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CONSOLIDATED FINANCIAL REPORT | EXPLANATORY NOTES
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update residual useful lives. This periodic update may lead to a variation in the depreciation/amortisation
period and therefore also in the depreciation/amortisation charge for future years.
(d) Recognition of construction contract revenues and costs
The Group uses the percentage of completion method to account for construction contracts. The margins
recognised in the income statement depend on the progress of the contract and its estimated margins upon
completion. This means that if work-in-progress and margins on as yet incomplete work are to be correctly
recognised, management must have correctly estimated contract costs, potential contract variations, as well
as delays, and any cost overruns and penalties that might reduce the expected profit. The percentage of
completion method requires the Group to estimate contract completion costs and involves making estimates
dependent on factors which may change over time and could therefore have a significant impact on current
values. Should actual cost differ from estimated cost, this variation will impact future results.
(e) Taxes
Consolidated companies are subject to different tax jurisdictions. A significant degree of estimation is needed
to establish the expected tax payable globally. There are many transactions for which the relevant taxes are
difficult to estimate at year end. The Group records liabilities for tax risks on the basis of estimates, possibly
made with the assistance of outside experts.
(f) Inventory valuation
Inventories are recorded at the lower of purchase cost (measured using the weighted average cost formula
for non-ferrous metals and the FIFO formula for all others) and net realisable value, net of selling costs. Net
realisable value is in turn represented by the value of firm orders in the order book, or otherwise by the
replacement cost of supplies or raw materials. If significant reductions in the price of non-ferrous metals are
followed by order cancellations, the loss in the value of inventories may not be fully offset by the penalties
charged to customers for cancelling their orders.
(g) Employee benefit obligations
The present value of the pension plans reported in the financial statements depends on an independent
actuarial calculation and on a number of different assumptions. Any changes in assumptions and in the
discount rate used are duly reflected in the present value calculation and may have a significant impact on
the consolidated figures. The assumptions used for the actuarial calculation are examined by the Group
annually.
Present value is calculated by discounting future cash flows at an interest rate equal to that on high-quality
corporate bonds issued in the currency in which the liability will be settled and which takes account of the
duration of the related pension plan.
Further information can be found in Note 15. Employee benefit obligations and Note 21. Personnel costs.