6.1. Activity and description of the Group

Industria de Diseño Textil, S.A. (“Inditex”), domiciled in Spain (Avenida de la Diputación s/n Edificio Inditex, Arteixo, A Coruña), is the Parent of a group of companies, the principal activity of which consists of the distribution of fashion items, mainly clothing, footwear, accessories and household textile products. Inditex carries out its activity through various commercial formats such as Zara, Pull & Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterqüe. Inditex is listed on all four Spanish stock exchanges and, together with its subsidiary companies, comprises the Inditex Group (“the Group”).

Each format’s commercial activity is carried out through chains of stores managed directly by companies in which Inditex holds all or the majority of the share capital, with the exception of certain countries where, for various reasons, the retail selling activity is performed through franchises. Certain franchise agreements entered into by the Group include purchase options which, if exercised, would entitle the Group to lease the premises in which the franchised stores operate and the assets associated with these stores. These options may be exercised after a certain period of time has elapsed since the signing of the franchise agreement.

Inditex’s business model is characterized by the search for flexibility in adapting production to market demand by controlling the supply chain throughout the various stages of design, manufacture and retailing. This enables it to focus both its own and suppliers’ production on changes in market trends during each sales campaign.

The Group’s logistics system is based on constant deliveries from the distribution centers of the various commercial formats to stores throughout each season. This system essentially operates through centralized logistics centers for each concept in which inventory is stored and distributed to stores worldwide.

At 31 January 2014 the various Group formats had stores in 87 countries, as follows:

At 31 January 2013, the geographical distribution of stores was as follows:

The majority of store premises are held under operating leases. Information on the main terms of the leases is provided in note 25.

6.2. Business combinations

On 18 April 2013, the Group acquired for euros 5,423 thousand all the shares of Retail Group Kazakhstan, LLP, Best Retail Kazakhstan, LLP, PRO Retail Kazakhstan, LLP, Master Retail Kazakhstan, LLP and Spanish Retail Kazakhstan, LLP, which held the Zara, Bershka, Stradivarius, Pull&Bear and Massimo Dutti franchise rights in Kazakhstan. The acquisition price was paid in full in cash.

The aim of the acquisition is to strengthen the Group’s retail presence in Kazakhstan.

The amounts recognized in relation to the identifiable assets acquired and liabilities assumed are as follows:

No deferred taxes arose as a result of this acquisition.

The sales revenue included in the consolidated income statement from 18 April 2013 that was contributed by the franchises acquired by the Group amounted to euros 37,520 thousand and the related profit amounted to euros 6,491 thousand.

Had these franchises been included in the scope of consolidation from 1 February 2013, the consolidated income statement would have reflected sales revenue of euros 45,380 thousand and a profit of euros 9,425 thousand.

The aforementioned acquisition gave rise to a gain on a bargain purchase of euros 16,426 thousand, which was recognized in the consolidated income statement.

The gain on a bargain purchase arose as a result of the purchase price, which was established by applying the price-setting formula provided for in the franchise agreement. No tax effect is expected to arise in this connection.

The accounting for the business combination was considered to have been completed at the end of 2013.

6.3. Sales

Sales in the consolidated income statement include amounts received from the sale of goods and income from rentals, royalties and other services rendered in the ordinary course of the Group’s business, net of VAT and other sales taxes.

Details for 2013 and 2012 are as follows:

6.4. Cost of sales

Details for 2013 and 2012 are as follows:

Raw materials and consumables mainly include amounts relating to the acquisition from or production by third parties of products held for sale or conversion, and other direct expenses related to the acquisition of goods.

6.5. Operating expenses

The detail of “Operating Expenses” and of the changes therein is as follows:

At 31 January 2014, the Group had a total of 128,313 employees, of whom 99,546 were women and 28,767 were men (120,314 employees at 31 January 2013, of whom 93,607 were women and 26,707 were men). Note 27 (employee benefits) provides additional information on personnel expenses.

The detail, by categories, at 31 January 2014 is as follows:

At 31 January 2013 is as follows:

Lease expenses relate mainly to the rental, through operating leases, of the Group’s commercial premises. This line item also includes lease incentives, which are recognized in profit or loss. Note 25 provides more detailed information on the main terms of these leases, together with the related minimum future payment obligations.

“Other operating expenses” includes mainly expenses relating to store operations, logistics and general expenses, such as electricity, commissions on credit and debit card payments, travel, decoration expenses, communications and all kinds of professional services.

6.6. Other losses and income, net

This caption includes all operating expenses and income other than those associated with the Group’s commercial and logistics activity, which are included under “Operating expenses” in the consolidated income statement, as described in the previous note.

This caption includes mainly changes in the prices of the debts recognized as a result of the existence of cross call and put options between the Group and the owners of some of the shares of certain of the subsidiaries, since these cross options are considered to be a deferred acquisition of the shares constituting the underlying. The estimated option strike price is recognized as a liability and changes are recognized in profit or loss.

The changes in prices arise basically as a result of the fact that the prices are tied to the number of stores operated, equity and the profit or loss of the subsidiaries in question.

Following is a description of the main cross put and call options on those investments:

a) Subsidiaries domiciled in Mexico

The Group holds call options on 5% of the share capital of Zara México, S.A. de C.V., on 3% of the share capital of Bershka México, S.A. de C.V., on 1.5% of the share capital of Oysho México, S.A. de C.V., on 1.5% of the share capital of Pull & Bear México, S.A. de C.V., on 1.5% of the share capital of Zara Home México, S.A. de C.V. and on 2% of the share capital of Massimo Dutti México, S.A. de C.V. owned by a non-controlling shareholder.

b) Subsidiaries domiciled in Korea

The Group holds a call option on 20% of the share capital of Zara Retail Korea, Ltd. This ownership interest is held by Lotte Shopping Co., Ltd., which in turn holds an option to sell the full amount of this holding to Industria de Diseño Textil, S.A.

c) Subsidiaries domiciled in South Africa

The Group holds a call option on 10% of the share capital of ITX Fashion Retail South Africa (Proprietary), LTD. This ownership interest is held by Peter Vundla Retail (Propietary), LTD, which in turn holds an option to sell the full amount of this holding to Industria de Diseño Textil, S.A.

d) Subsidiaries domiciled in Australia

The Group holds a call option on 20% of the share capital of Group Zara Australia, PTY. LTD. This ownership interest is held by International Brand Management, PTY. LTD., which in turn holds an option to sell the full amount of this holding to Industria de Diseño Textil, S.A.

6.7. Amortization and depreciation

The detail of “Amortization and depreciation” is as follows:

“Other” relates mainly to gains on non-current asset sales.

6. 8. Financial results

Details of “Financial results” in the consolidated income statements for 2013 and 2012 are as follows:

Financial income and expenses mainly comprise interest accrued on the Group’s financial assets and liabilities during the year (see note 20). Net foreign exchange differences are principally due to fluctuations in the currencies with which the Group operates (see note 26) between the time when income, expenses, acquisitions or disposals of assets are recognized and when the corresponding assets or liabilities are realized or settled under applicable accounting principles.

6. 9. Earnings per share

Basic earnings per share were calculated by dividing net profit for the year attributable to the Parent by the weighted average number of ordinary shares outstanding during the year, excluding the average number of treasury shares held by the Group (see note 23), which totalled 623,112,435 in 2013 and 623,330,400 in 2012.

Diluted earnings per share is calculated based on profit attributable to the holders of equity instruments of the Company and a weighted average number of ordinary shares outstanding after adjustment for the dilution effect of all potential ordinary shares.

6.10. Segment reporting

The principal activity of the Inditex Group comprises the retail distribution of clothing, footwear, accessories and household textile products through various commercial format stores aimed at different targeted sectors of the public.

The origin and predominant nature of the risks and rewards of the Inditex Group’s business units correspond to operating segments, as these risks and rewards are mainly influenced by the fact that each cash-generating unit belongs to a particular commercial format. The internal organization of the Inditex Group, the decision-making process and the system for communicating information to the board of directors and Group management are organized by commercial format and geographical areas.

The key business indicators, understood to be those which form part of the segment information reported periodically to the board of directors and management of the Group and which are used in the decision-making process, are net sales and operating profit by segment.

The segment liabilities, financial results and taxes are not broken down as they do not form part of the key business indicators defined above or of the segment information reported periodically to the board of directors and management of the Group.

Details of Inditex Group segment reporting are as follows:

For the purposes of the reconciliation with the consolidated financial statements, sales to third parties relate to “Sales” in the consolidated income statement and the amortization and depreciation corresponds to “Amortization and depreciation” in the consolidated income statement.

The segment result refers to the operating result (EBIT) of the segment. Income and expenses which are considered corporate in nature or as belonging to the group of segments as a whole have been assigned to each segment in accordance with criteria considered reasonable by Group management. Inter-segment transactions are not material and, therefore, are not broken down.

Total segment assets relate to “Total assets” in the consolidated balance sheet. .

Return on Capital Employed (ROCE) is defined as the ratio between the segment’s result for the year (EBIT) and the average capital employed (equity and, where applicable, net financial debt).

Zara was the first chain created by the Inditex Group and its leading position is based on its fashion offering, with a wide range of products.

Bershka is aimed at the younger consumers and its aim is to offer the latest fashion at affordable prices.

Geographical reporting

In the presentation of information by geographical segment, revenue is based on the geographical location of customers and segment assets are based on the geographical location of assets. Non-current segment assets do not include deferred tax assets.

6.11. Trade and other receivables

Details at 31 January 2014 and 2013 are as follows:

Trade receivables are mainly customer debit/credit card payments pending collection.

Part of the Group’s activity is carried out through franchised stores (see note 1). Sales to franchisees are made under agreed collection terms, which are partially secured as described in note 26.

Balances receivable from public entities comprise VAT and other taxes and duties incurred by Group companies in the countries in which they operate.

Other current receivables include items such as rental incentives due from shopping center developers (see note 25) and outstanding balances on sundry operations, largely advances from creditors to sales representatives.

6.12. Inventories

Details at 31 January 2014 and 2013 are as follows:

The Group contracts insurance policies to cover the potential risk of damage to its inventories.

6.13. Property, plant and equipment

Details of property, plant and equipment in the accompanying consolidated balance sheet and related changes are as follows:

In 2013 there were no material additions to “Land and buildings”. Additions in 2012 include most notably the investment for the acquisition of premises in London housing the flagship Zara store in Bond Street and the investment made to expand the corporate headquarters in Arteixo (A Coruña, Spain).

“Other plant and equipment” includes, inter alia, information technology equipment and motor vehicles.

An impairment test and a sensitivity analysis were performed in relation to reasonably possible changes in the main fair value estimates and the results did not vary significantly (see note 32.2.g).

Disposals comprise mainly assets related to the commercial premises at which the Group carries on its commercial activities.

Fully depreciated items of property, plant and equipment include certain items, mainly machinery, fixtures and furniture, with a gross cost value of euros 1,548,964 thousand and euros 1,474,245 thousand at 31 January 2014 and 31 January 2013, respectively.

Through its corporate risk management policy, the Group identifies, assesses and controls damage and liability-related risks to which the Group companies are exposed. It does this by compiling and measuring the main risks of damage, loss of profits and liability affecting the Group and implements prevention and protection policies aimed at reducing the frequency and intensity of these risks.

Likewise, standard measurement criteria are established at corporate level which enable the different risk risks to which the Group is exposed to be quantified, measured and insured.

Lastly, the Group takes out insurance policies through corporate insurance programs to protect its assets from risk and establishes limits, excesses and conditions according to the nature of such risk and the financial relevance of the company concerned.

6.14. Investment property

Investment property mainly relates to premises and other properties leased to third parties. The changes in this caption during 2013 and 2012 were as follows:

The total market value of the investment property at 31 January 2014 was approximately euros 83,000 thousand (31 January 2013: euros 83,000 thousand). This market value is supported, in the case of the most significant properties (91% of the total cost), by appraisals conducted in 2012 and 2013 by an independent valuer of acknowledged professional capacity and recent experience in relation to the location and category of the investment property being valued. The appraisals were conducted using a future cash flow discounting method based on the market prices of similar premises.

In 2013 euros 4,765 thousand (euros 3,178 thousand in 2012) of rental income on these properties were included under “Net sales – Other sales and services rendered” (see note 3) in the consolidated income statement.

6.15. Rights over leased assets and other intangible assets

“Rights over leased assets” include amounts paid in respect of leasehold assignment, access premiums or tenancy right waivers and indemnities in order to lease commercial premises.

The payments for these rights are attributable to the leased assets and the related cost is allocated to profit or loss in accordance with the terms and conditions of the leases over the lease term.

At 31 January 2014, the Group had included under “Rights on Leased Premises” items with an indefinite useful life amounting to euros 169,900 thousand (euros 161,407 thousand at 31 January 2013). The useful lives of these assets is reviewed at year-end and no events or circumstances altering this indefinite useful life assessment were identified. The Group does did not have other any intangible assets with an indefinite useful life.

“Other intangible assets” include amounts paid for the registration and use of Group brand names, industrial designs of items of clothing, footwear, accessories and household goods created during the year and the cost of software applications.

An impairment test and a sensitivity analysis were performed in relation to reasonably possible changes in the main fair value estimates and the results did not vary significantly (see note 32.2.g).

Details of other intangible assets and changes during 2013 and 2012 are as follows:

The Group capitalized euros 13,401 thousand in 2013 (euros 7,661 thousand in 2012) corresponding to software development activities that meet the requirements for capitalization under IAS 38. The Group also capitalized euros 53,481 thousand (euros 49,734 in 2012) in respect of industrial designs that meet the requirements for capitalization under IAS 38.

6.16. Goodwill

The detail of this caption in the consolidated balance sheet and of the changes therein in 2013 and 2012 is as follows:

The goodwill corresponding to Stradivarius España, S.A. was generated upon acquisition of this company in 1998 and is stated at its carrying amount at 1 February 2004, the date of transition to EU-IFRSs.

The goodwill corresponding to BCN Diseños, S.A. de C.V. was generated upon acquisition of the holder of the franchise rights to the Massimo Dutti format in Mexico in 2004.

In 2005 Inditex acquired the Polish company formerly called Young Fashion Sp. Zo.o. (now Zara Polska S.p. Zo.o), which until then held the franchise rights to Zara in that country.

In 2006 Inditex acquired 100% of the share capital of the Russian company formerly known as Zao Stockmann-Kranoselskaya (currently Zao Zara CIS), which until then held the franchise rights to Zara in that country.

In 2007 Inditex acquired the companies which held the franchise rights to the Pull & Bear and Stradivarius formats in Russia, thus generating goodwill of euros 428 thousand and euros 6,719 thousand, respectively.

In 2011 the Group acquired the companies that until then had held the franchise rights to the Zara, Pull&Bear, Massimo Dutti, Bershka, Stradivarius and Oysho formats in Serbia and Montenegro, the Massimo Dutti format in Portugal and Belgium and the Uterqüe format in Belgium, giving rise to the goodwill shown in the accompanying table.

The additions in 2013 relate to the goodwill that arose on the acquisition of companies.

Goodwill arising from the acquisition or termination of franchise contracts is equal to the value of intangible assets that did not meet with the requirements established in IFRS 3 for separate recognition. These requirements were essentially related to the capacity of the assets to generate future cash flows.

The recovery of the goodwill is adequately guaranteed through the profitability of the acquired companies, whose future cash flows support their carrying amount at year end (see note 32.2.g).

Also, sensitivity analyses were performed in relation to reasonably possible changes in the main fair value estimates and the recoverable amount is higher than the related carrying amount (see note 32.2.g).

6.17. Financial investments

The detail of this caption in the consolidated balance sheet and of the changes therein in 2013 and 2012 is as follows:

The investment in Economic Interest Groupings (EIGs) comprises Inditex’s shareholding in four EIGs (five at 31 January 2013), the activity of which is the leasing of assets managed by a separate, non-group entity which retains most of the profits and is exposed to the risks associated with this activity. These groupings have applied the tax incentives established in prevailing Spanish legislation (see note 24), the effect of which is shown under “Income tax” in the consolidated income statement.

6.18. Other non-current assets

The detail of this caption in the consolidated balance sheet and of the changes therein in 2013 and 2012 is as follows:

The guarantees and deposits relate mainly to amounts deposited with owners of leased commercial premises to ensure compliance with the conditions stipulated in lease contracts (see note 25), and to amounts paid to secure compliance with contracts in force.

These amounts are recognized at their repayment value as this value does not differ significantly from amortized cost.

6.19. Accounts payable

The detail of this caption in the consolidated balance sheet in 2013 and 2012 is as follows:

The following table shows the information on average payment periods required by Law 15/2012, of 5 July, amending Law 3/2004, of 29 December:

(*) The weighted average period of late payment.

This information relates to suppliers and creditors of Group companies domiciled in Spain. The maximum payment period applicable to the Spanish Group companies in 2013 was 60 days.

In addition, it is the Group’s policy not to make payments if for any reason the quality of the goods or services is lower than expected or agreed upon once they have been received until the situation is rectified.

6.20. Net financial position

Details of “Cash and cash equivalents” on the asset side of the consolidated balance sheets are as follows:

Cash in hand and at banks includes cash in hand and in demand deposits at banks. Short-term deposits and fixed-income securities comprise term deposits and money market investment funds that are used to acquire highly liquid, fixed-income securities with average weighted maturity of less than 90 days, a high credit rating and which are highly liquid and convertible to known amounts of cash and are subject to an insignificant risk of changes in value. All the balances under this caption are unrestricted as to their use and there are no guarantees or pledges attaching to them.

“Current assets - Financial investments” on the asset side of the consolidated balance sheet relates mainly to investments in money market investment funds and fixed-income securities, with weighted average maturities ranging from 90 days to 12 months, all of which have high credit ratings and are highly liquid.

Details of Group bank loans and borrowings and obligations under finance leases are as follows:

At 31 January 2014 the Group had a limit of euros 3,059,004 thousand on its credit facilities (euros 2,984,991 thousand at 31 January 2013).

Interest on all the financial debt is negotiated by the Group on the respective financial markets and usually consists of a monetary market index plus a spread in line with the solvency of the Parent or the subsidiary that has arranged the debt.

Financial debt is denominated in the following currencies:

The maturity of the Group’s bank loans and borrowings at 31 January 2014 and 2013 is as follows:

6.21. Provisions

The detail of this caption in the consolidated balance sheet and of the changes therein in 2013 and 2012 is as follows:

Provision for pensions and similar obligations with personnel
Certain group companies have undertaken to settle specific obligations with personnel. The Group has a provision to cover the liability corresponding to the estimated vested portion of these obligations at 31 January 2014. The estimated average payment period for the amounts provisioned is between three and five years.

Provision for liability
The amounts shown here correspond to current obligations from legal claims or constructive obligations deriving from past actions which include a probable outflow of resources that has been reliably estimated. At the date of preparation of these consolidated accounts, there were no legal proceedings whose final outcome could significantly affect the Group’s equity position.
The estimated average payment period for the amounts provisioned depends largely on the local legislation of each of the markets in which the Group operates. An analysis is performed each year of the portion that will foreseeably have to be paid the following year and the related amount is transferred to current payables.
The directors of Inditex consider that the provisions recorded in the consolidated balance sheet adequately cover risks deriving from litigation, arbitration and other contingencies and do not expect any liabilities additional to those recognized to arise therefrom.

6.22 Other non-current liabilities

The detail of this caption in the consolidated balance sheet and of the changes therein in 2013 and 2012 is as follows:

The additions to “Options with shareholders” with a charge to profit or loss were recognized under “Other losses and income, net” (income of euros 1,302 thousand in 2013 and a loss of euros 9,976 thousand in 2012) (see note 6), most of which related to options classified as long-term and the remainder to options classified as short-term.

6.23. Capital and reserves

Share capital

At 31 January 2014 and 2013, the Parent’s share capital amounted to euros 93,499,560 and was represented by 623,330,400 registered shares of euros 0.15 par value each, subscribed and fully paid. All shares are of a single class and series, carry the same voting and dividend rights and are represented by book entries.

The Parent’s share premium at 31 January 2014 and 2013 amounted to euros 20,379 thousand, while retained earnings totaled euros 2,857,039 thousand and euros 2,640,312 thousand, respectively. The Parent’s legal reserve, amounting to euros 18,700 thousand, has been appropriated in compliance with article 274 of the Spanish Companies Act, which requires that companies transfer 10% of profits for the year to a legal reserve until this reserve reaches an amount equal to 20% of share capital. The legal reserve is not distributable to shareholders and if it is used to offset losses, in the event that no other reserves are available, the reserve must be replenished with future profits. At 31 January 2014 and 2013, the Parent had appropriated to this reserve the minimum amount required by the Spanish Companies Act.

Of the total consolidated reserves at 31 January 2014, the restricted reserves amount to euros 359,141 thousand (euros 355,628 thousand at 31 January 2013), due mainly to local legal restrictions which limit their distribution.

Inditex shares are listed on the four Spanish stock exchanges. As shares are represented by book entries and the Company therefore does not maintain a record of shareholders, it is not possible to accurately know the share structure of the Company. According to public information registered with the Spanish Stock Exchange Commission, at 31 January 2014 the members of the board of directors owned, directly or indirectly, 59.36% of the Parent’s share capital, compared to 59.37% at 31 January 2013 (see note 30). Gartler, S.L. held 50.010% of the shares of INDITEX (50.010% at 31 January 2013).

Dividends

Dividends distributed by the Parent during 2013 and 2012 amounted to euros 1,370,832 thousand and euros 1,121,995 thousand, respectively. These amounts correspond to earnings of 2.20 euro cents per share in 2013 and 1.80 euro cents in 2012.

The distribution of profit proposed by the board of directors is shown in note 29.

Treasury shares

The annual general shareholders’ meeting held on 16 July 2013 approved a long-term share-based incentive plan (see note 27) and authorized the board of directors to derivatively acquire treasury shares to cater for that plan.

As a result, in 2013 450,000 treasury shares were acquired with an average acquisition cost of euros 103.32 per share.

6.24. Income taxes

With the exception of Industria de Diseño Textil, S.A., Indipunt, S.L. and Tempe, S.A., the companies whose information is included in these consolidated annual accounts file individual tax returns.

Industria de Diseño Textil, S.A. is the parent of a group of companies that files consolidated tax returns in Spain. The consolidated tax group is composed of Industria de Diseño Textil, S.A., the Parent, and Spanish subsidiaries which comply with prevailing tax legislation for filing consolidated tax returns. The subsidiaries that comprise this tax group are the following:

Indipunt, S.L. is the parent of another tax group formed by it and the subsidiary Indipunt Diseño, S.L.

Also, Tempe, S.A. is the parent of the tax group formed with its subsidiaries Tempe Diseño, S.L. and Tempe Logística, S.A.

“Income tax payable” in the consolidated balance sheet corresponds to the 2013 income tax provision, net of withholdings and payments on account made during the period. “Trade and other payables” includes the liability deriving from the other applicable taxes.

“Income tax receivable” in the consolidated balance sheet essentially corresponds to amounts recoverable from the tax authorities. “Trade and other receivables” in the consolidated balance sheet includes mainly the amount by which the input VAT exceeded output VAT.

The income tax expense comprises both current and deferred tax. Current tax is the amount of income taxes payable in respect of the taxable profit for the year. Deferred tax is the amount of income taxes payable or recoverable in future years and arises from the recognition of deferred tax assets and liabilities.

La composición del gasto por el Impuesto sobre Beneficios es la siguiente:

A reconciliation of the income tax expense under the prevailing Spanish general income tax rate to “Profit before tax” and the expense recorded in the consolidated income statements for 2013 and 2012 is as follows:

Permanent differences correspond mainly to non-deductible expenses, taxable income related to a contribution of rights to use certain assets to a subsidiary and the exemption of income from permanent establishments abroad.

Industria de Diseño Textil S. A. holds a 50% stake in two Economic Interest Groupings and a 49.5% stake in two other Economic Interest Groupings. These Groupings lease assets as their activity. They requested from the tax authorities, and were granted, tax incentives in accordance with income tax legislation. The aforementioned operations have given rise to positive and negative adjustments to taxable income mentioned above, which have been treated as permanent differences.

As permitted by the prevailing tax legislation in each country, Group companies took tax credits amounting to euros 22,603 thousand in 2013 (euros 18,151 thousand at 31 January 2013). These tax credits and tax relief relate mainly to investments and, to a lesser extent, to other tax benefits.

The Group revalued certain assets pursuant to Law 16/2012, of 27 December, which reduced the income tax expense by euros 47,366 thousand.

Temporary differences are the difference between the carrying amount of an asset or liability and its tax base. The consolidated balance sheet at 31 January 2014 reflects the deferred tax assets and liabilities at that date.

Details of “Deferred tax assets” and “Deferred tax liabilities” in the accompanying consolidated balance sheet are as follows:

Movement in deferred tax assets and liabilities in 2013 and 2012 is as follows:

These balances have been determined based on tax rates which, according to enacted tax legislation, will be in force during the years in which the balances are expected to reverse and which, in certain cases, differ from the tax rates prevailing in the current year.

At 31 January 2014, the Group had tax losses of euros 253,237 thousand (euros 208,713 thousand at 31 January 2013) which may be offset against future profits, the majority of which may be utilized indefinitely. Euros 53,562 thousand were recognized as a deferred tax asset since there is evidence that they will be recovered in the future. In this regard, the Group has a systematic generally applicable procedure for carrying out impairment tests as each Group company in the terms described in note 32.2.g) below.

Also, certain companies forming part of the consolidated Group have reserves which could be taxable if distributed. These consolidated annual accounts include the tax effect of those cases in which a firm decision has been taken to distribute reserves.

In addition, under the tax legislation applicable to the Parent of the Group, the dividends proposed or declared for the Parent’s shareholders before the financial statements have been authorized for issue which have not bee recognized as liabilities do not have any income tax consequences for the Parent.

The years open to inspection by the tax authorities for the main applicable taxes vary depending on the tax legislation in each country in which the Group operates. During the year tax audits were initiated at the tax group of which Industria de Diseño Textil, S.A. is the parent. Also, certain foreign subsidiaries are being audited for tax purposes in France, Mexico and South Korea. In any case, the Group does not expect that significant additional liabilities that might significantly affect the Group equity position or results will arise as a result of these inspections or those that could be carried out in the future in relation to periods that have not yet expired.

6.25. Operating leases

Most of the commercial premises from which the Group carries out its retail distribution activities are leased from third parties. These leases are classified as operating leases since there is no transfer of risks and rewards incidental to ownership because:

• ownership of the asset is not transferred to the lessee by the end of the lease term;
• the lessee does not have any option to purchase the leased asset;
• the leases have an initial term of between 15 and 25 years, which is shorter than the estimated useful life of assets of this nature (see note 32.2 c);
• at the inception of the lease the present value of the minimum lease payments does not amount to at least substantially all of the fair value of the leased asset.

Due to the presence of the Group in various different countries, the variety of legislation governing lease contracts, the diverse nature and economic status of the owners and other factors, there is a broad range of clauses regulating leases contracts.

In many cases the lease contracts simply establish a fixed rental payment, normally monthly, adjusted for inflation based on a price index. In other cases the amounts payable to the lessor are a percentage of the sales obtained by the Group in the leased premises. These variable lease payments or contingent rent may have minimum guaranteed amounts or certain rules of calculation attached. In some countries lease contracts are periodically indexed to market rates, which on occasion entails an increase in rent, but rent is not reduced when market rates fall. Occasionally, staggered rental payments are agreed, which means cash outflows can be reduced during the initial years of the use of commercial premises, although the expense is recognized on a straight-line basis (see note 32.2-q). Free rental periods are also frequently established in order to avoid having to pay rent when premises are being refurbished and prepared for opening.

Lease contracts also sometimes require lessees to pay certain amounts to the lessor, which, from an accounting perspective, could be considered advance rental payments, or to the previous tenants so that they waive certain rights or transfer them to the Group (leasehold assignment rights or different types of indemnities). These amounts are recognized as non-current assets (see note 15) and are generally amortized over the term of the lease contract.

On certain occasions, shopping center developers or the proprietors of leased premises make contributions towards the establishment of the Group’s business in their premises.

These contributions are treated as lease incentives (see note 22) and are taken to income over the lease term. A wide variety of situations also apply to the duration of lease contracts, which generally have an initial term of between 15 and 25 years. However, legislation in certain countries or the situations in which lease contracts are typically used means the duration of contacts is sometimes shorter.

In some countries, legislation or the lease contracts themselves protect the right of the lessee to terminate the contract provided that sufficient advance notice (e.g. three months) is given. In other cases, however, the Group is obliged to see out the full term of the contract, or at least a significant part thereof. Some contracts combine these obligations with get-out clauses that may only be exercised at certain times over the term of the contract (e.g. every five years or at the end of the tenth year).

Details of operating lease expenses are as follows:

Future minimum payments under non-cancelable operating leases are as follows:

6.26. Risk management and financial instruments

Política de gestión de riesgos financieros

The Group’s activities are exposed to various financial risks: market risk (including foreign currency risk), credit risk, liquidity risk, and interest rate risk related to cash flows. The Group’s risk management policy centers on the uncertainty of financial markets and attempts to minimize the potential adverse effects on the Group’s profitability through the use of certain financial instruments as described below.

This note provides information on the Group’s exposure to each of the aforementioned risks, the Group’s objectives, policies and processes for managing risk, the methods used to measure these risks and any changes from the previous year.

Foreign currency risk

The Group operates in an international environment and, accordingly, is exposed to foreign currency risk, particularly relating to the US dollar and, to a lesser extent, the Mexican peso, the Russian ruble, the Chinese renminbi, the Japanese yen and the pound sterling. Foreign currency risk arises on future commercial transactions, recognized assets and liabilities and net investments in foreign operations.

Foreign currency risk is managed in line with Group management guidelines, which establish, mainly, the arrangement of financial or natural hedges, ongoing monitoring of fluctuations in exchange rates and other measures designed to mitigate this risk.

In 2013, had the value of the euro increased by 10% compared to the US dollar and, as a result, compared to the rest of the foreign currencies linked to the US dollar, all other things being equal, consolidated profit after income tax would have been approximately euros 58,100 thousand lower (euros 84,591 thousand in 2012), and had the value of the euro dropped by 10%, consolidated profit after income tax would have been approximately euros 43,853 thousand higher (euros 88,141 thousand in 2012), primarily because of the translation of subsidiaries’ annual accounts expressed in currencies other than the euro and the impact of merchandise purchases in US dollars.

Credit risk

The Group is not exposed to significant concentrations of credit risk as policies are in place to cover sales to franchises and retail sales comprise the vast majority of revenue. Collections are primarily made in cash or through credit card payments.

The Group adopts prudent criteria in its investment policy the main objectives of which are to reduce the credit risk associated with investment products and the counterparty risk associated with financial institutions by establishing highly detailed analysis criteria.

Investment vehicles are rated using a selection of criteria, including, ratings from the three main rating agencies, the size of the investment vehicle, location and returns. All the investment vehicles have the maximum credit rating.

In relation to the counterparty risk associated with financial institutions, the Group selects a minimum credit rating of A from the various rating agencies, a minimum TIER capital ratio pursuant to Basel III and also assesses other factors during the selection process.

Similarly, maximum limits are established for the various counterparties in order the meet the objective of ensuring diversification.

In relation to credit risk arising from commercial transactions, impairment losses are recognized for trade receivables when objective evidence exists that the Group will be unable to recover all the outstanding amounts in accordance with the original contractual conditions of the receivables. The amount of the impairment loss is the difference between the carrying amount of the asset and the present value of the estimated future cash flows, discounted at the effective interest rate. The amount of the impairment loss is recognized in the income statement. The net impairment losses recognized during the year in respect of value adjustments to the balances recorded under this caption amount to euros 574 thousand (net reversals of euros 309 thousand in 2012) and correspond to doubtful trade receivables.

At 31 January 2014 and 2013, no significant outstanding balances existed. Furthermore, based on available historical data, the Group does not consider it necessary to make valuation adjustments to receivables which are not past due. The fair value of the receivables is equal to their carrying amount.

The main financial assets of the Group are shown under Financial Instruments: other information.

Liquidity risk

The Group is not exposed to significant liquidity risk, as it maintains sufficient cash and cash equivalents to meet the outflows of normal operations. In the event the Group requires financing, either in euros or in other currencies, it reverts to loans, credit facilities or other types of financial instruments (see note 20).

Details of financial liabilities are disclosed in note 20, along with their expected maturities.

Interest rate risk

Interest rate fluctuations affect the fair value of assets and liabilities which accrue a fixed rate of interest, as well as future cash flows from assets and liabilities tied to a floating interest rate. Group exposure to this risk is not significant for the reasons mentioned above.

The Group does not have any financial assets or liabilities designated as at fair value through profit or loss. Given the Group’s investment policy, any changes in interest rates at year-end would not significantly affect consolidated profits.

Capital management

The Group’s capital management objectives are to safeguard the Group’s ability to continue operating as a going concern so that it can continue to generate returns for shareholders, benefit other stakeholders and maintain an optimum capital structure to reduce the cost of capital.

The Group manages its capital structure and makes adjustments thereto in response to changes in economic conditions. No significant changes to capital management were made during the year.

Neither the Parent nor the Inditex Group subsidiaries are subject to strict capital management criteria.

Financial instruments

Merchandise and goods for resale are partly acquired from foreign suppliers in US dollars. In accordance with prevailing foreign currency risk policies, Group management arranges derivatives, mainly forward contracts, to hedge cash flow fluctuations related with exchange rates.

Occasionally the Group instruments its hedges through financial investments owned by it.

Certain Group subsidiaries are granted internal financing denominated in currencies other than the euro. In accordance with prevailing foreign currency risk policies, derivatives are arranged, mainly forward contracts and swaps, to hedge changes in fair value related with exchange rates.

Moreover, and as described in note 32.2.o, the Group applies hedge accounting to mitigate the volatility that the existence of significant foreign currency transactions would have on the consolidated income statement. Hedge accounting is used because the Group meets the requirements described in note 32.2.o on accounting policies to be able to classify financial instruments as accounting hedges. More specifically, these financial instruments have been formally designated as hedges and it has been observed that the hedges are highly affective. The expiry dates of hedging instruments have been negotiated so that they coincide with the expiry dates of the hedged items. In 2013, using hedge accounting, no significant amounts were recognized in profit or loss either in relation to gains or losses on transactions that did not occur or as a result of the ineffectiveness of the hedges.

Approximately 60% of the cash flows associated with hedges in US dollars are expected to be generated during the six months subsequent to year-end, while the remaining 40% is expected to be generated between six months to a year. It is also likely that the impact on consolidated profit and loss will arise during these periods.

Also, as part of the risk management policy, the Group designates as hedged items financial assets recognized under “Current financial investments”, since the related derivatives qualify for hedge accounting.

The fair value of the hedging instruments was calculated as described in note 32.2.o

At 31 January 2014 and 2013, the Group had arranged derivatives, basically forward contracts on future purchases in US dollars forwards to hedge intra-Group financing. The fair value of these derivatives is recognized under “Other financial assets” or “Other financial liabilities” depending on the related balance.

The detail of “Other financial assets” and “Other financial liabilities” in the consolidated balance sheet is as follows:

The detail of the fair value (measured as indicated in note 32.2.o) of the hedging instruments is as follows:

There were no transfers among the various hierarchical levels (see note 32.2.o).

Financial instruments: other information

The main financial assets held by the Group, other than cash and cash equivalents and derivative financial instruments, comprise loans and receivables related to the Group’s principal activity and guarantees in relation to the lease of commercial premises, which are shown under other non-current assets. The main financial assets of the Group are as follows:

The financial liabilities of the Group mainly comprise debts and payables on commercial transactions.

The fair value of financial assets and liabilities measured at amortized cost does not differ substantially from their carrying amount, taking into account that in the majority of cases collection or payment is made in the short term. In 2013 no significant financial asset impairment losses were recognized.

6.27. Employee benefits

Defined benefit or contribution plan obligations

In general, the Group has no defined benefit or contribution plan obligations to its employees. However, in line with prevailing labour legislation or customary employment practice in certain countries, the Group assumes certain obligations related with the payment of specific amounts for accidents, illness, retirement, etc., to which employees sometimes contribute. The associated risk is partially or fully externalized through insurance policies.

Furthermore, in some countries employees receive a share of the profits generated by Group companies. Liabilities associated with these items are recognized under “Trade and other payables” and “Other non-current liabilities” in the consolidated balance sheet. The impact of these obligations on the consolidated income statement and the consolidated balance sheet is not significant.

Long-term cash-settled incentive plan

Inditex’s board of directors authorized a long-term incentive plan for members of the management team and other personnel from Inditex and its Group of companies. By complying with the terms of the plan, each beneficiary is entitled to receive an incentive up to a designated maximum.

The plan started on 1 February 2013 and ends on 31 January 2016. Incentives are divided into an initial payment for the period ending 31 January 2015 and a final payment for the period ending 31 January 2016.

In order to be entitled to the initial and final payments the employees must, in addition to fulfilling the other terms and conditions provided for in the plan, remain uninterruptedly in the employ of Inditex or of any Inditex Group company in the period from 1 February 2013 to the end of each of the aforementioned periods, unless any of the cases in which early settlement occurs arises (e.g. death, retirement, permanent disability or unjustified dismissal), in which case the incentive to which the employee in question might be entitled will be paid on the basis of the length of time effectively worked from the beginning of the term of the plan as a proportion of the total duration of the plan or, in the case of the initial payment, as a proportion of the duration of the initial period.

The liability in this connection is recognized under “Provisions” in the consolidated balance sheet and the period provision is reflected under “Operating expenses” in the consolidated income statement. The impact of these obligations on the consolidated balance sheet and the consolidated income statement is not material.

The cash-settled incentive plan does not expose the Group to significant risks. There are no plan assets in this connection.

Long-term equity-settled incentive plan

The general shareholders’ meeting resolved to establish a long-term equity-settled incentive plan targeted at members of the management team and other personnel of Inditex and of its Group of companies whereby each beneficiary will be entitled, if the terms and conditions provide for in the plan are met, to receive up to the maximum number of shares designated to that beneficiary.

The plan consists of two mutually independent time periods: the first, and the only one running in 2013, started on 1 July 2013 and ends on 30 June 2016; and the second, if approved in 2014, starts on 1 July 2014 and ends on 30 June 2017.

The amount relating to this plan is recognized under “Equity” in the consolidated balance sheet and the period expense is recognized under “Operating expenses” in the consolidated income statement. The impact of these obligations on the consolidated income statement balance sheet and the consolidated balance sheet is not material.

The equity-settled incentive plan does not expose the Group to significant risks.

To cater for the plan, the Group acquired, as a plan asset, a sufficient number of treasury shares to be able to settle the future obligations (see note 23).

The number of shares granted is calculated on the basis of a performance-based formula approved by the shareholders at the general shareholders’ meeting.

No shares were delivered under the plan in 2013.

6.28. Interests in joint ventures

Inditex has a 50% stake in the group formed by the parent Tempe, S.A. and its subsidiaries Tempe México, S.A. de C.V., Tempe Brasil, S.A., Tempe Logística, S.A., Tempe Diseño, S.L., Tempe Trading, Tempe Trading Asia, Ltd. and TMP Trading (Shanghai) Co. LTD. The principal activity of these companies is the design, supply and distribution of footwear to Inditex Group companies, their main customer. The assets, liabilities, income and expenses of the joint ventures that have been consolidated are as follows:

(*) Income received from non-Group third parties: euros 74,691 thousand and euros 75,100 thousand in 2013 and 2012, respectively.

There are no obligations to the other venturers of the joint ventures other than those of a strictly commercial nature, from which no significant future contingencies are expected to arise.

6.29. Proposed distribution of the profit of the Parent

The directors will propose that the euros 1,507,371 thousand of 2013 net profit of the Parent, which is the maximum amount distributable, be distributed as an ordinary dividend of euros 1.92 per share and an extraordinary gross dividend of euros 0.5 per share on the total outstanding shares, and that euros 33,522 thousand be taken to voluntary reserves.

6.30. Remuneration of the board of directors and transactions with related parties

Remuneration of the board of directors

Remuneration earned by the board of directors and senior management during 2013 is shown in the section on transactions with related parties.

Other information concerning the board of directors

According to the public registers of the Spanish Stock Exchange Commission (CNMV), at 31 January 2014 the members of the board of directors held the following direct and indirect investments in the share capital of Inditex:

1 Through Gartler, S.L. and Partler 2006, S.L.

As required by article 229 of the Spanish Companies Act, the following are companies outside the consolidated Inditex Group with a statutory activity which is identical, similar or complementary to that of Inditex and in which members of its board of directors or persons related thereto hold investments or management positions.

It should also be noted that those members of the board of directors or persons related thereto do not hold ownership interests of more than 0.1% in the share capital of those companies.

Related party transactions

Related parties are subsidiaries, joint ventures and associates, details of which are shown in Appendix I to the consolidated annual accounts, as well as significant or controlling shareholders, members of the board of directors of Inditex and senior management of the Inditex Group, as well as their close relatives, as defined in Article 2.3 of Spanish Ministry of Economy and Finance Order EHA/3050/2004, of 15 September, on information on related-party transactions that issuers of securities on official secondary markets must disclose. All amounts are expressed in thousands of euros.

The transactions with related parties were performed on an arm’s length basis.

Inditex Group companies

Details of operations between Inditex and other Group companies not performed in the ordinary course of business of the Company in terms of their objective and continues or which have not been completely eliminated in the consolidation process as they are proportionately consolidated are as follows.

Details of operations with significant shareholders, the members of the board of directors and management are as follows:

Significant shareholders

In 2013 the transactions performed by the Inditex Group with Gartler, S.L., Partler 2006, S.L. or with persons of companies related to them or with Rosp Corunna Participaciones Empresariales, S.L.U. with persons of companies related to it were as follows:

Several group companies have leased commercial premises belonging to companies related to the controlling shareholder. Most of these lease contracts were signed prior to 1994 and expire between 2014 and 2016.

Members of the board of directors and management

The following tables show the remuneration and termination benefits earned by the directors and management of Inditex in 2013:

An itemized breakdown of the remuneration of the members of the board of directors is as follows:

Amounts in thousands of euros
(1) represented by Ms Flora Pérez Marcote

The following table shows the remuneration and termination benefits received by the management of the Inditex Group in 2013:

The following tables show the remuneration and termination benefits received by the directors and management of Inditex in 2012:

An itemized breakdown of the remuneration of the members of the board of directors in 2012 is as follows:

Amounts in thousands of euros
(1) represented by Ms Flora Pérez Marcote

The following table shows the remuneration and termination benefits received by the management of the Inditex Group in 2012:

The long-term incentive plan targeted at management and other employees of the Inditex Group approved by Inditex in 2010 (the features of which are described in note 26 to the consolidated annual accounts for 2012) expired on 31 January 2013. For the purposes of the related party transactions, the noted to the 2012 annual accounts disclosed the estimated amount accrued in relation to the incentive assigned to directors and executives payable provided that the terms and conditions stipulated in the plan were met: Directors euros 1,333 thousand and executives euros 2,293 thousand.

At the meeting held on 14 June 2011 Inditex’s board of directors agreed to contract a benefits plan for the Chairman/CEO, as part of his remuneration for carrying out his senior management duties. The plan is a defined contribution plan, consisting of a group life insurance policy contracted by Inditex with a reputable insurance company operating in the Spanish market. The plan contributions are payable by Inditex and will be settled in single annual installments each September. These annual contributions are equivalent to 50% of the fixed base salary approved by Inditex for the Chairman and CEO for each year. Inditex’s contribution to the Plan during 2013 amounted to euros 1,625 thousand (euros 1,625 thousand in 2002).

6.31. External auditors

In 2013 and 2012 the fees for financial audit and other services provided by the auditor of the Company’s annual accounts, or by companies related to these auditors as a result of a relationship of control, common ownership or common management, were as follows:

The figures in the table above include the total fees for services rendered in 2013 and 2012, irrespective of the date of invoice.

In addition to the audit of the Inditex Group annual accounts, audit services rendered by Deloitte in 2013 and 2012 also include certain audit work related with the external audit.

Non-audit services relate mainly to advisory services to certain of the Group’s subsidiaries abroad.

According to information received from the auditors, fees received from the Inditex Group by the principal auditors and the rest of the firms belonging to the international network (and associated firms) do not exceed 0.019% of their total revenue.

6.32. Selected accounting policies

32.1) Basis of consolidation

i) Subsidiaries

Subsidiaries are entities controlled by the Parent. Control exists when the Parent has the power, directly or indirectly, to govern financial and operating policies. Subsidiaries are consolidated by aggregating the total amount of assets, liabilities, income, expenses and cash flows, after carrying out the adjustments and eliminations relating to intra-Group transactions. The results of subsidiaries acquired during the year are included in the consolidated annual accounts from the date that control commences. Details of subsidiaries and jointly-controlled entities are provided in Appendix I. Net identifiable assets acquired, liabilities and contingent liabilities assumed as part of a business combination are stated at their acquisition date fair value, providing this acquisition took after 1 January 2004, the date of transition to EU-IFRSs.

For business combinations subsequent to that date, any consideration given plus the value assigned to non-controlling interests that is in excess of the net assets acquired and liabilities assumed is recognized as goodwill. Any shortfall determined between the consideration given, the value assigned to non-controlling interests and identifiable net assets acquired is recognized in profit and loss.

Acquisitions of shares in businesses subsequent to gaining control and partial disposals that do not result in a loss of control are recognized as transactions with shareholders in equity.

Non-controlling interests in the consolidated statement of changes in equity are presented separately from the consolidated equity attributable to equity holders of the Parent.

The results and each item of other comprehensive income are allocated to equity attributable to equity holders of the Parent and to non-controlling interests in proportion to their investment, even if this gives rise to a balance receivable from non-controlling interests. Agreements entered into between the Group and non-controlling interests are recognized as a separate transaction.

The share of non-controlling interests shareholders of the equity and results of subsidiaries are presented under “Equity attributable to non-controlling interests” and “Net profit attributable to non-controlling interests”, respectively. Details of subsidiaries and jointly-controlled entities are provided in Appendix I

ii) Joint ventures

Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement. The consolidated annual accounts include, in each individual caption of the balance sheet and income statement, the Group’s proportionate share in these entities’ assets, liabilities, revenue, expenses and cash flows from the date that joint control commences until the date that joint control ceases to exist.

iii) Harmonization of criteria

Each of the entities included in the consolidated Group prepares its annual accounts and other accounting records in accordance with the accounting policies and legislation applicable in the country of origin. When these accounting criteria and policies are different to those adopted by Inditex in the preparation of its consolidated annual accounts, they have been adjusted in order to present the consolidated annual accounts using homogenous accounting policies.

iv) Intra-Group eliminations

All intra-Group receivables, payables and transactions, and any unrealized gains or losses arising from transactions with third parties, are eliminated in the consolidation process. In the case of jointly controlled entities, receivables, payables, income and expenses between Group companies, and any unrealized gains or losses arising from transactions with third parties, are eliminated in the consolidation process to the extent of the Group’s interest in the entity.

v) Translation of annual accounts denominated in foreign currencies

The Group has applied the exemption relating to accumulated translation differences from IFRS 1 First-time Adoption of International Financial Reporting Standards and, therefore, any translation differences recognized in the consolidated annual accounts generated prior to 1 January 2004 are recorded under reserves. Since that date, the financial statements of entities with a functional currency other than the euro are translated as follows:

• Assets and liabilities are translated to euro at the exchange rates prevailing at the balance sheet date.
• Items that comprise the equity of these entities are translated to euros at historical exchange rates (or, for retained earnings, at the average exchange rates for the year in which they were generated).
• Income and expenses are translated into euros at the exchange rates prevailing on the date on which they were recognized, while average exchange rates are used in the cases in which the application of this simplifying criterion does not generate significant differences.

Differences arising from the application of these exchange rates are included in consolidated equity under “Translation differences”.

However, exchange differences deriving from trade balances payable and receivable and financing operations between group companies, with foreseeable settlement, are recognized in the consolidated income statement for the year.

vi) Annual accounts in hyperinflationary countriess

The annual accounts statements of foreign operations in countries considered to have hyperinflationary economies have been adjusted prior to translation to euros to account for the effect of changes in prices.

vii) Companies with a reporting date that differs from that of the Group

Companies with a reporting date which differs from that of the consolidated annual accounts were consolidated with the financial statements at their closing date (see Appendix I). Significant operations carried out between the reporting date of these subsidiaries and that of the consolidated annual accounts are subject to a temporary unification process. .

viii) Changes in the consolidated Group

The following entities were incorporated or acquired by the Group and consolidated for the first time during the year:

Companies incorporated:

Companies acquired:

During the year Fashion C. Neuhauser Strabe 33, GmbH merged with Kommanditgesellschaft ZARA Deutschland B.V. & Co.

The inclusions in the consolidated Group referred to above did not have a material impact on the consolidated annual accounts for 2013.

32.2) Accounting policies

Certain standards, amendments and interpretations recently came into force for years beginning on or after 1 January 2013.

The Group applied IFRS 13 for the first time in 2013. This IFRS includes a new definition of fair value and now constitutes the only regulatory framework for the measurement of fair value and for the disclosures concerning fair value measurement. The Group analyzed the impact of the new standard on the measurement of its assets and liabilities and concluded that it will only give rise to changes in the methods used to measure derivative financial instruments. Under the new IFRS 13 definition of fair value, an entity’s own credit risk must be taken into account in measuring the fair value of liabilities.

IFRS 13 was applied prospectively from 1 February 2013. The impact of first-time application was, at 1 February 2013, an increase in the value of liability derivative financial instruments, giving rise to an expense of euros 1,180 thousand, which was recognized in the consolidated statement of comprehensive income.

• Amendments to IAS 1, Presentation of Items of Other Comprehensive Income

These amendments only gave rise to a change in the presentation of these items in the statement of other comprehensive income, since items of OCI must now be grouped into items that will be reclassified (recycled) to profit or loss in subsequent periods and items that will not be reclassified subsequently.

Also, the other new standards, amendments or interpretations mandatorily applicable from 1 February 2013 (amendments to IAS 19, Employee Benefits, in relation to defined benefit plans, amendments to IAS 12 in relation to deferred taxes arising from investment property at fair value, amendments to IFRS 7 in relation to offsetting financial assets and financial liabilities and the amendments arising from the improvements to IFRSs) did not have a material effect on these consolidated annual accounts.

At the date of formal preparation of the consolidated annual accounts the following standards and interpretations with a potential impact on the Group had been issued by the IASB and adopted by the European Union for application in annual reporting periods beginning on or after 1 January 2014:

• IFRS 10, Consolidated Financial Statements
• IFRS 11, Joint Arrangements
• IFRS 12, Disclosure of Interests in Other Entities
• IAS 28, Investments in Associates and Joint Ventures

The directors assessed the potential effects of their application in the coming reporting period and do not expect their entry into force to have a material impact on these consolidated annual accounts.

AAlso, at the date of formal preparation of the consolidated annual accounts the following standards and interpretations with a potential impact on the Group had been issued by the IASB but had not become effective because they had not yet been adopted by the European Union:

• Amendments to IFRS 9, Financial Instruments: Classification and Measurement
• Amendments to IAS 36, Recoverable Amount Disclosures for Non-Financial Assets .
• Amendments to IAS 39, Novation of Derivatives and Continuation of Hedge Accounting
• IFRIC 21, Levies

The Company’s directors consider that, taking into account the business activities carried on by the Group companies, the future application of the new legislation will not have a material effect on the consolidated annual accounts.

a) Foreign currency translation

Foreign currency transactions are translated to euros using the exchange rates prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to euros at the exchange rates prevailing at that date. Exchange differences arising on translation are recognized in the income statement as financial results.

Cash flows from transactions in foreign currency are translated into euros in the consolidated cash flow statement at the exchange rates prevailing at the transaction date. The effect of fluctuations in exchange rates on cash and cash equivalents expressed in foreign currencies is presented separately in the consolidated cash flow statement under “Effect of exchange rate fluctuations on cash and cash equivalents”.

b) Property, plant and equipment

Items of property, plant and equipment are stated at cost, including any additional costs incurred until the assets are ready for their intended use, less accumulated depreciation and any impairment losses or write-downs that have to be recognized.

Depreciation is taken on a straight-line basis over the estimated useful lives of the assets.

* In the case of assets located in leased premises, the depreciation rate is adapted to the estimated term of the lease if this shorter than the useful lives of the assets.

The Group reassesses property, plant and equipment residual values, useful lives and depreciation methods at each reporting date. Modifications to initially established criteria are recognized as changes in estimates.

After initial recognition of an asset, only costs that will generate future economic benefits that can be classified as probable and be reliably estimated are capitalized.

Periodic maintenance, upkeep and repair costs are expensed as they are incurred.

c) Rights over leased assets

These rights, known as leasehold assignment rights, access premiums or tenancy right waivers, relate to the amounts paid for lease rights over premises for access to commercial premises, in which the acquirer and the new lessee are subrogated to the rights and obligations of the transferor and former lessee under the previous lease.

Since these rights arose as a result of an acquisition for consideration, they were recognized as assets in the accompanying consolidated balance sheet.

These assets are recognized at cost of acquisition. After initial recognition, they are stated at cost less accumulated amortization and any impairment losses and are amortized over the term of the lease contract, except when, for legal reasons, the rights do not lose value, in which case they are determined to be intangible assets with indefinite useful lives and are therefore systematically tested for impairment.

In order to assess the possible existence of impairment of these assets, the Group uses the procedures described in Note 32.2. g.

d) Other intangible assets

• Intellectual property: intellectual property is charged for the amounts paid for the acquisition of title to or the right to use the related items, or for the expenses incurred in registration of the rights developed by the Group and is amortized on a straight-line basis over a maximum period of ten years.
• Computer software: software is stated at cost and is amortized on a straight-line basis over a five-year period.
• Industrial designs: these items are reflected at their cost of production, which includes the cost of samples, personnel costs and other directly or indirectly attributable costs, and are amortized on a straight-line basis over an estimated useful life of two years.

The Group reviews the intangible asset residual values, useful lives and amortization methods at the end of each reporting period. Modifications to initially established criteria are recognized, where applicable, as changes in estimates.

e) Financial investments

Marketable securities which represent less than 20% of the share capital of the related investee are stated at cost net of any impairment losses that have to be recognized.

f) Investment property

Investment property is made up of assets held to generate rental income of for capital appreciation or both, and is stated at cost of acquisition less accumulated depreciation and any impairment losses that have to be recognized. Depreciation is calculated on a straight-line basis over the useful lives of the corresponding assets.

Details of the market value of investment property are shown in note 14.

g) Impairment of non-current assets

The Group periodically assesses the possible existence of indications that its non-current assets (including goodwill and intangible assets with indefinite useful lives) might have become impaired in order to determine whether their recoverable amount is lower than their carrying amount (impairment loss). In the case of goodwill and intangible assets with indefinite useful lives the impairment tests are performed at least once a year, or more frequently if there are indications of impairment.

Impairment of non-current assets (property, plant and equipment and intangible assets) other than goodwill and intangible assets with an indefinite useful life

The Group has developed a general, systematic procedure for carrying out these impairment tests based on the monitoring of certain events or circumstances such as the performance of a store, operating decisions regarding the continuity of a particular location, or other circumstances which indicate that the value of an asset may not be recovered in full.

The recoverable amount of assets is the higher of fair value less costs to sell and value in use. Value in use is determined on the basis of the expected future cash flows for the period in which these assets are expected to generate revenue, forecast variations in the amount or distribution of the cash flows over time, the time value of money, the risk premium attached to the risk of uncertainty attached to the asset, and other factors which a market participant would consider in valuing the cash flows from the asset.

Recoverable amount is determined for each individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. For assets that do not generate cash inflows individually, the recoverable amount is determined for the cash-generating unit (CGU) to which the asset belongs.

Based on the actual management of operations, the Group has defined each of the commercial premises in which it carries out its activities (stores) as basic cash-generating units, although these basic units can be aggregated to concept-country level, or even to all the companies located in the same country. Group assets which are not clearly assignable under this scheme (for example industrial or logistics assets) are treated separately within the context of this general policy according to their specific nature.

The Group uses the budgets and business plans, which generally cover a period of between three and five years, of the various cash-generating units to which the assets are assigned. The key assumptions on which the budgets and business plans are based are estimated sales growth in comparable stores and the evolution of the operating expenses and gross margin of each of the cash-generating units, based on experience and knowledge of the trends in each of the markets in which the Group operates.

The estimated cash flows are extrapolated to the period not covered by the business plan using a growth rate and expense structure that are similar to those of the last year of the business plan in the remaining term of the leases for the commercial premises.

The discount rate applied is usually a pre-tax measurement based on the risk-free rate for 10-year bonds issued by the governments in the relevant markets (or similar instruments, if no 10-year bonds have been issued), adjusted by a risk premium to reflect the increase in the risk of the investment per country and the systematic risk of the Group.

The results obtained from the 2013 impairment test performed on non-current assets (property, plant and equipment and intangible assets), are shown in the tables of changes reflected in notes 13 and 15 to the consolidated annual accounts relating to property, plant and equipment and rights on leased assets and other intangible assets.

Also, the Group performed sensitivity analyses on the result of the impairment test to test its sensitivity to the following assumptions:

• Increase of 100 basis points in the discount rate.
• 5% reduction in future cash flows.

These sensitivity analyses performed separately for each of the aforementioned assumptions disclosed the existence of additional de asset impairment amounting to euros 2,241 thousand and euros 2,130 thousand, respectively.

Impairment of goodwill

Goodwill acquired through a business combination is allocated to the group of basic cash-generating units corresponding to the company acquired, since this is the lowest level at which this goodwill is controlled for internal management purposes.

Each year, or more often if there are indications of impairment, an impairment test is performed, using the methodology described in the preceding point, unless, if the CGU in question is an acquired company, the cash flow analysis is performed considering a period of five years, after which perpetual income is projected using a perpetuity growth rate of 2% with respect to the growth of the preceding period. The review of the impairment for 2013 did not disclose the need to recognize any impairment loss on goodwill.

Also, the Group performed sensitivity analyses on the result of the impairment test to test its sensitivity to the following assumptions:

• Increase of 100 basis points in the discount rate.
• Use of a perpetuity growth rate of 0%.
• 5% reduction in future cash flows.

These sensitivity analyses performed separately for each of the aforementioned assumptions did not disclose the existence of any impairment in any case.

Impairment of intangible assets with an indefinite useful life

The intangible assets with an indefinite useful life are assigned to each of the commercial premises in which the Group carried on its business activities (stores).

These leasehold assignment rights are included in the calculation of the impairment of the non-current assets, as explained above.

Reversals of impairment losses

Reversals of impairment losses on non-current assets are recognized with a credit to “Amortization and depreciation” in the consolidated income statement, up to the limit of the carrying amount that the asset would have had, net of depreciation or amortization, had the impairment loss never been recognized, solely in cases in which, once the internal and external factors have been assessed, it can be concluded that the indications of impairment that led to the recognition of the impairment losses have ceased to exist or have been partially reduced.

The reversal of an impairment loss on a cash-generating unit is distributed among its assets, except for goodwill, which is distributed in accordance with its carrying amount and taking into account the limitation set out in the preceding paragraph.

An impairment loss recognized for goodwill must not be reversed in a subsequent period.

h) Accounts receivable

Trade receivables are initially recognized at fair value. After initial recognition, they are stated at amortized cost in accordance with the effective interest rate method, less any impairment losses recognized.

Impairment losses are recognized on trade receivables when there is objective evidence that the Group will not be able to collect the entire amount owed by the debtor in accordance with the terms of the debt. The amount of the impairment loss is the difference between the carrying amount of the asset and the present value of the estimated future cash flows, discounted at the original interest rate. The amount of the impairment loss is recognized in the income statement.

i) Inventories

Inventories are measured at the lower of acquisition or production cost and net realizable value.

Cost comprises all the costs incurred in acquiring and transforming the inventories, as well as the design, storage, logistics and transport costs incurred in bringing the inventories to their present location and condition.

Transformation costs comprise the costs directly related to the units produced and a systematically calculated portion of indirect, variable and fixed costs incurred during the transformation process.

Cost is calculated on a FIFO basis and includes the cost of materials consumed, labor and manufacturing expenses.

The cost of inventories is adjusted through the caption “Cost of merchandise” in the consolidated income statement when cost exceeds net realizable value. Net realizable value is considered as the following:

• Raw materials and other supplies: replacement cost. However, materials are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost.
• Goods for resale: estimated selling price in the normal course of business.
• Work in progress: the estimated selling price for the corresponding finished products, less estimated costs of completion.

j) Cash and cash equivalents

Cash and cash equivalents include cash on hand and demand deposits at financial institutions. They also include other short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Investments which mature in less than three months from the acquisition date are also included.

In the statement of cash flows, bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents. Bank overdrafts are recognized in the consolidated balance sheet as financial liabilities from bank borrowings.

The Group classifies cash flows relating to interest and dividends paid and received as cash flows used in and obtained from investing and financing activities.

k) Current financial investments

Current financial investments include bank deposits and investments in investment funds that are not available at short term or that mature at between three and twelve months from acquisition.

The Group classifies cash flows relating to the amounts invested and received as cash flows from investing activities.

l) Employee benefits

Obligations acquired with Group personnel to be settled in the long term are estimated based on the dates on which they vest through the application, where appropriate, of actuarial assumptions. The Group has created a provision to cover the actuarial liability of the estimated portion vested at 31 January 2014.

Personnel expenses accrued during the year are determined based on the best estimate of how far the conditions of payment have been met and the period that has elapsed since the plan started.

Personnel expenses accrued by the beneficiaries of the plans referred to in note 27 to the consolidated annual accounts are recognized with a credit to liability accounts during the period in which the expenses accrue.

m) Provisions and contingent liabilities

Provisions are recognized in the balance sheet when:

• the Group has a present legal or constructive obligation as result of a past event;
• it is probable that an outflow of economic benefits will be required to settle the obligation; and
• the amount can be reliably estimated.

Provisions are based on the best information available at the date of preparation of the annual accounts and are revised at each balance sheet date.

If it is more likely than not that an outflow of resources will no longer be required to settle the obligation, the provision is reversed. The provision is reversed against the consolidated income statement item where the corresponding expense was recognized.

There are no risks that might give rise to significant future contingencies affecting the Group that have not already been taken into account in these consolidated annual accounts.

n) Financial liabilities

Financial liabilities, including trade and other payables, are initially recognized at fair value less any transaction costs that are directly attributable to the issue of the financial liability. After initial recognition, the Group’s financial liabilities are measured at amortized cost using the effective interest method.

o) Derivatives and hedging operations

Financial instruments acquired by the Group to hedge forecast transactions in foreign currencies are initially recognized at fair value plus any transaction costs directly attributable to acquiring the instrument.

Foreign currency hedges relating to forecast transactions are treated as cash flow hedges, and therefore any gains or losses derived from measuring the instrument at fair value which correspond to the effective portion of the hedge are recognized in equity. The ineffective portion is taken to financial income or expenses, as appropriate.

Amounts recognized in equity are taken to income when the forecast transaction takes place with a charge or credit to the account in which it was recognized. Also, gains or losses recognized in equity are reclassified to finance income or expenses when the forecast transaction is not expected to occur. The fair value of the hedges is recognized, depending on whether it is positive or negative, under “Other financial assets” or “Other financial liabilities” in the accompanying consolidated balance sheet.

In order for financial instruments to qualify for hedge accounting, they are initially designated as such and the hedging relationship is documented. Also, the Group verifies initially and periodically over the life of the hedge, using “effectiveness tests” that the hedging relationship remains effective, i.e., that it is prospectively foreseeable that changes in the fair value or cash flows from the hedged item (attributable to the hedged risk) are offset almost completely by changes in the fair value or cash flows of the hedging instrument and that, retrospectively, the gain or loss on the hedge was within a range of 80-125% of the gain or loss on the hedged item. Also, the ineffective portion of the hedging instrument is recognized immediately in the consolidated income statement.

The fair value of the hedging instruments has been calculated using measurement techniques based on the spot exchange rate and interest rate curves (Levels 1 and 2), based on the fair value hierarchy shown below: /p>

Level 1

Fair value is calculated on the basis of quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.

Level 2

Fair value is calculated on the basis of inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3

Unobservable inputs for the asset or liability.

The Group does not have any assets or liabilities assigned to this hierarchical level.

The measurement methodology, based on the aforementioned hierarchy, is as follows:

Level 1 instruments

The Group assigns certain fixed-income securities to this level and measures them at the prices in the active market in which they are traded.

Level 2 instruments

The Group assigns the assets and liabilities associated with its OTC derivative positions and measures them using observable market inputs.

Accordingly, the fair value of the hedging instruments arranged by the Group is calculated as follows:

Currency forwards

Fair value measurement:

Unit of account used for determining fair value

The Group determines that the appropriate unit of account, i.e., the level at which its assets or liabilities associated with its forward positions are valued for the purposes of their recognition and disclosure, is at aggregate level. This is permitted because the Group:

• Manages the group of financial assets and financial liabilities on the basis of its net exposure to a particular market risk (or risks) or credit risk in accordance with its documented risk management strategy.
• Provides information on that basis about the group of financial assets and financial liabilities to its key management personnel.
• Has master netting agreements with all its counterparties in the form of ISDA agreements the result of which is a net position with respect to the credit risk of the counterparties.
• The adjustment for credit risk is measured at counterparty level taking into account the netting agreements. The calculation of the contribution of each instrument under a given agreement is based on calculating the individual contributions of the expected exposures.

Methodology for determining fair value:

• The risk-free value is calculated by discounting the receipts and payments with the appropriate yield curve based on the currency involved. Amounts in foreign currency are translated to euros and it is calculated as the difference between the two amounts.
• The risk-adjusted value is calculated by obtaining the value of the Credit Value Adjustment (CVA), which represents the credit risk of the counterparty, and the Debit Value Adjustment (DVA), which represents the default risk. Both are a function of the severity of the expected loss in the event of default, of the probability of loss in the interval of time through maturity and of the risk-free value of the instrument.
• The value of the CVA is deducted from, and the value of the DVA is added to, the risk-free value of the derivative.

Cross-Currency Swap

Fair value measurement:

• The risk-free value is calculated. To measure the leg of the receipts in euros, the flows are discounted at the value date using the euro discount factor curve. To value the leg of the payments in US dollars, the flows are discounted at the value date using the US dollar discount factor curve obtained from the euro curve, from the market foreign exchange rates and from the spot exchange rate so that the measurement is consistent with market instruments. The spot rate at the value date is applied to the value obtained to thus obtain the equivalent euro value.
• The risk-adjusted value is calculated. The value of the CVA and DVA is obtained as indicated above.
• The value of the CVA is deducted from, and the value of the DVA is added to, the risk-free value of the derivative.

p) Revenue recognition

The sale of goods is recognized when the significant risks and rewards of ownership of the goods are transferred.

Sales to franchises are recognized when the aforementioned conditions are met and when revenue can be reliably determined and collection is considered probable.

The Group sells certain assets with the right for the buyers to return the goods. In these cases, the sale of the goods is recognized when the above conditions are met and it is possible to reliably estimate future returns based on experience and other relevant factors. Estimated returns are recognized against revenue and with a credit to the provision for sales returns. The estimated cost of returned goods is recognized as inventories, net of the effect of any reduction in value.

Rental income is recognized on a straight-line basis over the term of the lease.

Revenue from royalties is recognized using the accrual principle based on the substance of the contracts, providing collection is considered probable and the amount can be reliably estimated.

q) Leases

Lease contracts in which the significant risks and rewards inherent to ownership of the asset are substantially transferred to third parties are classified as finance leases, and are otherwise recorded as operating leases. All other leases are classified as operating leases.

Assets acquired through a finance lease are recognized as non-current assets at the lower of the present value of the future lease payment and the fair value of the leased asset, while the corresponding debt with the lessor is recognized as a liability. Lease payments are apportioned between the reduction of the outstanding liability and the finance charge, which is recorded as a financial expense during the year.

In the case of operating leases, non-contingent or fixed rent payments are charged to the income statement on a straight-line basis over the term of the lease. Contingent rent is recognized in the period in which payment is probable, as are variable rent increases linked to the consumer price index.

Incentives received from shopping center developers or owners of commercial premises (mainly contributions to construction work and grace periods) are recognized as non-current liabilities under “Other non-current liabilities – Lease incentives” and are booked as a reduction in rental expense under “Other operating expenses” on a straight-line basis over the term of the respective lease contracts.

r) Financial income and expenses

Finance income and expenses are recognized on an accrual basis using the effective interest method. Dividend income is recognized when the right to receive payment is established.

s) Income tax

The income tax expense for the year comprises current tax and deferred tax. Income tax comprises current and deferred tax and is recognized in the income statement and included in the determination of net profit or loss for the year, except to the extent that it relates to a transaction which has been recognized in equity in the same or previous years, in which case it is charged or credited to equity, or to a business combination.

Current tax is the tax expected to be paid or recovered in the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable or recoverable in respect of previous years.

Deferred tax is calculated using the balance sheet liability method, which provides for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Deferred tax liabilities comprise income tax amounts payable in the future on account of taxable temporary differences while deferred tax assets are amounts recoverable due to the existence of deductible temporary differences, tax loss or tax credit carryforwards.

The Group recognizes deferred tax assets and liabilities derived from temporary differences, except those relating to the initial recognition of an asset or liability in a transaction which is not a business combination and which did not affect either accounting or taxable profit (losses), or in the case of deferred taxes, where temporary differences are related to the initial recognition of goodwill. Deferred tax assets and liabilities are also recognized for temporary differences relating to investments in subsidiaries, except when the Parent can control their reversal and the temporary differences will probably not reverse in the foreseeable future.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the years when the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantially enacted by the balance sheet date and reflecting the tax consequences that would follow from the manner in which the Group expects to recover or settle the carrying amount of its assets or liabilities.

Deferred tax assets are recognized to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. Deferred tax assets, whether recognized or not, are reviewed at each balance sheet date.

The Group only offsets current tax assets and liabilities if it has a legally enforceable right to set off the recognized amounts and intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

Deferred tax assets and liabilities are recognized in the consolidated balance sheet under non-current assets or liabilities, irrespective of the expected date of realization or settlement.

t) Current and non-current assets and liabilities

The Group classifies assets and liabilities as current and non-current. Assets and liabilities are classified as current when they are expected to be realized or settled within twelve months of the balance sheet date, and are otherwise classified as non-current.

Assets and liabilities are not netted unless there are specific requirements to the contrary or a standard or interpretation so permits.

u) Treasury shares

Treasury shares acquired by the Group have been presented separately at cost as a reduction in equity in the consolidated balance sheet, and no gains or losses have been recorded as a result of transactions carried out with treasury shares.

Costs incurred in treasury share transactions are recorded as a reduction in equity, after consideration of any tax effect.

6.33. Environment

In view of the business activities carried on by the Group, it does not have any environmental liability, expenses, assets, provisions or contingencies that might be material with respect to its equity, financial position or results. Therefore, no specific disclosures relating to environmental issues are included in these notes to the consolidated annual accounts.

6.34. Events after the reporting period

At the date of preparation of these consolidated annual accounts no matters had been disclosed that might modify the consolidated annual accounts or give rise to disclosures additional to those already included in these consolidated annual accounts.

6.35. Explanation added for translation to English

These consolidated annual accounts are presented on the basis of the regulatory financial reporting framework applicable to the Group (see first page of the notes). Certain accounting practices applied by the Group that conform with that regulatory framework may not conform with other generally accepted accounting principles and rules.