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4.2 INTRODUCTION TO THE NOTES AND ACCOUNTING POLICIES
Introduction
Euronext N.V. is a company domiciled in the Netherlands and was incorporated by Société des Bourses Françaises S.A. (SBF), Amsterdam Exchanges N.V. (AEX) and Société de la Bourse de Valeurs Mobilières de Bruxelles S.A./Effectenbeursvennootschap van Brussel N.V. (BXS). These three constituting compalanies merged into Euronext N.V. (hereafter: the Group) as at 22 September 2000 and were renamed Euronext Paris S.A., Euronext Amsterdam N.V. and Euronext Brussels S.A./N.V. as from that date.
The Group operates stock and derivative exchanges through subsidiaries in Paris, Brussels, Amsterdam and as from January 2002 also in London and Lisbon. The range of services originally included listing of financial instruments, the organization of trading in such instruments, clearing, settlement, custody and the sale of related information and services. In 2002 and 2003, the Group disposed of its clearing, settlement and custody activities and became minority shareholder of Euroclear plc and LCH.Clearnet Ltd.
Statement of compliance
The consolidated financial statements for the year ended
31 December 2004 have been prepared in accordance with International Financial Reporting Standards/International Accounting Standards (IFRS/IAS) and interpretations issued by the International Financial Reporting Interpretations Committee/Standing Interpretations Committee as adopted by the International Accounting Standards Board (IASB).
In 2004, IFRS 2 "Share-based Payment" has been issued by the IASB. Early adoption of this standard has been applied for the financial year 2004. All other changes of IFRS/IAS will be applied as from their effective date, including IFRS 3 and accordingly changes of IAS 36 "Impairment of assets" and IAS 38 "Intangible assets" which has been applied for new acquisitions after 31 March 2004.
The consolidated financial statements for the year ended 31 December 2004 have also been prepared in accordance with accounting principles generally accepted in the Netherlands and comply with the financial reporting requirements included in part 9 of Book 2 of the Dutch Civil Code.
The financial statements deviate from part 9, Book 2 of the Dutch Civil Codes in three respects:
1. the application of standard models for the balance sheet and income statement;
2. goodwill amortization is presented separately on the face of the consolidated income statement as a component part of profit from operations rather than as part of depreciation;
3. goodwill related to investments in associates/joint ventures is presented as part of the respective balance sheet caption (as required under IFRS) rather than presented as part of the intangible assets.
These departures from Dutch legal requirements are done on the basis of the international character of the Group, as it is considered that this improves the insight of the international user (as required by article 362.4 of the Dutch Civil Code). This presentation does not affect equity or net results.
Continued operations and comparative information
On 25 June 2003, the Boards of Euronext, BCC/Clearnet and London Clearing House announced their intention to merge BCC/Clearnet and London Clearing House under a new independent UK holding company called LCH.Clearnet Group Limited.
On 22 December 2003, the Group exchanged its stake in the share capital of BCC/Clearnet to LCH.Clearnet Group Limited and 17.7% of LCH in exchange for 49.1% of the newly formed company. Subsequently, the Group sold 7.6% of these shares to third parties. The remaining interest in LCH.Clearnet Group Limited is divided into 16.6% Redeemable Convertible Preference Shares (RCPSs) and 24.9% of total capital in the form of ordinary shares. The preference shares are intended to be either redeemed by December 2008 at the latest, to be converted into ordinary shares or to be sold in the coming years. Accordingly, despite the continued relationship with LCH.Clearnet through its shareholding in ordinary shares and RCPSs, the Group considered the sale as a discontinued operation.
BCC/Clearnet, established as a credit institution under French law, was the sole clearing house and central counter party for markets operated by Euronext (excluding Euronext.liffe). The net assets, results and cash flows of BCC/Clearnet were fully consolidated in the Euronext consolidated accounts in the period prior to 22 December 2003. As of that date, assets and liabilities of BCC/Clearnet have been deconsolidated.
"Continued operations" comparative information predominantly in the same manner as was disclosed last year in note 6.3.5 has been included in the income statement for 2003 to enable a comparison that is based on the current activities. Contrary to last year, the capital gain and related (deferred) tax recognized on the transaction has been classified as being part of income and expense of Discontinued operation (see also note 4.3.5 "Discontinued operation"). Since the transfer of activities was as of 22 December 2003, the term "Continued operations" could only be used as from that date.
All information relating to 2002 has been reported as disclosed historically.
Changes in the scope of the consolidation
The assets, liabilities, results and cash flows of two entities acquired by GL TRADE S.A. are included in the Group's consolidated financial statements since the date of their acquisition in 2004.
Further reference is made to note 4.3.7 "Effect of acquisitions".
Significant accounting policies
(a) Basis of preparation and measurement
The consolidated financial statements are presented in thousands of euros.
The consolidated financial statements have been prepared on an historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, investments held for trading and investments available-for-sale. Recognized assets and liabilities that are hedged are stated at fair value in respect of the risk that is hedged.
(b) Use of estimates in the preparation of the financial statements
In preparation of the financial statements, management is required to make estimates and assumptions that affect reported income, expenses, assets, liabilities and disclosure of contingent assets and liabilities.
Use of available information and application of judgement are inherent in the assessment of estimates.
© Basis of consolidation
(i) Subsidiaries
Subsidiaries are those enterprises that are controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the financial statements from the date that control effectively commences until the date that control effectively ceases. Acquisitions of subsidiaries are accounted for using the purchase method of accounting. The fair value of the assets and liabilities of newly acquired subsidiaries is the cost price of these assets and liabilities for the Group.
(ii) Joint ventures and associates
Joint ventures are those enterprises over whose activities the Group has joint control, established by contractual agreement. They are stated at net equity value using the alternative treatment allowed under IFRS. Associates are those enterprises in which the Group has significant influence, but not control, over the financial and operating policies. The consolidated financial statements include the Group's share of the total recognized gains and losses of joint ventures and associates on an equity accounted basis, from the date that significant influence effectively commences until the date that significant influence effectively ceases.
(iii) Transactions eliminated upon consolidation
Intra-group balances and transactions, and any (un)realized gain or loss arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. (Un)realized gain or loss arising from transactions with associates (and jointly controlled entities) is eliminated to the extent of the Group's interest in the enterprise. (Un)realized gain or loss resulting from transactions with associates and joint ventures is eliminated against the investment in the associate or joint venture.
The functional and presentation currency of Euronext and its subsidiaries on the continent is the euro. Transactions in foreign currencies are initially recorded in the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the balance sheet date. All differences are taken to the consolidated income statement with the exception of differences on foreign currency borrowings that provide a hedge against a net investment in a foreign entity. These are taken directly to equity until the disposal of the net investment, at which time they are recognized in the consolidated income statement. Tax charges and credits attributable to exchange differences on those borrowings are also dealt with in equity. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of initial transaction. Non-monetary items measured at fair value in a foreign currency shall be translated using the exchange rates at the date when the fair value was determined.
The functional currency of the overseas subsidiaries in the United Kingdom is the pound sterling. As at the reporting date, the assets and liabilities of these overseas subsidiaries are translated into the presentation currency (the euro) of Euronext at the rate of exchange ruling at the balance sheet date and, their income statements are translated at the weighted average exchange rates for the year. The exchange differences arising on the retranslation are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognized in equity relating to that particular foreign operation shall be recognized in the income statement.
(i) Classification
Originated loans and receivables are loans and receivables created by the Group providing money to a debtor other than those created with the intention of short-term profit taking. Originated loans and receivables comprise loans and advances to banks and customers.
Held-to-maturity assets are financial assets with fixed or determinable payments and fixed maturity that the Group has the intent and ability to hold to maturity.
Held for trading assets are financial assets that are acquired or incurred principally for the purpose of generating a profit from short-term fluctuations in price.
Available-for-sale assets are financial assets that are not held for trading purposes, originated by the Group, or held to maturity.
(ii) Recognition
The Group recognizes held-for-trading/available-for-sale assets on the date it commits to purchase the assets.
Held-to maturity loans and originated loans and receivables are recognized in the balance sheet on the day they are originated by, or transferred to the Group.
At the initial recognition, financial assets may be classified into a certain category with the recognition basis decided upon that moment (use of the fair value option for assets).
(iii) Measurement
Financial instruments are measured initially at cost, including transaction costs. Subsequent to initial recognition all held-for-trading and available-for-sale assets are measured at fair value, except any instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably measured. Such an instrument is stated at cost, including transaction costs, less impairment losses.
All non-trading financial liabilities, originated loans and receivables and held-to-maturity assets are measured at amortized cost less impairment losses. Amortized cost is calculated using the effective interest rate method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortized based on the effective interest rate of the instrument.
(iv) Fair value measurement principles
The fair value of financial instruments is based on their quoted market price at the balance sheet date without any deduction for transaction costs. If a quoted market price is not available, the fair value of the instrument is estimated using pricing models or discounted cash flow techniques.
(v) Gains or losses on subsequent measurement
Gains or losses arising from a change in the fair value of available-for-sale assets are recognized directly in equity. When the financial assets are sold, collected or otherwise disposed of, the cumulative gain or loss previously recognized in equity is transferred to the income statement.
A decline in the fair value of an available-for-sale asset that is deemed to be other than temporary, results in a reduction in the carrying amount to fair value. This impairment is charged to the income statement as part of "net financing income" and a new cost basis for the asset is established. Gains or losses on investments held for trading are recognized in income.
(vi) Derivative financial instruments
The Group uses interest rate swaps to manage its exposure to interest rate risks arising from operational and financing activities. In accordance with its treasury policy, the Group does not hold or issue such derivative financial instruments for speculative purposes.
Derivative financial instruments are recognized initially at cost. Subsequent to initial recognition, derivative financial instruments are stated at fair value. Any resultant gain or loss arising from measurement at fair value on derivative financial instruments is recognized in the income statement.
Hedge of recognized assets and liabilities
Where a derivative financial instrument hedges a recognized receivable or payable, the hedged item is also adjusted for the fair value in respect of the risk being hedged, with any resultant gain or loss being recognized in the income statement.
The carrying amount at the balance sheet date of the hedged items is the valuation basis of the investment translated to euros at the foreign exchange rate ruling at that date and adjusted for the fair value movement in respect of the risk being hedged.
(i) Owned assets
Items of property and equipment are stated at cost less accumulated depreciation and impairment losses (see accounting policies under [l:"impairment"]). Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment.
(ii) Leased assets
Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as financial leases. Equipment acquired by way of financial leases are stated at an amount equal to the lower of fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses.
(iii) Subsequent expenditure
Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately, is capitalized with the carrying amount of the component being written off. Other subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the item of property and equipment. All other expenditure is recognized in the income statement as an expense as incurred.
(iv) Depreciation
Depreciation is charged to the income statement generally on a straight-line basis over the estimated useful lives of items of property and equipment. Land is not depreciated. The estimated useful lives are as follows:
Buildings: 5-40 years
IT-equipment: 2-3 years
Other equipment: 5-12 years
Vehicles: 3-4 years
Fixtures and fittings: 4-10 years
(i) Goodwill
Goodwill arising on an acquisition represents the excess of the cost of the acquisition over the fair value of the identifiable net assets acquired. Goodwill is stated at cost less accumulated amortization up to and including the year 2004 and impairment losses (see accounting policies under [l:"impairment"]). In respect of associates and joint ventures, the carrying amount of goodwill is included in the amount of the investment in the associates and joint venture.
Negative goodwill arising on an acquisition represents the excess of the fair value of the net identifiable asset acquired over the cost of acquisition. To the extent that negative goodwill relates to an expectation of future losses and expenses that are identified in the plan of acquisition and can be measured reliably, but which have not yet been recognized, it is recognized in the income statement when the future losses and expenses are recognized.
Any remaining negative goodwill, not exceeding the fair values of the non-monetary assets acquired, is recognized in the income statement over the weighted average useful life of those assets that are depreciable/amortizable.
In 2004, IFRS 3 "Business Combinations" has been issued by the IASB and has been applied as from its effective date of 31 March 2004 for new acquisitions. As from 1 January 2005 it will also be applied for goodwill acquired in business combinations before 31 March 2004.
(ii) Research and development
Expenditure on research activities, undertaken with the prospect of gaining technical knowledge and understanding, is recognized in the income statement as an expense as incurred.
Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalized if the product or process is technically and commercially feasible and the Group has sufficient resources to complete development. The expenditure capitalized includes the cost of materials and direct labour. Other development expenditure is recognized in the income statement as an expense as incurred. Capitalized development expenditure is stated at cost less accumulated amortization and impairment losses.
(iii) Other intangible assets
Other intangible assets, which are acquired by the Group, are stated at cost less accumulated amortization and impairment losses.
(iv) Subsequent expenditure
Subsequent expenditure on capitalized intangible assets is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.
(v) Amortization
Amortization is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets. Goodwill is amortized from the date of initial recognition; other intangible assets are amortized from the date the asset is available for use. The estimated useful lives are as follows:
Goodwill: 5-20 years
Capitalized development costs: 2-3 years
Patents and trademarks: 5 years
Investments held for trading are classified as current assets and are stated at fair value, with any resultant gain or loss recognized in the income statement. Where the Group has the positive intent and ability to hold bonds to maturity, they are stated at amortized costs. Other investments held by the Group are classified as being available-for-sale and are stated at fair value, with any resultant gain or loss recognized in equity. Realized gains or losses are recognized in the income statement with a reversal of any revaluation recorded in equity.
The fair value of investments held for trading and investments available-for-sale is their market price, excluding disposal costs, at the balance sheet date.
Trade and other receivables are stated at cost less, where applicable, impairment losses.
Cash equivalents include current investments that are readily convertible to cash and which are subject to an insignificant risk of changes in value. Deposits and other fixed interest instruments with a maturity of less than three months are considered cash equivalents.
The carrying amounts of the Group's fixed assets (both tangible and intangible including goodwill) are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated. For intangible assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date. An impairment loss is recognized whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.
In the assessment of any impairment the Group applies the best available information bases on market prices. If such information is not available the Group uses discounted cash flow methods to approximate the recoverable amount.
(i) Repurchase of share capital
When share capital recognized as equity is repurchased, the amount of the consideration paid, including directly attributable costs and withholding tax, is recognized as a change in equity. Repurchased shares are presented as a deduction from total equity. Purchased shares subsequently sold are added at equity for the amount
of the consideration received.
(ii) Dividends
Dividends are recognized as a liability in the period in which they are declared.
(iii) Costs of other equity transactions
Transaction costs related to the issuance of new shares are directly charged to equity, net of any related tax benefits. These expenses are restricted to incremental external expenses such as legal and bank fees. Expenses related to the listing of new or already existing shares are expensed.
Interest-bearing borrowings are recognized initially at cost, net of any transaction costs incurred. Subsequent to initial recognition, interest-bearing borrowings are stated at amortized cost with any difference between cost and redemption value being recognized in the income statement over the period of the borrowings. When borrowings are repurchased or settled before maturity, any difference between the amount repaid and the carrying amount is recognized immediately in the income statement.
(i) Defined contribution plans
Contributions to defined contribution pension plans are recognized as an expense in the income statement as incurred.
(ii) Defined benefit plans
The Group's net obligation in respect of defined benefit pension, early retirement and healthcare plans is calculated separately for each defined benefit plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine the present value and the fair value of any plan assets. The discount rate is the yield at balance sheet date on AAA credit rated bonds that have maturity dates approximating the terms of the Group's obligations. A qualified actuary using the projected unit credit method performs the calculation.
When the benefits of a plan change, the portion of the increased benefit relating to past service by employees is recognized as an expense in the income statement on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognized immediately in the income statement.In calculating the Group's obligation in respect of a plan, to the extent that any cumulative unrecognized actuarial gain or loss exceeds ten percent of the greater of the present value of the defined benefit obligation and the fair value of plan assets, that portion is recognized in the income statement over the average remaining service period of the employees.Where the calculation results in a benefit to the Group, the recognized asset is limited to the net total of any unrecognized actuarial losses and past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan.
(iii) Equity and equity-related compensation benefits
The cost of option schemes with employees is measured by reference to the fair value at the date at which they are granted. The fair value is determined by an external valuator using a binomial model. In valuing option schemes no account is taken of any performance conditions, other than conditions linked to the price of the shares of the company.The cost of equity-settled transactions is recognized, together with a corresponding increase in equity, over the period, ending on the date on which the relevant employees become fully entitled to the award ("vesting date"). No expense is recognized for awards that do not ultimately vest.Where the terms of an equity-settled award are modified, as a minimum an expense is recognized as if the terms had not been modified. In addition, an expense is recognized for any increase in the value of the transaction as a result of the modification, as measured at the date of modification. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognized for the award is recognized immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated
as if they were a modification of the original award, as described in the previous paragraph.
The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share.
The company has an employee share incentive plan and an employee share trust for the granting of non-transferable options to executives and senior employees. Shares in the company held by employee share trusts as far as controlled by the company are treated as treasury shares and presented in the balance sheet as a deduction from equity. The company has taken advantage of the transitional provisions of IFRS 2 in respect of equity-settled awards and has applied IFRS 2 only to equity-settled awards granted after
7 November 2002 that had not vested on or before 31 December 2003.
A provision is recognized in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.
A provision for restructuring is recognized when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been announced publicly. Costs relating to the ongoing activities of the Group are not provided for.
Trade and other payables are stated at their cost.
Revenues are attributed to the period to which they relate.Revenues, excluding "Sale of software" and "Other income", consist mainly of fees for executing transactions in shares, bonds, options and futures, fees for providing technical infrastructure related to these activities, proceeds from the sale of exchange information and Listing fees.
"Sale of software" comprises revenues from fees received for the sale of software licenses. These revenues are recognized in accordance with the substance of the licensing agreements.Revenues from licensing agreements with a specified period of time are amortized on a straight-line basis over the life of the agreements. Fees received under licensing agreements for which the Group has no remaining obligations to perform or to deliver are recognized immediately.
Expenses are attributed to the period to which they relate.
(i) Operating lease payments
Payments made under operating leases are recognized in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognized in the income statement as an integral part of the total lease payments made.
(ii) Net financing income
Net financing costs comprise interest payable on borrowings, interest receivable on funds invested, dividend income, foreign exchange gains and losses, gains on disposal, revaluations to fair value of held-for-trading financial instruments, gains and losses on hedging instruments that are recognized in the income statement as well as impairment adjustments related to available-for-sale financial instruments.
Interest income is recognized in the income statement as it accrues, taking into account the effective yield on the asset. Dividend income is recognized in the income statement on the date that the dividend is declared.
All interest and other costs incurred in connection with borrowings are expensed as incurred as part of net financing costs. The interest expense component of financial lease payments is recognized in the income statement using the effective interest rate method.
Income tax on the profit or loss for the period comprises current and deferred tax. Income tax is recognized in the income statement except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous periods.Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date.A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the unused tax losses and credits can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.
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