in other operating assets and liabilities and provisions for risks and charges(46)166

32. Related-party transactions

Commercial and financial relations with related parties are carried out at arm’s length, as is settlement of interest-bearing receivables and payables. Below are the balance sheet amounts of 2016 and 2015.

Receivables at 31 December 2016

Non-current loans and receivablesCurrent loans and receivablesTrade receivablesReceivables from consolidated tax mechanismOther current receivablesTotal
Subsidiaries      
Agustawestland Philadelphia Co  209  209
Agustawestland SpA 929322135
Agustawestland Ltd  163  163
PZL-Swidnik14121  36
Agustawestland Australia Pty Ltd  19  19
Agustawestland Malaysia SDN BHD  17  17
Selex ES SpA 7562  137
Selex ES Inc 123  15
Selex ES International SpA 372  39
Leonardo MW Ltd  38  38
Bredamenarinibus SpA 50   50
Leonardo Global Solutions SpA53 53869
So.Ge.Pa.Società Generale di Partecipazione SpA 13   13
Other with unit amount lower than €mil. 10 8412152
Associates      
NH Industries SAS  197  197
Eurofighter Jagdflugzeug Gmbh  73  73
Iveco - Oto Melara S.c.a.r.l.  35  35
Orizzonte - Sistemi Navali SpA  23  23
Macchi Hurel Dubois SAS  20  20
Other with unit amount lower than €mil. 10  33  33
Joint Ventures      
GIE ATR  61  61
MBDA SAS  18  18
Thales Alenia Space SAS 3420 155
Joint Stock Company Helivert  53  53
Telespazio SpA1211 115
Other with unit amount lower than €mil. 10  3  3
Consortia      
Other with unit amount lower than €mil. 10 28  10
Companies subject to the control or considerable influence of the MEF      
ENAV SpA  29  29
Fintecna SpA  12  12
Poste Italiane SpA  16  16
Other with unit amount lower than €mil. 10  16 117
Other related parties      
Other  9  9
Total683261,22637141,671
% against total for the period34.7%92.4%43.2%100.0%14.6% 

Receivables at 31 December 2015

Non-current loans and receivablesCurrent loans and receivablesTrade receivablesReceivables from consolidated tax mechanismOther current receivablesTotal
Subsidiaries      
AgustaWestland SpA592951914 387
Alenia Aermacchi North America Inc     -
Alenia Aermacchi SpA 32427  351
AnsaldoBreda SpA 1813  184
Bredamenarinibus SpA 64   64
Leonardo Global Solutions SpA26711 35
Selex ES SpA 1,63921351,668
So.Ge.Pa.Società Generale di Partecipazione SpA17   219
Whitehead Sistemi Subacquei SpA 262  28
Other with unit amount lower than €mil. 10 6116124
Joint Ventures      
Thales Alenia Space Italia SAS 11   11
Other with unit amount lower than €mil. 103361 13
Consortia      
Other with unit amount lower than €mil. 10 2   2
Companies subject to the control or considerable influence of the MEF      
Other with unit amount lower than €mil. 10  1  1
Total1052,558912582,787
% against total for the period99.1%100.0%97.8%100.0%6.4% 

Payables at 31 December 2016

Non-current loans and borrowingsCurrent loans and borrowingsTrade payablesPayables from consolidated tax mechanismOther current payablesTotalGuarantees
Subsidiaries       
AgustaWestland Ltd 96870  1,0381,388
AgustaWestland Philadelphia Co  220  220110
AgustaWestland SpA  16 1228204
Leonardo MW Ltd 6627 59856
Alenia Aermacchi SpA     - 59
AnsaldoBreda SpA 53 18118189749
Bredamenarinibus SpA     - 12
Larimart SpA  182 20 
Gruppo DRS  10  10175
Fata Logistic Systems SpA 726 4374
Leonardo Global Solutions SpA 2349 3753
Meccanica Holdings USA Inc     - 1,289
PZL-Swidnik  18  1812
Selex ES SpA 113515566 
Selex ES Saudi Arabia Ltd     - 13
Selex ES Malaysia SDN BHD     - 35
Selex ES Eleckronik Turkey AS     - 23
Selex ES GMBH     - 119
Sirio Panel SpA 3117 553 
So.Ge.Pa.Società Generale di Partecipazione SpA 6 219277
Other with unit amount lower than €mil. 10 451 217615
Associates       
Eurofighter Jagdflugzeug GmbH 39   39 
Other with unit amount lower than €mil. 10  24 731 
Joint Ventures       
GIE ATR  2 148150 
MBDA SAS 4407 144847
Telespazio SpA 14 1419228
Other with unit amount lower than €mil. 10  11  11 
Consortia       
Other with unit amount lower than €mil. 10  1 12 
Companies subject to the control or considerable influence of the MEF       
Ansaldo Energia SpA     -718
Other with unit amount lower than €mil. 10 210  12 
Other related parties       
Other  1  1 
Total- 1,664613383532,6685,266
% against total for the period0.0%70.2%23.9%100.0%30.3% 100.0%

Payables at 31 December 2015

Non-current loans and borrowingsCurrent loans and borrowingsTrade payablesPayables from consolidated tax mechanismOther current payablesTotalGuarantees
Subsidiaries       
AgustaWestland Ltd     - 1,693
AgustaWestland Philadelphia Co     - 107
AgustaWestland SpA 4181 1325512,573
Alenia Aermacchi North America Inc     - -
Alenia Aermacchi SpA 1,797451441,9503,554
Ansaldo STS SpA     -  
AnsaldoBreda SpA   55127182799
Bredamenarinibus SpA   13316 
Cyberlabs Srl     -  
Gruppo DRS  7  7126
Fata SpA  - 88341
Leonardo Global Solutions SpA 1111 5271
Meccanica Holdings USA Inc     - 1,194
Oto Melara SpA 46  2672156
PZL-Swidnik     - 6
Selex ES Gmbh     - 35
Selex ES Ltd 2783 428571
Selex ES SpA 3515 47971,212
Selex Service Management SpA   471130
Selex Sistemi Integrati SpA    1717 
Selex ES Inc     - 5
Sirio Panel SpA    331
So.Ge.Pa.Società Generale di Partecipazione SpA 2 1258
Whitehead Sistemi Subacquei SpA   134125
Other with unit amount lower than €mil. 10 61131131-
Associates       
Eurofieghter Jagoflugzeug Gmbh 56   56-
Joint Ventures       
Mbda Italia SpA     - 47
Mbda Treasury Company Limited 332   332 
Superjet International SpA   212148
E-Geos SpA   2 2 
Telespazio SpA 21 47211
Companies subject to the control or considerable influence of the MEF     -  
Ansaldo Energia SpA    55727
Other with unit amount lower than €mil. 10       
Total- 2,98353865603,68213,030
% against total for the period0.0%95.7%53.0%100.0%95.4% 100.0%

As regards the most important transactions we note:

  • loans and borrowings from related parties include, in particular, the payable of €mil. 440 (€mil. 332 at 31 December 2015) of the Group companies to the Joint venture MBDA.
  • current loans and borrowings, for a total of €mil. 1,664 (€mil. 2,983 at 31 December 2015), reflect the method adopted by Leonardo for centralising the Group Treasury resources and show, by their high amount, the net cash inflows realised by the Group companies during the year, particularly during the final quarter. These loans and borrowings also include the balancing entry for cash surpluses that a number of Group companies pay to Leonardo outside the cash pooling system as their share, under treasury agreements signed with the latter, the corresponding balancing entry of which is found under cash and cash equivalents. Similarly, current loans and receivables of €mil. 326 (€mil. 2,558 at 31 December 2015) arise from financing activities conducted by Leonardo in favour of the Group companies, again as a result of this centralisation of Treasury resources;
  • other receivables and payables, which include amounts deriving from the Group tax consolidation mechanism (€mil. 38 and €mil. 41 respectively) and from the Group VAT mechanism (€mil. 169 of payables), are recognised by the Parent Company, the sole party having a legal relationship with the Tax Authority, against payables and receivables recognised by the companies that adopt the national tax consolidation and the Group VAT. Receivables and payables recognised by the Company did not have any impact on the income statement since these items were offset with balancing tax items in the balance sheet. Moreover, payables include debts to the subsidiaries in relation to the refund they are entitled to following the allowed deductibility of IRAP for IRES purposes (€mil. 16);

The changes during the year and the composition of assets by maturity, currency and geographical area are shown in Appendices nos. 3, 4, 5 and 6 to these Notes.

Below are all income statement transactions with the Leonardo’s related parties for the years 2016 and 2015.

Income statement transactions at 31 December 2016

RevenueOther operating incomeOther operating expensesServices expensesPurchase expensesFinancial incomeFinancial expenses
Subsidiaries       
AgustaWestland Ltd166  289729
AgustaWestland Philadelphia Co1334 19117  
AgustaWestland SpA7   161 
Agusta Aerospace Services SA12      
Agustawestland Malaysia SDN BHD11   11  
Fata Logistic Systems SpA   65   
Selex Galileo Inc    11  
Leonardo Global Solutions SpA1  167 1 
Leonardo MW Ltd8761381311
Larimart SpA    12  
PZL-Swidnik22   841 
Sirio Panel SpA    29  
Other with unit amount lower than €mil. 1035 1491913 
Associates       
Eurofighter Jagdflugzeug GmbH703      
NH Industries SAS342      
Orizzonte Sistemi Navali S.p.A.206      
Iveco-Oto Melara Scarl123     3
Macchi Hurel Dubois SAS73      
Agustawestland Aviation Services LLC12      
Atitech Manufactoring Srl   16   
Other with unit amount lower than €mil. 10361 143  
Joint Ventures       
GIE ATR331   57  
MBDA SAS38     2
Superjet International SpA20    2 
Thales Alenia Space France Sas68      
Rotorsim Srl13 16   
Other with unit amount lower than €mil. 102 15 1 
Consortia       
Other with unit amount lower than €mil. 104  1   
Companies subject to the control or considerable influence of the MEF       
Eni SpA   16   
Cassa Depositi e Prestiti SpA     30 
Enav SpA37      
Poste Italiane SpA29      
Other with unit amount lower than €mil. 10231 5   
Other related parties       
Other9  31  
Total2,5311534424705215
% against total for the period31.9%3.3%0.7%6.3%6.7%4.6%1.7%

Income statement transactions at 31 December 2015

RevenueOther operating incomeOther operating expensesServices expensesFinancial incomeFinancial expenses
Subsidiaries      
AgustaWestland Ltd    3 
AgustaWestland SpA142 1133
Alenia Aermacchi North America Inc      
Alenia Aermacchi SpA10  21213
Leonardo Global Solutions SpA  1173 
Selex ES Ltd   3 1
Selex ES SpA116 20521
Other with unit amount lower than €mil. 107  12205
Joint Ventures      
Other with unit amount lower than €mil. 1010  114
Companies subject to the control or considerable influence of the MEF      
Other with unit amount lower than €mil. 1011    
Total53915610427
% against total for the period98.1%81.8%3.7%45.9%7.7%3.2%

“Financial income (expense)” relates to interest on financial receivables and payables and commissions, mainly connected with the centralisation of the management of Group treasury resources within Leonardo. In carrying out its treasury management functions, the Company acts as the main counterparty, always at arm’s length, for the financial assets and liabilities of the subsidiaries within the scope of such centralisation.

33. Financial risk management

Leonardo S.p.a. is exposed to financial risks associated with its operations, specifically related to these types of risks:

  • interest-rate risks, related to exposure to financial instruments;
  • exchange-rate risks, related to operations in currencies other than the reporting currency;
  • liquidity risks, relating to the availability of financial resources and access to the credit market;
  • credit risks, resulting from normal commercial transactions or financing activities.

The Company closely and specifically follows each of these financial risks, with the objective of promptly minimising them, even using hedging derivatives.

The sections below provide an analysis, conducted through sensitivity analysis, of the potential impact on the final results deriving from assumed fluctuations in reference parameters. As required by IFRS 7, these analyses are based on simplified scenarios applied to the final results of the reference periods and, by their own nature, they cannot be considered as indicators of the actual effects of future changes in reference parameters with different financial statements and market conditions, and cannot reflect the inter-relations and the complexity of reference markets.

Below are the main information related to the abovementioned risks. However, for further details reference is made to the section on “Financial risk management” of the consolidated financial statements.

Interest rate risk

Leonardo is exposed to interest rate risk on borrowings. The management of interest rate risk is consistent with the long-standing practice of reducing the risk of fluctuations in interest rates while seeking to minimise related borrowing costs.

To that regard and with reference to borrowings equal to €mil. 5,302 at 31 December 2016 the fixed-rate percentage amounted to around 65%, while the floating-rate percentage is around 35%.

At 31 December 2016, the outstanding transactions were the following:

  • interest-rate swap fixed/floating/fixed rate for €mil. 200, related to the Finmeccanica Finance issue due 2018, totalling €mil. 500, (subsequently transferred to Leonardo) which guarantees a fixed rate of 5.30% compared to the bond issue rate of 5.75%. Therefore, the average interest rate related to this issue is 5.57%;;
  • options for €mil. 200 (CAP and Knock out at 4.20% in relation to the 6-month euribor interest rate), originally purchased in order to partially cover the bond issue due 2025. Moreover, given the low cost of the transaction, it is currently deemed appropriate not to settle the transaction, in order to use it in the event of the Group’s strategy providing for a return to the floating rate, or against an unfavourable floating-rate indebtedness.

The detail of the main derivative instruments in interest-rate swaps (IRS) at 31 December 2016 is as follows:

 NotionalUnderlying
(maturity)
 
Fair value
01.01.2016
 
ChangesFair value
31.12.2016
 20162015IncomeExpenseCFH Reserve
IRS fixed/floating/fixed200200Bond 20182---2
Options200200Bond 2025(3)-(1)-(4)
Total notional400400 (1)- (1)- (2)

 NotionalUnderlying (maturity)Fair value 01.01.2015ChangesFair value 31.12.2015
 20152014  IncomeExpenseCFH Reserve 
IRS fixed/floating/fixed200200Bond 20183-(1)-2
Options200200Bond 2025(4)-1-(3)
Total notional400400 (1)---(1)

The table below shows the effects of the sensitivity analysis for 2016 and 2015 on IRS at 31 December 2016 deriving from the 50-basis-point shift in the interest rate curve:

Effect of shift of interest-rate curve

31 December 201631 December 2015
 Increase of 50 bpsDecrease of 50 bpsIncrease of 50 bpsDecrease of 50 bps
Net result4(4)1(1)
Equity (*)4(4)1(1)

(*): Defined as sum of earnings and cash-flow hedge reserve

Exchange rate risk

Exchange-rate risk management for the Group is governed by the directive issued by Leonardo S.p.a. The purpose of the directive is to standardise for all the Group companies the management criteria based on industrial-not speculative-strategies so as to contain risks within specific limits by carefully and constantly assessing all foreign currency positions.

The Company hedges its own risks related to short-term financial payables and receivables denominated in currencies other than the euro and enters into foreign exchange transactions in the interest of other Group companies totalling €mil. 6,425 (notional amount) (substantially in line with the previous year), as detailed in the following table:

 Notional 2016Notional 2015
 SalesPurchasesTotalSalesPurchasesTotal
Swap and forward transactions2,5123,9136,4253,2823,1806,462

As a result of the financial centralisation, the cash flows of the Group’s foreign companies were recharged in several ways to Leonardo through intercompany transactions mainly denominated in GBP and USD. For this type of risks, the income statement is hedged using mirror transactions of payables/receivables to/from third parties in the currency of intercompany items or through specific exchange-rate derivatives, classified as fair-value hedges. The table below shows the expected due dates of receipts and payments related to derivative instruments broken down by main currencies:

 31 December 2016 31 December 2015
 Notional ReceiptsNotional Payments Notional ReceiptsNotional Payments
 USDGBPUSDGBP USDGBPUSDGBP
Cash-flow and fair-value hedges1,140625181,357 ----
Within 1 year5939310323 -1419769
2 to 3 years52-125382 ---434
4 to 9 years---- --- 
Total1,785719532,062 -14191,203
          
Hedging transactions which cannot be classified as hedging transactions56735673 ----
          
Total transactions2,352741,5202,065 -14191,203

The table below shows the effects of the sensitivity analysis carried out on the change in the exchange rates of the euro against the pound sterling and the US dollar, assuming a +/-5% change in the euro/US dollar exchange rate and the euro/pound sterling exchange rate compared with the reference rates at 31 December 2016 (1.0541 and 0.8562, respectively) and at 31 December 2015 (1.0887 and 0.7339, respectively),

 31 December 201631 December 2015
 Effect of change in the €/GBP rateEffect of change in the €/USD rate Effect of change in the €/GBP rateEffect of change in the €/USD rate
 Increase of 50 bpsDecrease of 50 bpsIncrease of 50 bpsDecrease of 50 bps Increase of 50 bpsDecrease of 50 bpsIncrease of 50 bpsDecrease of 50 bps
Net result4(1)1(5) (1)(2)(2)2
Equity (*)(31)3725(28) (1)(2)(2)2

(*): Defined as sum of earnings and cash-flow hedge reserve

(*) Defined as sum of earnings and cash-flow hedge reserve.

Liquidity risk

Leonardo is exposed to liquidity risk, i.e. the risk of not being able to efficiently finance its usual business and investment operations, as well as the requirements connected with the volatility of the relevant commercial markets and with the effects of the current reorganisation of the Group, specifically with regard to the financial outlays relating to efficiency-improvement processes and to activities linked to business contracts at risk of renegotiation. Furthermore, there is the risk of not being able to repay debts at the expiry dates.

In order to face the above-mentioned risks, Leonardo has adopted a series of instruments aimed at optimizing the management of financial resources.

During 2016, €mil. 47 was repaid of the principal portion of the EIB loan, which was signed by the Company in 2010. Furthermore, in order to finance its own ordinary and extraordinary operations, Leonardo can use the €bil. 2.0 Revolving Credit Facility, whose maturity date has been extended to 2020.

 Credit risk

Following the mergers and demergers commented on in the Report on Operations, Leonardo S.p.a. was transformed from an industrial holding company responsible for direction and control into a trading company, exposed to the exchange risk with reference to its portfolio, orders, revenues and costs denominated in currencies other than Euro (in particular USD) The Company operates in markets which are or have been recently affected by geopolitical or financial tensions. In particular, with reference to the situation at 31 December 2016, we note the following relations with countries exposed to credit risk according to the international institutions:

 Libya Egypt Other countries Total
Assets 10 24 5 39
Liabilities 8 10 2 20
Net exposure 2 14 3 19

Finally the receivables related to these agreements, as reported in “Leonardo and risk management” in the Report on Operations, might not be paid, renegotiated or written off. Among receivables, we note in particular those from Piaggio Aero Industries (gross amount of €mil. 118) which is currently defining a restructuring plan that envisages also the rescheduling of the company’s borrowings.

The table below summarises trade receivables at 31 December 2016 and 2015 (values in €bil.):

€ billions

31 December 2016 31 December 2015
Portion due1.3 -
- of which: for more than 12 months0.4 -
Portion not yet due1.5 -
Total trade receivables2.8 -

Both trade and financial receivables are impaired individually if they are significant.

Classification of financial assets and liabilities

The table below shows the fair value hierarchy of financial assets and liabilities measured at fair value. The fair value is determined on the basis of measurement techniques which consider directly observable market inputs (the so-called “Level 2”). In particular, the inputs used for the fair value measurement are the foreign exchange rate and interest rate observable on the market (spot exchange rates and forwards), exclusively in relation to options, and the volatility of these inputs. Vice versa, the fair value of the remaining 15% interest in Ansaldo Energia, subject to put&call options (classified starting from 2016 under other current assets) is determined on the basis of measurement techniques which do not consider directly observable market inputs (the so-called “Level 3”). In particular, the fair value of the stake in Ansaldo Energia was calculated on the basis of the price of the sale, as established in the related agreements and increased by capitalised interest at a yearly 6% rate.

31 December 201631 December 2015
 Level 2Level 3Total Level 2Level 3Total
Other non current assets--- -131131
Other assets113138251 4-4
        
Other non-current liabilities-275275 ---
Other current liabilities273-273 17-17

34. Remuneration to key management personnel

Remuneration paid to persons who have strategic power and responsibility of Leonardo S.p.a. are reported in Note 36 to the Consolidated Financial Statements.

35. Share-based payments

As largely reported in the section “Leonardo and Sustainability” of the report on operations, in order to implement an incentive and retention system for the Group’s employees and associates, starting from 2015 Leonardo adopted incentive plans which provide for the assignment of Leonardo shares, subject to assessing the attainment of pre-set business targets. These shares will be awarded to the beneficiaries at the end of the vesting period, provided that they have met the condition of being still employed with the company. The cost recognised in the income statement for the share incentive plans amounted in 2016 to €mil. 5 (€mil. 1 in 2015).
With specific regard to the Long-Term Incentive Plan, the fair value used to measure the portion linked to the performance indicators (Group Net Debt for 25% and ROS for 25%) was equal to € 13.12, (namely the value of Leonardo shares at the grant date of 31 July 2015) with reference to the first three-year cycle (2015-2017) and to €9.83 (value of Leonardo shares at the grant date of 31 July 2016) with reference to the second three-year cycle (2016-2018).
Vice versa, the award of the remaining 50% of the shares depends upon market conditions which affect the determination of the fair value (“adjusted fair value”). The adjusted fair value, calculated using the “Monte Carlo” method in order to simulate the possible performance of the stock and of the other companies within the basket, was equal to €10.90 with reference to the first three-year cycle (2015-2017) and to € 3.88 with reference to the second three-year cycle (2016-2018).

The input data used to calculate the adjusted fair value were:

  • the stock price at the grant date;
  • the average share price in the three months preceding the performance period;
  • the risk-free interest rate based on the zero-coupon yield curve in 36 months;
  • the expected volatility of the price of Leonardo shares and of the shares of the other companies within the basket based on time series in the 36 months prior to the grant date;
  • correlation coefficients between Leonardo and the other companies within the basket on the basis of logarithms of the daily performance of the stocks in the 36 months prior to the grant date;
  • dividend distribution forecasts on a historical basis.

With reference to the co-investment plan, during 2016, in respect of the bonus shares (“matching shares”) the requirements for the award of the rights have not yet been fulfilled.