EDF / 2018 Reference document

FINANCIAL STATEMENTS Notes to the consolidated financial statements

for obligated actors, if there is a shortfall in the stocks of capacity ■ certificates, a provision is recorded equivalent to the best estimate of the expense necessary to extinguish the obligation; at the closing date, if the realisable value of the stock of capacity ■ certificates is lower than its net book value, impairment is recognised. British system: The British capacity mechanism is based on a system of ■ auctions for operators, organised by the network operator 4 years prior to delivery. Capacity operators which have acquired certificates are remunerated in the year of delivery out of a fund consisting of contributions from electricity suppliers. The electricity suppliers’ contribution to this mechanism is proportional to their sales to customers in the peak period and the cost of capacity is passed on to final customers through their sale price. EDF Energy is concerned by both aspects of this system, as an operator of electricity plants and a supplier. For accounting purposes, the remuneration received in its capacity as an operator is recognised in sales revenues in the year of delivery and the contribution paid to the mechanism in its capacity as an electricity supplier is recognised in expenses over the peak period. The cost of the capacity mechanism passed on to final customers is recognised in sales revenues as and when the electricity is delivered. On 15 November 2018, the UK's Capacity Market was suspended after a ruling by the European Court of Justice concluding that it did not comply with EU rules on state aid. The British government is aiming to set up a new mechanism in time for further auctions in summer 2019 for the delivery period 2019/2020. No capacity market revenues have been recognised for the suspension period of 2018. 1.3.8 Income taxes include the current tax expense (income) and the deferred tax expense (income), calculated under the tax legislation in force in the countries where earnings are taxable. In compliance with IAS 12, current and deferred taxes are generally recorded in the income statement or in equity symmetrically to the underlying operation. Under IAS 32, income taxes on distributions to holders of equity instruments (notably dividends and the remuneration paid to holders of perpetual subordinated bonds) must be recognised in accordance with IAS 12. The Group considers that these distributions are paid out of previous years’ accumulated profits and as a result the associated tax effects are included in the net income for the period. The current tax expense (income) is the estimated amount of tax due on the taxable income for the period, calculated using the tax rates adopted at the year-end. Deferred taxes result from temporary differences between the book value of assets and liabilities and their tax basis. No deferred taxes are recognised for temporary differences generated by: goodwill which is not tax deductible; ■ the initial recognition of an asset or liability in a transaction which is not a ■ business combination and does not affect the accounting profit or taxable profit (tax loss) at the transaction date; investments in subsidiaries and associates, investments in branches and interests ■ in joint arrangements, when the Group controls the timing of reversal of the temporary differences, and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are valued at the expected tax rate for the period in which the asset will be realised or the liability extinguished, based on tax rates adopted at the year-end. If the tax rate changes, deferred taxes are adjusted to the new rate and the adjustment is recorded in the income statement, unless it relates to an underlying for which changes in value are recorded in equity, for example in accounting for actuarial gains and losses or fair value on hedging instruments and debt or equity securities. Income taxes

In accordance with the provisions of IFRS 15 on the principal/agent distinction, energy delivery services are recognised in sales in the following cases: either when these services are not distinct from the energy supply service; ■ or when they are distinct from the energy supply service and the entity concerned ■ is acting as a principal, notably because it bears the risk of execution of the service or is able to set the tariff for delivery to the final customer. Energy trading operations and optimisation transactions carried out by certain group entities under its risk management policy are recognised net of purchases. The sales revenue from other services or deliveries of goods is recognised over time in the three following cases, based on a contractual analysis: when the customer simultaneously receives and consumes all the benefits ■ generated as the service is performed by the Group (this is notably the case of operations and maintenance services); when the good or service to be supplied cannot be reallocated to another ■ customer, and the Group is entitled to payment for the work done so far (this is notably the case of certain design, delivery and commissioning activities for power plants or major components designed specifically for a customer); when the service creates or enhances an asset (good or service) for which the ■ customer acquires control as performance of the service progresses. Capacity mechanism 1.3.7.1 Capacity mechanisms have been set up in France and the UK to ensure secure power supplies during peak periods. French system: French law 2010-1488 of 7 December 2010 on the new ■ organisation of the electricity market introduced an obligation in France to contribute to power supply security from January 2017. Operators of electricity generation facilities and load-shedding operators must have their capacities certified by RTE, and commit to a forecast level of availability for a given year of delivery. In return, they are awarded capacity certificates. Meanwhile, electricity suppliers and purchasers of power to compensate for networks losses (obligated actors) must have capacity certificates equivalent to consumption by their customers in peak periods. Suppliers pass on the cost of the capacity mechanism to final customers through their sale prices. The system is completed by registers for capacity trading between actors. Capacity auctions are held several times a year. The Group is concerned by both aspects of this system, both as an operator of electricity plants (EDF SA, Dalkia, EDF Renewables (formerly EDF Énergies Nouvelles)) and as an electricity supplier (EDF SA, Électricité de Strasbourg) and a purchaser of power to compensate for networks losses (Enedis and Électricité de Strasbourg). The operations are recorded as follows: sales of certificates are recognised in income when the auctions or ■ over-the-counter sales take place; the cost of the capacity mechanism passed on to final customers through ■ regulated sales tariffs and market-price offers is recognised in sales revenues as and when the electricity is delivered. However, the ARENH price has included a capacity value since 1 January 2017 when the capacity mechanism took effect, as the terms of transfer for the capacity guarantees associated with the ARENH system were defined by the CRE; stocks of certificates are stated either at their certification value (i.e. cost of ■ certification by RTE) or at their purchase value on the markets; decreases in the stock of certificates are valued at the weighted average ■ unit cost. The timing of recognition depends on the actor: operators of installations: when the auction sales take place, ■ obligated actors: spread on a straight-line basis over the 5-month peak ■ period;

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EDF I Reference Document 2018