6. NOTES TO THE CONSOLIDATED ANNUAL ACCOUNTS OF THE INDITEX GROUP AT 31 JANUARY 2017

The consolidated annual accounts of the Inditex Group for 2016 were prepared by the Board of Directors on 14 March 2017 and will be submitted for approval at the corresponding annual general shareholders’ meeting, and it is considered that they will be approved without any changes. The consolidated annual accounts for 2015 were approved by the annual general shareholders’ meeting held on 19 July 2016.

These annual accounts were prepared in accordance with the International Financial Reporting Standards (IFRSs) and related interpretations (IFRICs and SICs) adopted by the European Union (EU-IFRSs) and the other provisions of the applicable regulatory financial reporting framework.

Inditex’s financial year and that of most of its subsidiaries starts on 1 February of each year and ends on 31 January of the following year. The twelve-month period ended 31 January 2016 will hereinafter be referred to as “2015”, the twelve-month period ended 31 January 2017 as “2016”, and so on.

Unless otherwise stated, the amounts shown in these consolidated annual accounts are expressed in thousands of euros.

The consolidated annual accounts are presented in euros, since the euro is the Group’s functional currency.

The separate annual accounts of the Parent (Inditex) for 2016 were prepared by the Board of Directors in a separate document to these consolidated annual accounts.

These consolidated annual accounts present fairly the equity and financial position of the Inditex Group at 31 January 2017, as well as the results of its operations, the changes in equity and the cash flows for the year then ended.

The consolidated annual accounts of the Inditex Group for 2016 were prepared on the basis of the accounting records of Inditex and the other Group companies.

The Group uses certain performance measures additional to those defined in IFRSs, since these measures include information that is essential to assess the evolution of the Group.

In the consolidated income statement, gross profit, EBITDA and EBIT are defined as follows:

• Gross profit: the difference between net sales and the cost of sales. Notes 3 and 4 contain detailed information on the items included in these consolidated income statement line items. The percentage gross profit is calculated as the gross profit in absolute terms as a percentage of net sales.
• Gross operating profit (EBITDA): earnings before interest, the result of companies accounted for using the equity method, taxes, depreciation and amortization, calculated as the gross profit less operating expenses and other losses and income, net.
• Operating Income (EBIT): earnings before interest, the result of companies accounted for using the equity method and taxes, calculated as EBITDA less amortization and depreciation.

Other alternative measures of performance are as follows:

• Return on capital employed (ROCE): defined as EBIT divided by average capital employed in the year (average of equity attributable to the Parent plus net financial debt for the year).
• Return on equity attributable to the Parent (ROE), defined as net profit attributable to the Parent divided by average shareholders’ equity for the year.

In preparing the consolidated annual accounts at 31 January 2017 estimates were made in order to measure certain of the assets, liabilities, income, expenses and obligations reported herein. These estimates relate basically to the following:

• The assessment of possible impairment losses on certain assets.
• The useful life of the property, plant and equipment, intangible assets and investment property.
• The fair value of certain assets, mainly financial instruments.
• The assumptions used in the actuarial calculation of pension and other obligations to employees.
• The calculation of the provisions required for contingencies relating to litigation in progress and doubtful debts.
• The term of leases.
• The amount of the future minimum non-cancellable operating lease payments.
• The recovery of deferred tax assets.

These estimates were made using the best information available at 31 January 2017 and 2016. However, events that take place in the future might make it necessary to change these estimates. Changes in accounting estimates would be applied prospectively in accordance with IAS 8.

The basis of consolidation and accounting policies applied are disclosed in Note 2.

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 whose principal activity is the retail 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, composes the Inditex Group (“the Group”).

Each format’s commercial activity is carried out through an integrated store and on-line model managed directly by companies over which Inditex exercises control through the ownership of all or the majority of the share capital and of the voting rights, 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 essentially enable the Group to have access to the lease rights over 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.

The Group does not have any significant non-controlling interests.

The Group holds joint ownership interests in the entities making up the Tempe Group. Based on an analysis of the contractual arrangements giving it joint control, the Group classified its ownership interest in the Tempe Group as a joint venture. The interest in the Tempe Group was accounted for using the equity method.

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

The Group’s logistics system is based on continuous deliveries to stores, throughout each season, from the distribution centers of the various commercial formats. This system essentially operates through centralized logistics facilities for each of the concepts, at which inventory is stored and from which it is distributed to all the stores worldwide.

At 31 January 2017, the various Group formats had stores in 93 different markets with the following geographical distribution:

At 31 January 2016, the geographical distribution of stores was as follows:

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

6.2. Selected accounting policies

6.2.1. Basis of consolidation

i) Subsidiaries

Subsidiaries are entities over which the Parent has control and, therefore, the power to govern their financial and operating policies (see Note 1). Subsidiaries are consolidated by aggregating the total amount of their assets, liabilities, income, expenses and cash flows, after making 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 effective acquisition date. A detail of the subsidiaries is provided in Appendix I. The identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are stated at their acquisition-date fair values, provided the acquisition took place after 1 January 2004, the date of transition to EU-IFRSs.

For business combinations subsequent to that date, any excess of the consideration transferred plus the value assigned to non-controlling interests over the net amounts of the assets acquired and the liabilities assumed is recognized as goodwill.

Any deficiency of the amount of the consideration transferred plus the value assigned to non-controlling interests below the identifiable net assets acquired is recognized in profit or loss.

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

The non-controlling interests shown in the consolidated statement of changes in equity relate to non-controlling interests in subsidiaries, and they are presented in consolidated equity separately from the equity attributable to shareholders of the Parent.

The profit or loss and each component of other comprehensive income are allocated to the equity attributable to shareholders of the Parent and to non-controlling interests in proportion to their relative interests, even if this results in the non-controlling interests having a deficit balance. Agreements entered into between the Group and non-controlling interests are recognized as a separate transaction.

The share of non-controlling interests of the equity and profit or loss of the subsidiaries is presented under “Equity attributable to non-controlling interests” and “Net profit attributable to non-controlling interests”, respectively. A detail of the subsidiaries is provided in Appendix I.

ii) Jointly controlled entities

Jointly controlled entities are those entities over whose activities the Group has joint control, established by contractual arrangement. As indicated in Note 1, on the basis of the analysis performed of the contractual arrangements, the Group classified these interests as a joint venture. Pursuant to IFRS 11, Joint Arrangements, these entities are accounted for using the equity method in the consolidated annual accounts.

iii) Harmonization of criteria

Each of the companies included in the consolidated Group prepares its annual accounts and other accounting records in accordance with the corresponding accounting standards, based on the legislation in force in the country of origin. Where these accounting and measurement criteria differ from those adopted by the Inditex Group in preparing its consolidated annual accounts, they are adjusted in order to present the consolidated annual accounts using uniform accounting policies.

iv) Intra-Group eliminations

All intra-Group receivables, payables and transactions, and any intra-Group gains or losses not yet realized vis-à-vis third parties, are eliminated in the consolidation process.

v) Translation of annual accounts denominated in foreign currencies

The Group applied the exemption relating to cumulative translation differences envisaged in IFRS 1 First-time Adoption of International Financial Reporting Standards and, therefore, any translation differences recognized in the consolidated annual accounts that were generated prior to 1 January 2004 are recorded in reserves. Since that date, the annual accounts of companies with a functional currency other than the euro have been translated as follows:

• Assets and liabilities are translated to euros at the exchange rates prevailing at the balance sheet date.
• Items composing the equity of these companies are translated to euros at the 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 to euros at the exchange rates prevailing at the dates on which they were recognized, while average exchange rates are used in those cases in which the application of this simplifying criterion does not generate significant differences.

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

However, exchange differences arising from trade balances payable and receivable and financing transactions between Group companies, with foreseeable settlement, are recognized in profit or loss for the year.

vi) Annual accounts in hyperinflationary countries

The annual accounts of companies based in countries meeting the requirements for classification as hyperinflationary economies were adjusted prior to translation to euros to account for the effect of changes in prices. There are currently no companies in the Group’s consolidation scope that operate in countries considered to be hyperinflationary economies. 

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 using the annual accounts at their respective reporting dates (see Appendix I). Temporary adjustments are made to reflect the effect of significant transactions occurring between the reporting date of these subsidiaries and that of the consolidated annual accounts.

viii) Changes in the consolidation scope

Appendix I lists all the companies included in the scope of consolidation. The detail of the main companies incorporated and consolidated for the first time in 2016 is as follows:

Companies incorporated:

During the financial year, Massimo Dutti Puerto Rico INC has merged with Zara Puerto Rico INC, and the company ITX Japan Corporation as merged with Zara Japan Corporation.

The inclusions in the consolidated Group referred to above did not have a material impact on equity in the consolidated annual accounts for 2016.

6.2.2. Accounting policies

New standards and amendments applied in 2016

The following standards, amendments and interpretations recently came into force for all reporting periods beginning on or after 1 January 2016:

• Clarification of Acceptable Methods of Depreciation and Amortization (Amendments to IAS 16, Property, Plant and Equipment and IAS 38, Intangible Assets): These amendments clarify the acceptable methods of depreciation and amortization of property, plant and equipment and intangible assets.
• Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11, Joint Arrangements): The amendments provide guidance on the accounting for acquisitions of interests in joint operations in which the activity constitutes a business.
• Improvements to IFRSs, 2012-2014 cycle - a series of minor amendments to the following standards was introduced:
  • IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations.
  • IFRS 7, Financial Instruments: Disclosures.
  • IAS 19, Employee Benefits.
  • IAS 34, Interim Financial Reporting.
• Equity Method in Separate Financial Statements (Amendments to IAS 27, Separate Financial Statements): the amendments permit the use of the equity method in the separate financial statements of an investor.
• Disclosure Initiative (Amendments to IAS 1, Presentation of Financial Statements): the amendments included clarifications in relation to disclosures (materiality, aggregation, order of specific items within the notes to the financial statements, etc.)
• Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10, Consolidated Financial Statements, IFRS 11, Disclosure of Interests in Other Entities and IAS 28, Investments in Associates and Joint Ventures). The amendments introduce certain clarifications on the consolidation exception for investment entities.
• Agriculture: Bearer Plants (Amendments to IAS 16, Property, Plant and Equipment and IAS 41, Agriculture). Bearer plants shall be measured at cost rather than at fair value.

The application of the aforementioned amendments and improvements did not give rise to a material impact on the Group’s annual accounts. Also, certain standards and amendments do not have an impact due to their subject-matter (e.g. IAS 41, Agriculture).

Standards approved for use in the European Union

At the date of formal preparation of these 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 their application in annual reporting periods beginning on or after 1 January 2018 (they were not applied early):

• IFRS 15, Revenue from Contracts with Customers, and the related clarifications. This standard, which supersedes the current standards on revenue IAS 18, Revenue and IAS 11, Construction Contracts and the interpretations issued (IFRIC 13, IFRIC 15, IFRIC 18 and SIC-31), establishes a new model for revenue recognition based on the concept of control, whereby revenue is recognized when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer. To this end, IFRS 15 introduces a five-step approach to the recognition of revenue and more extensive disclosure requirements. Also, certain clarifications to the standard issued by the IASB are yet to be adopted.
  
  As detailed in Notes 1 and 3, the main activities for which the Group recognizes revenue are retail sales through company-managed stores and online, franchises and other online channels. In a preliminary assessment, Group management considered that the aforementioned activities represent mainly the performance obligation to transfer certain goods to customers, revenue from which is recognized at the point in time at which control over the aforementioned products is transferred, which does not differ significantly from the current identification of independent price components performed pursuant to IAS 18. Also, management does not expect the allocation of the transaction price to the various performance obligations in each contract, where applicable, or the timing of recognition of the revenue in the income statement as a result of applying IFRS 15 to differ significantly from those provided for in the current standard IAS 18.
• IFRS 9, Financial Instruments. This standard supersedes IAS 39. There are significant differences with respect to the current standard for the recognition and measurement of financial instruments, the most important being as follows:
• Classification and measurement of financial instruments:
  
  Two categories are established with respect to financial assets:
  • Debt and equity instruments: they are measured at fair value through profit or loss. However, entities may make an election to present in other comprehensive income subsequent changes in the fair value of certain investments in equity instruments and, in general, only the dividends from those investments will be recognized subsequently in profit or loss.
  • Debt instruments held within a business model whose objective is to hold financial assets in order to collect contractual cash flows that are solely payments of principal and interest are measured at amortized cost. Debt instruments held within a business model whose objective is achieved by both collecting contractual cash flows (payments of principal and interest) and selling financial assets are in general measured at fair value through other comprehensive income.
  In relation to the measurement of financial liabilities designated optionally as at fair value through profit or loss, the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability shall be presented in other comprehensive income (unless this would create or enlarge an accounting mismatch in profit or loss) and shall not be reclassified subsequently to profit or loss.
  
  On the basis of the Group’s financial assets and liabilities at 31 January 2017, application of IFRS 9 vis-à-vis measurement and clarification of financial instruments is not expected to have a significant effect on the consolidated annual accounts.
• Impairment: a new impairment model based on expected credit losses is established, as opposed to the current incurred loss model. Under the expected credit loss model, it is no longer necessary for an impairment event to have occurred before credit losses are recognized. Given the nature of the Group’s business, in which the majority of sales are collected in cash and there are no material accounts receivable of another kind, the impact of applying this new impairment model is not expected to be significant.
• Hedge accounting: IFRS 9 eases the rules for determining transactions that qualify for hedge accounting and revises the rules of the hedge effectiveness test. Given that the new hedge accounting requirements will be more closely aligned with the Group’s risk management policies, a preliminary assessment of the Group’s current hedging relationships indicates that they will meet the conditions to continue as hedging relationships on application of IFRS 9. Application of IFRS 9 vis-à-vis hedge accounting is not expected to have a significant impact on the consolidated annual accounts.
  
  The aforementioned assessment was made by reference to an analysis of the Group’s financial assets and liabilities at 31 January 2017 and of the facts and circumstances that existed at that date. Since the facts may change in the period until the date of initial application of IFRS 9 (expected to be 1 February 2018, since the Group does not intend to apply the standard early), the assessment of its potential effect is subject to change.

Standards issued but not yet approved for use in the European Union

At the date of preparation of these consolidated annual accounts, the following standards and interpretations with a potential impact on the Group had been issued by the IASB but had not yet been adopted by the European Union:

• Disclosure Initiative (Amendments to IAS 7, Statement of Cash Flows). Effective for annual periods beginning on or after 1 January 2017, the amendments introduce new additional disclosure requirements relating to the reconciliation of changes in financial liabilities to cash flows from financing activities.
• Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12, Income Taxes). Effective for annual periods beginning on or after 1 January 2017, the amendments introduce clarifications to the principles established for the recognition of deferred tax assets for unrealized losses on debt instruments measured at fair value.
• Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2, Share-based Payment). Effective for annual periods beginning on or after 1 January 2018, the amendments relate to specific issues concerning the classification and measurement of share-based payment transactions.
• Applying IFRS 9, Financial Instruments with IFRS 4, Insurance Contracts (Amendments to IFRS 4). Effective for annual periods beginning on or after 1 January 2018. The amendments provide entities within the scope of IFRS 4 with the option of applying IFRS 9 or the temporary exemption therefrom.
• Transfers of Investment Property (Amendments to IAS 40, Investment Property). Effective for annual periods beginning on or after 1 January 2018, these amendments clarify the circumstances in which the transfer of a property to, or from, investment property is permitted.
• Annual Improvements to IFRS Standards 2014–2016 Cycle, establishing minor amendments to IFRS 1, First-time Adoption of International Financial Reporting Standards, IFRS 12, Disclosure of Interests in Other Entities and IAS 28, Investments in Associates and Joint Ventures, effective for annual periods beginning on or after 1 January 2018.
• IFRIC 22, Foreign Currency Transactions and Advance Consideration. This interpretation, mandatorily applicable in annual periods beginning on or after 1 January 2018, establishes the date of the transaction for the purpose of determining the exchange rate to use in transactions with advance consideration in a foreign currency.

The Group is analyzing the impact that these new standards and amendments may have on the consolidated annual accounts, which is not expected to be significant.

Also, at the date of preparation of these consolidated annual accounts the IASB had issued IFRS 16, Leases. IFRS 16 is mandatorily applicable for annual reporting periods beginning on or after 1 January 2019 and is expected to be adopted by the European Union, per the information published by the European Financial Reporting Advisory Group (EFRAG), in the next twelve months. This Standard, which supersedes IAS 17, Leases and the related interpretations (IFRIC 4, SIC-15 and SIC-27), sets out the new principles for the identification of leases and their accounting treatment.

From a lessee accounting model standpoint, IFRS 16 replaces the current dual model that distinguishes between finance leases and operating leases with a single lessee accounting model under which lessees shall recognize all leases in their balance sheets as if they were financed purchases, except for the very specific exceptions of leases for which the underlying asset is of low value and short-term leases. In general, the foregoing entails for each lease:

• The recognition in the balance sheet of an asset for the value of the underlying asset and of a liability for the present value of the fixed lease payments (including in-substance fixed payments) and variable lease payments that depend on an index or a rate.
• The recognition in the income statement, over the lease term, of a depreciation charge for the right-of-use asset and an interest expense relating to the amortized cost of the lease liability.

As indicated in Note 1 to the consolidated annual accounts, the majority of the Group’s company-managed stores are located in commercial premises leased under operating leases, in relation to which the Group recognized a lease expense and committed to certain future non-cancellable minimum payments which are detailed in Note 25 to the consolidated annual accounts. At the date of preparation of these consolidated annual accounts, the Group was adapting its reporting systems to gather the necessary information on leases in order to recognise them in accordance with IFRS 16. Also, at the date of preparation of these consolidated annual accounts, management was estimating the impact that application of this new standard will have on the Group’s consolidated annual accounts, which, on the basis of the foregoing, is expected to be significant.

a) Foreign currency translation

Foreign currency transactions are translated to euros by applying the exchange rates prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated to euros at the end of the reporting period using the closing rate. Exchange differences arising on translating these items at those exchange rates are recognized in the income statement for the year as financial results.

In presenting the consolidated statement of cash flows, cash flows arising from transactions in a foreign currency are translated to euros by applying the exchange rates at the date of the cash flow. The effect of exchange rate changes on cash and cash equivalents denominated in foreign currency is presented separately in the consolidated statement of cash flows 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 (see Note 6.2.2.g).

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

The estimated average useful lives are as follows:

* 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 reviews the residual values and useful lives of its property, plant and equipment at each financial year-end. Any change in the initially established estimates is accounted for as a change in an accounting estimate.

After initial recognition of an asset, only those costs that it is probable will give rise to future economic benefits and that can be measured reliably are capitalized.

Periodic maintenance, upkeep and repair expenses are recognised in profit or loss as they are incurred.

c) Rights over leased assets

These rights, known as leasehold assignment rights, lease access or surrender premiums, relate to the amounts paid for lease rights over premises for access to commercial premises, in which the acquirer and new lessee is 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 on a straight-line basis 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 6.2.2.g., Impairment of non-current assets.

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. It 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 residual values and useful lives of its intangible assets at each financial year-end. Any change in the initially established estimates would be accounted for as a change in an accounting estimate.

e) Financial investments

Investments in companies over which the Group does not exercise significant influence are stated at cost net of any impairment losses that have to be recognized.

f) Investment property

Investment property consists of assets held to generate rental income or 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 (see Note 6.2.2.g).

A detail of the market value of investment property is shown in Note 14.

g) Impairment of non-current assets

The Group periodically assesses whether there are any 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, expectations about possible variations in the amount or timing of those future cash flows, the time value of money, the price for bearing the uncertainty inherent in the asset, and other factors that market participants would consider in pricing the future cash flows to be derived 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. If this is the case, 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 at concept-country level, or even at the level of all the companies located in a given country. Group assets which are not clearly assignable under this structure (for example industrial or logistics assets) are treated separately in a manner consistent with this general policy but considering 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 profit 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 and on the macroeconomic indicators that reflect the current and foreseeable economic situation for each market.

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 or without any time limit in the case of company-managed premises (perpetual return).

The discount rate applied is usually a pre-tax measure 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 average discount rate, resulting from those applied by the Group in the various markets, used for the purpose of calculating the present value of the estimated cash flows was as follows:

The results obtained from the 2016 impairment test performed on non-current assets (property, plant and equipment and intangible assets) are shown in the tables of changes included in Notes 13 and 15 to the consolidated annual accounts relating to property, plant and equipment and rights over leased assets and other intangible assets.

Also, the Group analysed the sensitivity of the result of the impairment test to the following changes in 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 potentia existence of additional asset impairment amounting to Euros 1,761 thousand and Euros 1,416 thousand, respectively (Euros 1,587 thousand and Euros 1,217 thousand, respectively, in 2015).

Impairment of goodwill

Goodwill acquired through a business combination is allocated to the group of basic cash-generating units aggregated at concept-country level, for the purpose of performing the related impairment tests. This aggregation is made on the basis of:

• The degree of independence of the cash flows in each case.
• How the Group monitors the economic performance of its operations, and the model with which its operations are conducted.
• The degree to which the CGUs are subject to the same macroeconomic circumstances.
• The level with which the goodwill would be naturally associated on the basis of the business model.

In any case, this aggregation is never larger than an operating segment, as defined in IFRS 8.

Each year, or more often if there are indications of impairment, an impairment test is performed, using the methodology described in the preceding point, with the exception that, since the CGU is the acquiree, 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 impairment tests for 2016 and 2015 did not give rise to the recognition of any impairment loss on goodwill.

Also, the Group analysed the sensitivity of the result of the impairment test to the following changes in 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 potential existence of any impairment in any of the cases.

Impairment of intangible assets with an indefinite useful life

Intangible assets with an indefinite useful life are assigned to each of the commercial premises where the Group carries on its business activity (stores) and are included in the calculation of the impairment of 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 those 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 for a cash-generating unit is allocated to the assets of the unit, except for goodwill, pro rata with the carrying amounts of those assets and taking into account the limit for the reversal referred to in the preceding paragraph.

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

h) Trade and other receivables

Trade receivables are initially recognized at fair value. After initial recognition, they are stated at amortized cost in accordance with the effective interest 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 under the original terms governing the accounts receivable. 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.

The cost of inventories comprises all costs of purchase and costs of conversion, as well as design, logistics and transport costs and any directly allocable costs incurred in bringing the inventories to their present location and condition.

The costs of conversion comprise the costs directly related to the units of production and a systematically calculated portion of indirect, variable and fixed costs incurred during the conversion process.

Cost is calculated on a “First in - First out” (FIFO) basis and includes the cost of materials consumed, labor and manufacturing expenses.

The cost of inventories is adjusted through “Cost of sales” in the consolidated income statement when cost exceeds net realizable value. Net realizable value is understood to be:

• Raw materials and other supplies: replacement cost. However, raw materials and other supplies are not written down below cost if the finished products in which they will be incorporated are expected to be disposed of at or above production cost.
• Finished goods for sale: estimated selling price in the normal course of business.
• Goods in process: 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 banks. 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, on initial investment. 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 relating to bank borrowings.

The Group classifies the cash flows relating to interest and dividends paid and received as cash flows 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 and which do not meet the requirements to be considered as cash equivalents.

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

l) Employee benefits

Obligations to 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 2017.

The personnel expense accrued during the year is determined based on the best estimate of the degree to which the conditions giving entitlement to payment have been met and the period that has elapsed since the commencement of the vesting period for each of the obligations.

The personnel expenses incurred by the Company in relation to the beneficiaries of the plans referred to in Note 27 to the consolidated annual accounts are recognized with a credit to liability and equity accounts in the period in which the expenses are incurred.

m) Provisions and contingent liabilities

Provisions are recognized in the balance sheet when:

• the Group has a present obligation (legal or constructive) as result of a past event;
• it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
• a reliable estimate can be made of the amount of the obligation.

Provisions are quantified on the basis of the best information available at the date of preparation of the annual accounts and are reviewed at the end of each reporting period.

If it is no longer probable that an outflow of resources embodying economic benefits will 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.

The Group guarantees the debts of certain companies in the Netherlands, pursuant to the provisions of Article 403.1, Book 2, Part 9 of the Civil Code of the Netherlands.

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.

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

Amounts recognized in equity are taken to income when the forecast transaction takes place with a charge or credit to the income statement account in which it was recognized. Also, gains or losses recognized in equity are reclassified to finance income or costs when the forecast transaction is no longer 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 these financial instruments to qualify for hedge accounting, they are initially designated as hedging instruments and the hedging relationship is documented. Also, the Group verifies, both at inception and periodically over the term of the hedge, using “effectiveness tests”, that the hedging relationship is effective, i.e. that it is prospectively foreseeable that the changes in the fair value or cash flows of the hedged item (attributable to the hedged risk) will be almost fully offset by those 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 was calculated using valuation techniques based on the spot exchange rate and yield curves, which are Level 1 and 2 inputs according to the fair value hierarchy shown below:

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 to this level and measures them using observable market inputs.

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

Foreign currency forwards

Fair value measurement:

Foreign currency forwards are basically measured by comparing the contract strike price (agreed delivery price) with the market forward rate for the maturity of the contract. Once the estimated future settlement of the contract has been obtained based on the aforementioned comparison (in euros), the settlement is discounted using the risk free zero coupon yield curve (or the interbank yield curve). This risk free valuation is subsequently adjusted to include each party’s credit risk, both the risk corresponding to the counterparty (Credit Value Adjustment (“CVA”) or counterparty default risk) and own risk (Debit Value Adjustment (“DVA”) or own default risk).

The CVA and the DVA are calculated by multiplying the estimated exposure by the probability of default and the loss severity (which measures the loss given default). Where possible, the probability of default and the assumed recoverable amount in the event of default are obtained from quoted CDSs or from other observable market inputs. The CVA and the DVA calculations are netted for each counterparty with which the entity has an ISDA master agreement providing for the netting of the derivative positions in the event of default.

Cross-currency swaps

Fair value measurement:

• Cross currency swaps are basically measured by discounting the future cash flows of each leg of the derivative (swap) with the corresponding risk free yield curve (in the applicable currency). Subsequently, the present value of the leg that is not denominated in euros is translated to euros (using the current spot exchange rate) and the risk free value is calculated as the difference between the present value of the receiving leg and the present value of the paying leg. The discount curves are adjusted for the cross currency (basis) swap corresponding to the currency pair.
• The risk free portion is then adjusted to include the credit risk adjustment: both the CVA (Credit Value Adjustment - counterparty default risk) and the DVA (Debit Value Adjustment - own default risk).
• The CVA and the DVA are calculated by multiplying the estimated exposure by the probability of default and the loss severity (which measures the loss given default). Where possible, the probability of default and the assumed recoverable amount in the event of default are obtained from quoted CDSs or from other observable market inputs.
• The CVA and the DVA calculations are netted for each counterparty with which the entity has an ISDA master agreement providing for the netting of the derivative positions in the event of default.

Zero-premium option combinations

Fair value measurement:

Valuation of zero-premium options is based on a stochastic local volatility (“SLV”) model using a Monte Carlo simulation. The valuation depends on the implied volatility of the standard option contracts as well as the dynamics of the implied volatilities. Fair value is a function of the stochastic process that describes the behavior of the underlying’s volatility parameter and of the weighted local volatility component determined by the implied volatility surface.

Options purchased

Fair value measurement:

The determination of the fair value of the (plain vanilla) options is based on a modified version of the Black-Scholes formula (Garman-Kohlhagen). Fair value is a function of the underlying’s price, the exercise price, the time to expiration and the volatility of the underlying. The credit risk adjustment is performed using the spread method.

p) Revenue recognition

Sales of goods are recognized when substantially all the risks and rewards of ownership of the goods are transferred, and they are presented net of actual and projected sales returns.

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

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, provided that collection of the revenue is considered probable and its amount can be reliably estimated.

q) Leases

Leases are classified as finance leases when they transfer substantially all the risks and rewards inherent to ownership of the leased asset. 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 payments 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 finance cost for the year.

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

Incentives received from shopping centre 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, in respect of the portion expected to be taken to income in the following year, as current liabilities under “Trade and other payables”. They are credited to profit or loss, as a reduction of the rental expense under “Other operating expenses”, on a straight-line basis over the term of the respective lease contracts.

r) Finance income and costs

Interest income and interest 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. Current and deferred tax is recognized as income or as an expense and included in net profit or loss for the period, except to the extent that the tax arises from a transaction which is charged or credited, in the same or a different period, directly to equity, or from 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, in respect of the current period, and any adjustment to tax payable or recoverable in respect of prior periods.

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 are the amounts of income taxes payable in the future in respect of taxable temporary differences, while deferred tax assets are the amounts of income taxes recoverable in the future due to the existence of deductible temporary differences, tax loss carryforwards or tax credit carryforwards.

The Group recognizes deferred tax assets and liabilities for temporary differences, except where they relate to the initial recognition of an asset or liability in a transaction which is not a business combination and which at the time of the transaction affected neither gross accounting profit nor taxable profit (tax loss), or in the case of deferred tax liabilities, where the temporary differences relate to the initial recognition of goodwill. Deferred tax liabilities are also recognized for temporary differences associated with investments in subsidiaries, except to the extent that the Parent is able to control the timing of their reversal and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period 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 and liabilities.

Deferred tax assets are recognized to the extent that it is probable that future taxable profits will be available against which the corresponding unused tax losses or tax credits 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 and 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 items in the consolidated balance sheet. 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 offset, unless required or permitted by a standard or interpretation.

u) Treasury shares

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

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

6.3. Net 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.

The detail of this line item in 2016 and 2015 is as follows:

6.4. Cost of sales

The detail of this line item in 2016 and 2015 is 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 (see Note 6.2.2.i).

6.5. Operating expenses

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

The detail, by category, of the headcount of the Group and its jointly controlled entities at 31 January 2017 is as follows:

The detail, by category, of the headcount of the Group and its jointly controlled entities at 31 January 2016 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

With respect to the Group’s performance in 2016, the Board of Directors, following a favourable report from the Remuneration Committee, resolved at its meeting held on 14 March 2017 to increase, on an extraordinary basis and applicable solely to that business year, the total amount of the employees’ profit-sharing plan, up to a total of Euros 42,000 thousand, and recognized Euros 14,000 thousand under this heading in relation to the excess over the amount corresponding to 10% of the growth in profit. The characteristics of this plan are described in Note 27, “Employee benefits”.

Also, this heading includes 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.

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

a) Subsidiaries domiciled in Mexico

The Group holds a call option on 5% of the share capital of Zara México, S.A. de C.V. owned by a non-controlling shareholder. The strike price is set on the basis of the non-controlling shareholder’s share of the equity of the investee when the call option is exercised.

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. The strike price is set on the basis of the shareholder’s share of the equity of the investee when the call option is exercised.

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. The strike price is set on the basis of the shareholder’s share of the equity of the investee when the call option is exercised.

d) Subsidiaries domiciled in Australia

The Group holds a call option on 10% 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. The strike price is set on the basis of the shareholder’s share of the equity of the investee when the call option is exercised.

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

The detail of “Financial results” in the consolidated income statements for 2016 and 2015 is as follows:

Finance income and costs comprise mainly the 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 and asset acquisitions or disposals are recognized and when the corresponding assets or liabilities are realized or settled or translated in accordance with 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 3,113,647,003 in 2016 and 3,113,152,000 in 2015.

Diluted earnings per share is calculated based on the profit for the year attributable to the holders of equity instruments of the Company and the weighted average number of ordinary shares outstanding, after adjustment for the dilutive effects of potential ordinary shares.

At the end of 2016 there were no instruments with dilutive effects on earnings per share.

6.10. Segment reporting

The principal activity of the Inditex Group comprises the retail and on-line 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 are influenced mainly by the particular commercial format to which the units belong. The internal structure of the Inditex Group, the business decision-making process and the system for communicating information to the Board of Directors and Group management are organized by commercial format and geographical area.

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 disclosed 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.

The Inditex Group segment information is as follows:

For presentation purposes, the commercial concepts other than Zara and Bershka were grouped into a single reporting segment due to the similarities in the nature of the products sold and their management and monitoring model.

For the purpose of reconciliation with the consolidated annual accounts, sales to third parties relate to “Net sales” in the consolidated income statement and the amortization and depreciation corresponds to “Amortization and depreciation” in the consolidated income statement.

The segment’s profit from operations refers to its Operating Result (EBIT), as defined in the initial note to these consolidated annual accounts. Income and expenses which might be considered to be corporate in nature or as belonging to all segments were assigned to each of the segments based on distribution criteria considered reasonable by Group management. Transactions between the various segments are carried out on an arm’s length basis.

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

ROCE is calculated as defined in the initial note to these consolidated annual accounts.

Zara was the first concept created by the Inditex Group and its positioning is based on a fashion offering featuring a wide range of products.

Bershka targets 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 non-current assets are based on the geographical location of assets. Segment non-current assets do not include deferred tax assets.

6.11. Trade and other receivables

The detail of this line item at 31 January 2017 and 2016 is 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 guaranteed as described in Note 26.

Balances receivable from public authorities 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.

6.12. Inventories

The detail of this line item at 31 January 2017 and 2016 is as follows:

The Group takes out insurance policies to cover the possible risks of material damage to its inventories.

6.13. Property, plant and equipment

The detail of the items composing “Property, plant and equipment” in the accompanying consolidated balance sheet and of the changes therein is as follows:

“Fixtures, furniture and machinery” includes mainly assets related to stores.

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

Disposals comprise mainly assets related to the commercial premises at which the Group carries out 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 1,949,016 thousand and Euros 1,887,334 thousand at 31 January 2017 and 31 January 2016, respectively.

The Group performed an impairment test and a sensitivity analysis based on reasonably possible changes in the main variables used in asset measurement, and the results did not vary significantly (see Note 6.2.2.g).

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, to the extent possible, the frequency and intensity of these risks.

Likewise, standard measurement criteria are established at corporate level which enable the different 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 the various risks, and establishes suitable limits, excesses and conditions in view of the nature of the assets and the financial dimension of the Group.

6.14. Investment property

Investment property relates mainly to premises and other property assets leased to third parties. The changes in this line item in 2016 and 2015 were as follows:

The total market value of the investment property at 31 January 2017 was approximately Euros 22,000 thousand (31 January 2016: Euros 21,200 thousand). This market value is supported, in the case of the most significant properties (81% of the total cost), by appraisals conducted in the last few years by independent valuers with acknowledged professional capacity and recent experience in relation to the location and category of the investment property valued. The appraisals were conducted using a future cash flow discounting method based on the market prices of similar premises.

In 2016 Euros 2,367 thousand (Euros 2,675 thousand in 2015) of rental income on these investment 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 rights, lease access or surrender premiums 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 2017, “Rights over leased assets” included items with an indefinite useful life amounting to Euros 133,738 thousand (Euros 133,130 thousand at 31 January 2016). 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” includes basically 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.

The Group performed an impairment test and a sensitivity analysis based on reasonably possible changes in the main variables used in asset measurement, and the results did not vary significantly (see Note 6.2.2.g).

The detail of “Other intangible assets” in the consolidated balance sheet and of the changes therein in 2016 and 2015 is as follows:

The Group capitalized Euros 47,580 thousand in 2016 (Euros 24,824 thousand in 2015) corresponding to software development activities that meet the requirements for capitalization under IAS 38. The Group also capitalized Euros 77,163 thousand (Euros 86,538 thousand in 2015) in respect of the development of industrial designs and other intangibles associated with the Group’s activity that meet the requirements for capitalization under IAS 38.

6.16. Goodwill

The detail of this line item in the consolidated balance sheet and of the changes therein in 2016 and 2015 is as follows:

The goodwill arising from the acquisition or termination of franchise contracts corresponds to the amount of the intangible assets that did not meet 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 the carrying amount of goodwill at year-end (see Note 6.2.2.g).

Also, sensitivity analyses were performed based on reasonably possible changes in the main variables used in asset measurement, and the recoverable amount is higher than the related carrying amount (see Note 6.2.2.g).

6.17. Financial investments

The detail of this line item in the consolidated balance sheet and of the changes therein in 2016 and 2015 is as follows:

The carrying amount of the ownership interest in the Tempe Group in the accompanying consolidated balance sheet does not differ significantly from the value of the Group’s share of the net assets of the Tempe Group (see Note 28).

There are no significant restrictions of any kind on the Tempe Group’s ability to transfer funds to the Group in the form of cash dividends or the repayment of loans or advances granted by the Group.

6.18. Other non-current assets

The detail of this line item in the consolidated balance sheet and of the changes therein in 2016 and 2015 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 the 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. Trade and other payables

The detail of this line item in the consolidated balance sheets at 31 January 2017 and 2016 is as follows:

The following table shows the information on the average period of payment to suppliers required by Law 15/2010, of 5 July:

6.20. Net financial position

6.20. Posición financiera neta

The detail of the Group’s net financial position is 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” include term deposits and units in money market investment funds that use unitholders’ contributions to acquire fixed-income securities with maturities of less than 3 months that have a high credit rating, 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 line item 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 maturities ranging from 3 to 12 months, all of which have high credit ratings and are highly liquid.

The detail of the Group’s bank borrowings and obligations under finance leases is as follows:

At 31 January 2017, the Group had a limit of Euros 4,245,710 thousand on its drawable financing facilities (Euros 3,406,509 thousand at 31 January 2016). These include reverse factoring, credit and overdraft facilities.

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 schedule of the Group’s bank borrowings at 31 January 2017 and 2016 was as follows:

6.21. Provisions

The detail of this line item in the consolidated balance sheet and of the changes therein in 2016 and 2015 is as follows:

Provision for pensions and similar obligations to personnel

Certain Group companies have undertaken to settle specific obligations to personnel. The Group has recorded a provision to cover the liability corresponding to the estimated vested portion of these obligations at 31 January 2017. The estimated average payment period for the amounts provisioned is between three and five years.

Provision for liability

The amounts shown here correspond to present obligations due to legal claims or constructive obligations arising from past events which will probably result in an outflow of resources and can be reliably estimated. At the date of preparation of these consolidated annual accounts, there were no legal proceedings whose final outcome could significantly affect the Group’s equity position.

In estimating the amounts provisioned at year-end, the Group used the following hypotheses and assumptions:

• Maximum amount of the contingency
• Foreseeable evolution and factors on which the contingency depends

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 the risks relating to litigation, arbitration and other contingencies and do not expect any liabilities additional to those recognized to arise therefrom.

6.22. Other non-current liabilities

El desglose y los movimientos de este epígrafe del balance de situación consolidado durante los ejercicios 2016 y 2015 han sido los siguientes:

6.23. Capital and reserves

Share capital

At 31 January 2017 and 2016, the Parent’s share capital amounted to Euros 93,499,560 and was divided into 3,116,652,000 fully subscribed and paid shares of Euro 0.03 par value each. 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 2017 and 2016 amounted to Euros 20,379 thousand, while retained earnings amounted to Euros 3,666,407 thousand and Euros 3,334,142 thousand, respectively. The Parent’s legal reserve, amounting to Euros 18,700 thousand, was recognized in compliance with Article 274 of the Spanish Companies Act, which establishes that 10% of profit for each year must be transferred to the legal reserve until the balance of this reserve reaches at least 20% of share capital. The legal reserve is not distributable to shareholders and if it is used to offset losses, in the event that sufficient other reserves are not available for this purpose, the reserve must be replenished with future profits. At 31 January 2017 and 2016, the Parent had appropriated to this reserve the minimum amount required by the Spanish Companies Act.

The total consolidated reserves at 31 January 2017 include restricted reserves amounting to Euros 433,344 thousand (Euros 383,151 thousand at 31 January 2016) whose distribution is limited due to domestic legal requirements (basically bylaw reserves).

INDITEX shares are listed on the four Spanish stock exchanges. As the shares are represented by book entries and the Company does not keep a record of its shareholders, it is not possible to accurately ascertain the ownership structure of the Company. According to public information registered with the Spanish National Securities Market Commission (CNMV), at 31 January 2017 and 2016 the members of the Board of Directors owned, directly or indirectly, 59.36% of the Parent’s share capital (see Note 30). At 31 January 2017 and 2016, Pontegadea Inversiones, S.L. held 50.010% of the shares of INDITEX.

Dividends

The dividends paid by the Parent in 2016 and 2015 amounted to Euros 1,868,190 thousand and Euros 1,618,839 thousand, respectively. These amounts correspond to payments of euro 0.60 per share in 2016 and euro 0.52 per share in 2015.

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 the 2013-2017 Long-Term Share-Based Incentive Plan (see Note 27) and authorized the Board of Directors to derivatively acquire treasury shares to cater for this plan. Similarly, the annual general shareholders’ meeting held on 19 July 2016 approved the 2016-2020 Long-Term Incentive Plan (see Note 27) and authorized the Board of Directors to derivatively acquire treasury shares to cater for this plan.

At 1 February 2016, the Company owned a total of 3,500,000 treasury shares, representing 0.112% of the share capital. In 2016, settlement of the first cycle (2013-2016) of the 2013-2017 Long-Term Share-Based Incentive Plan took place, with the corresponding shares being delivered to the beneficiaries of the aforementioned first cycle of the Plan.

Also, in order for the Company to have the shares required for delivery to the beneficiaries of the second cycle (2014-2017) of the 2013-2017 Long-Term Share-Based Incentive Plan, the Company acquired shares until it reached a total of 3,610,755, representing 0.116 % of the share capital at 31 January 2017.

6.24. Income taxes

With the exception of Industria de Diseño Textil, S.A. and Indipunt, S.L., 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 income tax returns in Spain. The consolidated tax group includes Industria de Diseño Textil, S.A., as the Parent, and the Spanish subsidiaries that meet the requirements provided for in Spanish legislation regulating the taxation of the consolidated profits of corporate groups. The subsidiaries composing the aforementioned tax group are as follows:

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

The balance of “Income tax payable” in the consolidated balance sheet corresponds to the 2016 income tax provision, net of withholdings and payments on account made during the period. “Trade and other payables” includes the liability relating to the other applicable taxes.

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

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

The income tax expense comprises the following:

The reconciliation of the income tax expense that would result from applying the standard tax rate in force in Spain to the profit before tax and the income tax expense recognized in the consolidated income statements for 2016 and 2015 is as follows:

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

As permitted by the prevailing tax legislation in each country, consolidated Group companies availed themselves of tax benefits amounting to Euros 13,528 thousand in 2016 (Euros 15,568 thousand at 31 January 2016). These tax benefits relate mainly to tax credits for investments and, to a lesser extent, to tax relief.

The temporary differences are the differences between the carrying amounts of assets or liabilities and their tax base. The consolidated balance sheet at 31 January 2017 reflects the deferred tax assets and liabilities at that date.

The detail of “Deferred tax assets” and “Deferred tax liabilities” in the accompanying consolidated balance sheet is as follows:

These balances were determined using the tax rates that, based on enacted tax laws, will be in force in the period when they are expected to reverse, and in some cases these tax rates may differ from the tax rates in force in the present year.

The expense for deferred income tax was adjusted for the difference between the balances calculated at the tax rate in force at the end of the present year and those calculated at the new tax rates at which they will reverse.

The movement in deferred tax assets and liabilities in 2016 and 2015 was as follows:

At 31 January 2017, the Group had tax losses of Euros 415,719 thousand (Euros 399,889 thousand at 31 January 2016) which may be offset against future profits. The foregoing detail of deferred tax assets includes those relating to tax loss carryforwards, with a balance of Euros 101,046 thousand at 31 January 2017. The Group, based on the methodology established for verifying the existence of indications of impairment on its non-current assets (see Note 6.2.2.g), constructs the assumptions for analyzing the existence of sufficient taxable profits in the future to make it possible to offset the tax losses before they become statute-barred. Also, the Group takes into account the reversal at the same taxable entity of deferred tax liabilities relating to the same taxation authority that might give rise to sufficient taxable amounts against which it can offset the unused tax losses. Therefore, the balance of deferred tax assets recognized in the consolidated balance sheet is the result of the aforementioned analysis of the total amount of tax losses reported by the Group at year-end which, for the most part, are not subject to any effective statute-of-limitations period.

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 associated with such a distribution to the extent that it is probable that it will occur in the foreseeable future. The deferred tax liabilities associated with investments in subsidiaries, associates and permanent establishments, which were not recognized because the Group opted to avail itself of the exception provided for in IAS 12, amounted to €21.14 million.

In addition, under the tax legislation applicable to the Parent of the Group, the dividends to the Parent’s shareholders that were proposed or declared before the annual accounts were authorized for issue but which were not recognized as liabilities do not have any income tax consequences for the Parent.

The years open for review by the tax authorities for the main applicable taxes vary depending on the tax legislation in each country in which the Group operates. Certain Group companies are currently being audited for tax purposes, including most notably those domiciled in France, Italy and Greece. In any case, the Group does not expect any liabilities that might significantly affect its equity position or results to arise as a result of the tax audits in progress or those that might be carried out in the future in relation to periods are not yet statute-barred.

Lastly, these consolidated annual accounts include the effect of the entry into force in Spain of Royal Decree-Law 3/2016, of 2 December, adopting tax measures aimed at shoring up public finances. These measures consisted of the amendment of the limits for offsetting tax losses and the introduction of the compulsory reversal of impairment losses on investments and the non-deductibility of losses arising on the transfer of investments in certain entities. The effect of these measures on the Group’s equity position and results was not significant.

6.25. Operating leases

Most of the commercial premises at which the Group carries on its retail distribution activities are leased from third parties. These leases are classified as operating leases because they do not transfer the risks and rewards incidental to ownership of the underlying assets, since:

• ownership of the asset is not transferred to the lessee by the end of the lease term;
• the lessee does not have an 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 6.2.2.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, inter alia, to the presence of the Group in various different countries, the resulting variety of legislation governing lease contracts and the diverse nature and economic status of the owners, its leases are regulated by a broad range of clauses.

In many cases the lease contracts simply establish a fixed lease payment, normally made on a monthly basis and adjusted for inflation based on a price index. In other cases the amounts payable to the lessor are determined as a percentage of the sales obtained by the Group in the leased premises. These variable lease payments or contingent rent may have guaranteed minimum amounts or certain specific calculation rules attached. In some countries lease contracts are subject to periodic market rent reviews, and this is sometimes conducted on an upward-only basis (i.e. rent is reset upward to higher, but not downward to lower, market rates). Occasionally, escalating rental payments are agreed, which means cash outflows can be reduced during the initial years of the use of commercial premises, even though the expense is recognized on a straight-line basis (see Note 6.2.2.q). Rent-free periods are also frequently established in order to avoid having to pay rent when stores are being refurbished and prepared for opening.

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

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 on a straight-line basis over the lease term.

There is also a wide variety of different lease terms, and leases generally have an initial term of between 15 and 25 years. However, as a result of legislation in certain countries or the purposes for which lease contracts are habitually entered into, in some cases the term of the lease is shorter.

In some countries, legislation or the lease contracts themselves safeguard the ability of the lessee to terminate the lease at any time during its term, provided that it gives the owner prior notice, as previously agreed (e.g. three months’ notice), of its decision to do so. In other cases, however, the Group is obliged to see out the full term of the lease contract, or at least a significant portion thereof. Some contracts combine these obligations with get-out clauses that may only be exercised at certain times during the term of the contract (e.g. every five years or at the end of the tenth year).

The detail of the operating lease expense is as follows:

The breakdown of the future minimum lease payments under non-cancellable operating leases is as follows:

6.26. Financial risk management policy and financial instruments

Financial risk management policy

The Group’s activities are exposed to various financial risks: market risk (foreign currency risk and interest rate risk) and other risks (credit risk, liquidity risk and country risk). The Group’s financial risk management focuses on the uncertainty of financial markets and aims to minimize the potential adverse effects on the profitability of its business.

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, any changes from the previous year and the financial instruments used to mitigate the risks.

Foreign currency risk

The Group operates in an international environment and, accordingly, is exposed to foreign currency risk on transactions in currencies, in particular the US dollar (the Euro is the Group’s reference currency and the functional currency of the Parent) and, to a lesser extent, the Mexican peso, the Russian rouble, the Chinese yuan, 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 the corporate risk management model guidelines, which establish the ongoing monitoring of exchange rate fluctuations and other measures designed to mitigate this risk, mainly through the optimization of the Group’s operations in order to minimize the impact, using natural hedges, the benefits of diversification and the arrangement of financial hedges.

Merchandise and goods for resale are acquired partly through orders placed with foreign suppliers, mostly in US dollars. In accordance with prevailing foreign currency risk management policies, Group management arranges derivatives, mainly foreign currency forwards, to hedge fluctuations in cash flows relating to the EUR/USD exchange rate. The Group also uses non-derivative financial instruments as hedges (e.g. deposits held in currencies other than the euro), and these instruments are recognized under “Current financial investments”.

The Group’s head companies supply their subsidiaries with finished goods for sale to the end customers. With a view to reducing the fluctuations in value of the expected foreign currency cash flows arising from these intercompany transactions (denominated in currencies other than the euro), the Group uses financial derivatives such as zero-premium option combinations and, occasionally, foreign currency forwards and plain vanilla options.

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

As described in Note 6.2.2.o, the Group applies hedge accounting to mitigate the volatility that would arise in the consolidated income statement as a result of the existence of significant foreign currency transactions. Hedge accounting has been used because the Group meets the requirements described in Note 6.2.2.o on accounting policies in order to be able to classify financial instruments as hedges for accounting purposes.

The Group applies the hedge accounting rules established in the applicable accounting standards. As a result, certain financial instruments were formally designated as hedging instruments and the Group verified that the hedges are highly effective. The maturity dates of the hedging instruments were negotiated so that they coincide with those of the hedged items. In 2016, using hedge accounting, no significant amounts were recognized in profit or loss either as a result of transactions that ultimately 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 occur in the six months subsequent to year-end, while the remaining 40% are expected to fall due between six months and one year. Also, the impact on the consolidated income statement will foreseeably occur in those periods. The derivatives hedging the cash flows from intercompany transactions to supply finished goods for sale to end customers have short-term time horizons aligned with the expected cash flows.

The fair value of the hedging instruments was calculated as described in Note 6.2.2.o.

The Group uses the cash-flow-at-risk (CFaR) methodology to estimate the potential loss in the Group’s consolidated profit before tax and financial results arising from the effect of changes in exchange rates on the equivalent value of expected foreign currency cash flows in the following year. CFaR is calculated using probabilistic simulation and considering volatilities and correlations based on market series for the last three years. It is necessary to bear in mind the limitation that actual market changes and the magnitude and time horizon of the exposures may differ from the assumptions considered for the CFaR calculation. The potential negative impact is calculated with a confidence level of 95%. The impacts for each of the currencies are aggregated, considering their correlations, in a portfolio of exposures, which reduces the value of the total risk. It is estimated that the resulting negative impact on the 12-month expected cash flows, attributable to an adverse change in the exchange rate, could be €267 million at 31 January 2017 (€137 million at 31 January 2016).

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 represent the vast majority of revenue. Collections are made primarily in cash or through credit card payments.

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

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

In addition to taking into account the credit ratings issued by the three main rating agencies, the Group considers the solvency, liquidity, asset quality and managerial prudence of the banks, as well as the performance potential of the bank in stressed conditions and standard probability of default models.

Based on the aforementioned counterparty risk considerations, the Group assigns a rating that determines the maximum permissible exposure to a given bank. A rigorous analysis of the counterparty does not completely eliminate credit risk and, therefore, these limits seek to guarantee a broad diversification of the banks used by the Group. This principle of diversification is also applied to the jurisdiction in which assets are held and the range of financial products used for investing purposes. In the specific case of short-term money market funds, the credit analysis and diversification principles are satisfied by the requisite fulfilment by the investment vehicle of domestic and regulatory requirements.

The credit risk resulting from the arrangement of financial derivatives is mitigated by the requirement that such instruments be subject to an ISDA master agreement. Occasionally, where deemed necessary, the Group requests that additional security be provided in the form of pledged collateral.

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 cash flows, discounted at the effective interest rate. The amount of the impairment loss is recognized in the consolidated income statement. In 2016 there were no significant additions to or reversals of impairment losses in this connection.

At 31 January 2017 and 2016, there were no material outstanding balances. 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 does not differ from their carrying amount.

The main financial assets of the Group are shown in the “Financial instruments: other information” section below.

Liquidity risk

The Group is not exposed to significant liquidity risk, as it maintains sufficient cash and cash equivalents to meet the outflows required in its normal operations. If the Group has a specific financing requirement, either in euros or in other currencies, it resorts to loans, credit facilities or other types of financial instruments (see Note 20).

Note 20 contains a detail of the financial liabilities, along with their scheduled maturities.

Interest rate risk

The Group’s exposure to interest rate risk, which is no case is significant, arises principally in relation to the following items:

• Cash and cash equivalents: given the Group’s investment policy (see Note 20), any changes in interest rates at year-end would not significantly affect consolidated profits.
• Financial debt: given the amount of the Group’s external financing (see Note 20), any change in interest rates at year-end would not significantly affect consolidated profits.
• Discount rates: used in the calculation of the impairment losses on non-current assets (property, plant and equipment and intangible assets), goodwill and intangible assets with an indefinite useful life (see Note 6.2.2.g).
• Derivatives: given the type of hedging instruments arranged, the interest rate risk is not material.

The Group does not have any material financial assets or liabilities designated as at fair value through profit or loss.

Country risk

The international presence of the Group’s business activities exposes it to the country risk of multiple geographical regions, in both its supply and its sales and distribution activities. The Group adapts its administrative and business processes in order to minimize country risk and take advantage of the benefits of geographical diversification.

The outcome of the referendum held on 23 June 2016 on the United Kingdom’s continued membership of the European Union was an unexpected shock that brought added uncertainty to the markets. Nevertheless, its impact on the Group in 2016 was not significant. The depreciation of the pound sterling as a result of the Brexit vote did not trigger a material increase in foreign currency risk, in view of the behavior of the Group’s currency exposure portfolio due to its high level of diversification and the foreign currency risk management policy in place.

One of the most significant manifestations of country risk is foreign currency risk and the possibility of exposure to limits or controls on the free circulation of cash flows due to a lack of currency convertibility, in current or capital account terms, or to unexpected restrictions on the movement of capital. The Group manages cash at corporate level based on a highly active repatriation policy aimed at reducing the aforementioned risks to a minimum.

At 31 January 2017, there was no significant risk in relation to the repatriation of funds or any material cash surpluses not available for use by the Group or its subsidiaries. Similarly, there are no significant restrictions on the Group’s ability to access the assets and settle the liabilities of its subsidiaries.

At 31 January 2017, the Group did not operate in markets in which there was more than one exchange rate.

Capital management

The Group’s capital management objectives are to safeguard its ability to continue operating as a going concern, so that it can continue to generate returns for shareholders and benefit other stakeholders, and to 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. The current capital management policy is based on self-financing through funds generated by operations. The shareholder remuneration policy is detailed in Note 29.

There were no significant changes to capital management in the year.

Financial instruments

At 31 January 2017 and 2016, the Group had arranged hedging derivatives consisting basically of forwards on its future purchases in US dollars, forwards to hedge intra-Group financing, and options. 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 6.2.2.o) of the hedging instruments for 2016 and 2015 is as follows:

2016
Other financial assets at fair value and classification on a fair value hierarchy

Other financial liabilities at fair value and classification on a fair value hierarchy

2015
Other financial assets at fair value and classification on a fair value hierarchy

Other financial liabilities at fair value and classification on a fair value hierarchy

There were no transfers among the various levels of the fair value hierarchy (see Note 6.2.2.o).

Financial instruments: other information

The main financial assets held by the Group, other than cash and cash equivalents and derivative financial instruments, are the loans and receivables related to the Group’s principal activity and the guarantees given 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 main financial liabilities of the Group relate to accounts payable 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 will be made in a short time frame. In 2016 no significant impairment losses were recognized on financial assets.

6.27. Employee benefits

Defined benefit or defined contribution plan obligations

As a general rule, the Group does not have any defined benefit or defined contribution plan obligations to its employees. However, in certain countries, in line with prevailing labor legislation or customary local employment practice, the Group assumes certain obligations relating to the payment of specified 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. The 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 incentive plans

2013-2017 Long-Term Share-Based Incentive Plan

The annual general shareholders’ meeting held on 16 July 2013 resolved to launch the 2013-2017 Long-Term Share-Based Incentive Plan (the “2013-2017 Plan”) for members of the management team and other personnel of Inditex and of its corporate Group. Under the 2013-2017 Plan, each of the beneficiaries will be entitled, provided the terms and conditions established therein are fulfilled, to receive a number of shares up to the maximum number allocated to each of them.

The 2013-2017 Plan consists of two mutually independent time cycles. The first cycle of the 2013-2017 Plan ran from 1 July 2013 to 30 June 2016 (now ended). The second cycle of the Plan is from 1 July 2014 to 30 June 2017.

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

The 2013-2017 Plan does not expose the Group to any material risks.

To cater for this 2013-2017 Long-Term Share-Based Incentive 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 to be delivered to beneficiaries is calculated on the basis of the metrics indicated in the fifth resolution of the annual general shareholders’ meeting held on 16 July 2013.

2016-2020 Long-Term Incentive Plan

The annual general shareholders’ meeting held on 19 July 2016 approved the 2016-2020 Long-Term Incentive Plan (the “2016-2020 Plan”) for members of the management team and other personnel of Inditex and of its corporate Group. Under this Plan, each of the beneficiaries will be entitled, provided the terms and conditions established therein are fulfilled, to receive up to a maximum amount of the incentive allocated.

The 2016-2020 Plan combines a multi-year cash bonus and a restricted stock unit award which, after a specified period of time has elapsed and the achievement of specific targets has been verified, will be paid to the plan beneficiaries, either in full or at the percentage applicable in each case.

The 2016-2020 Plan has a total duration of four years and is structured into two mutually independent time cycles. The first cycle of the 2016-2020 Plan is from 1 February 2016 to 31 January 2019. The second cycle spans the period from 1 February 2017 to 31 January 2020.

The 2016-2020 Plan is linked to critical business targets and the creation of shareholder value.

The 2016-2020 Plan does not expose the Group to any material risks.

The liability relating to the cash-settled component of the 2016-2020 Plan is recognized under “Provisions” in the consolidated balance sheet and the related period provision is reflected under “Operating expenses” in the consolidated income statement. The impact of these obligations on the consolidated income statement and the consolidated balance sheet is not material.

The amount relating to the equity-settled component of the 2016-2020 Plan is recognized under “Equity” in the consolidated balance sheet and the related period charge is reflected under “Operating expenses” in the consolidated income statement. The impact of these obligations on the consolidated income statement and the consolidated balance sheet is not material.

To cater for this 2016-2020 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 incentive to be received will be calculated as provided for in the seventh resolution of the annual general shareholders’ meeting held on 19 July 2016.

Extraordinary profit-sharing plan

In view of the Group’s performance in recent years, the Board of Directors of Inditex approved an extraordinary plan for 2015-2016 to allow employees to share in the growth of profits. The plan is intended for all the employees of the stores, manufacturing and logistics centers, and concepts and subsidiaries around the world with a length of service of more than two years at the Group. Among all those participating in the plan, the Group will distribute 10% of the year-on-year increase in net profit attributable to the Parent of the Group, up to a maximum of 2% of total net profit. In 2016 more than 84,000 employees worldwide were plan beneficiaries (2015: more than 78,000 employees).

The plan has a two-year duration, covering the 2015 and 2016 reporting periods. The first phase of the plan was executed in April 2016 taking into account the increase in the net profit attributable to the Parent of the Group in 2015 as compared with 2014. The second phase will be executed in 2017, in accordance with the criteria described in Note 6.2.2.

The liability relating to this plan is recognized under “Trade and other payables” in the consolidated balance sheet and the related period charge is reflected under “Operating expenses” and “Other losses and income, net” in the consolidated income statement. The impact of these obligations on the consolidated income statement and the consolidated balance sheet is not material.

6.28. Jointly controlled entities

Inditex has a 50% stake in the group formed by the parent Tempe, S.A. and its subsidiaries, the detail of which is shown in the following table. The core activity of these companies is basically the design, supply and distribution of footwear for the various retail formats of the Inditex Group, which is their main customer.

Set forth below is the financial information of the Tempe Group (expressed in thousands of euros), obtained from its consolidated annual accounts prepared in accordance with IFRSs, together with other relevant financial information:

In 2016 the Group received dividends totalling Euros 27,493 thousand (Euros 22,414 thousand in 2015) from Tempe (see Note 17).

6.29. Proposed distribution of the profit of the Parent

The directors will propose that Euros 2,116,868 thousand of 2016 net profit of the Parent, which is the maximum amount distributable, be distributed as an ordinary dividend of Euro 0.50 gross per share and an extraordinary dividend of Euro 0.18 gross per share on the total outstanding shares, and that Euros 98,857 thousand be taken to voluntary reserves.

6.30. Remuneration of the Board of Directors and related party transactions

Remuneration of the Board of Directors

The remuneration earned by the Board of Directors and senior management of the Company in 2016 is shown in the section on related party transactions.

Other information concerning the Board of Directors

According to the public registers of the Spanish National Securities Market Commission (CNMV), at 31 January 2017 the members of the Board of Directors held the following direct and indirect investments in the share capital of Inditex:

¹ Throuhg Pontegadea Inversiones, SL and Partler 2006, S.L.

As established in Article 229 of the Spanish Companies Act, amended by Law 31/2014, of 3 December, reforming that Act in order to improve corporate governance, it is hereby disclosed that the directors did not report any situation of direct or indirect conflict of interest that they or persons related to them might have with the Parent. Two of the directors each notified the Board of Directors of a potential conflict of interest, of which the Board took due note. These conflicts of interest did not materialise in 2016. At the date of formal preparation of the consolidated annual accounts, the two concerned directors had reported that the potential conflicts of interest no longer existed.

When the Board of Directors deliberated on the appointment or re-election of a director, on the acknowledgment and acceptance of his/her resignation, on the placement of his/her office at the disposal of the Board, on remuneration or on any other resolution involving a director or a person or company related to a director, the person concerned left the meeting room during the deliberation of and voting on the corresponding resolution.

Related party transactions

Related parties are the subsidiaries, jointly controlled entities and associates detailed in Appendix I to the notes to the consolidated annual accounts, the significant or controlling shareholders, the members of the Board of Directors of Inditex and senior management of the Inditex Group, as well as their close family members, 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 listed 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

The transactions between Inditex and its subsidiaries, which form part of the normal course of business in terms of their purpose and terms and conditions, were eliminated in full on consolidation and, therefore, they are not disclosed in this note.

The following tables detail the transactions and the outstanding balances between Inditex and its jointly controlled entities in the consolidated balance sheet:

Transactions:

Balances:

The transactions with significant shareholders, members of the Board of Directors and management are detailed below.

Significant shareholders

In 2016 the transactions performed by the Inditex Group with Pontegadea Inversiones, S.L., Partler 2006, S.L. or with persons or companies related to them, or with Rosp Corunna Participaciones Empresariales, S.L.U. or with persons or companies related to it were as follows:

In 2015 the transactions performed by the Inditex Group with Pontegadea Inversiones, S.L., Gartler, S.L., Partler 2006, S.L. or with persons or companies related to them, or with Rosp Corunna Participaciones Empresariales, S.L.U. or with persons or companies related to it were as follows:

Several group companies have leased commercial premises belonging to companies related to the controlling shareholder or to significant shareholders.

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 2016:

An itemized breakdown of the remuneration of the members of the Board of Directors in 2016 is as follows:

Notes:
(1) Represented by Ms Flora Pérez Marcote.
(2) Cessation of employment af 18 July 2016.
(3) Appointment at 19 July 2016.
(4) Appointment as Audit and Control Comitee at 19 July 2016.

An itemized breakdown of the remuneration of the members of the Board of Directors in 2015 is as follows:

Notes:
(1) Represented by Ms Flora Pérez Marcote. Cessation of employment at 8 December 2015.
(1) Represented by Ms Flora Pérez Marcote. Appointment at 9 December 2015.
(3) Cessation of employment at 13 July 2015.
(4) Appointment at 14 July 2015.

The total remuneration and termination benefits earned by senior management of the Inditex Group in 2016 were as follows:

The total remuneration and termination benefits earned by senior management of the Inditex Group in 2015 were as follows:

The aforementioned remuneration for 2016 includes the amount vested in 2016 of the first cycle (2013-2016) of the 2013-2017 Plan for members of the management team and other personnel of the Inditex Group, which was approved by Inditex in 2013 (the features of which are described in Note 27). The incentive vested in 2016 under the aforementioned plan amounted to Euros 3,395 thousand for directors and Euros 7,638 thousand for senior management. The amounts vested in 2015 under the Long-Term Cash-Settled Incentive Plan were Euros 5,520 thousand for directors and Euros 14,444 thousand for senior management and were paid in the first half of the 2016 reporting period.

In 2016 and 2015 no contributions were made to the defined contribution benefit plan.

6.31. External auditors

In 2016 and 2015 the fees for financial audit and other services provided by the auditor of the Company’s annual accounts, or by any firms related to this auditor as a result of a relationship of control, common ownership or common management, were as follows:

The figures in the table above include the fees for services rendered in 2016 and 2015, irrespective of the date they were invoiced.

In addition to the audit of the Inditex Group annual accounts, the audit services rendered by Deloitte in 2016 and 2015 include certain audit work related to the external audit.

According to information received from the auditors, the fees received from the Inditex Group by the principal auditor and the other firms belonging to the international network (and their associated firms) did not exceed 0.0204% of their total revenue.

The fees for financial audit services provided by auditors other than the principal auditor amounted to Euros 58 thousand in 2016.

6.32. 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.

6.33. Events after the reporting period

At the date of formal 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.

6.34. 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 in Spain (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.