EDF / 2018 Reference document

FINANCIAL STATEMENTS Notes to the consolidated financial statements

Hedges of a net investment These instruments hedge exposure to the foreign exchange risk related to a net investment in an entity which does not have the same functional currency as the Group. The effective portion of accumulated changes in the hedge's fair value is recorded in equity until the disposal or liquidation of the net investment, when it is included in the gain or loss on disposal. The ineffective portion (defined in the same way as for cash flow hedges) is recorded directly in the income statement. The change in fair value resulting from the foreign exchange effect and interest rate effect of derivatives hedging a net investment in a foreign operation is recorded in equity. Derecognition of financial assets and liabilities 1.3.16.4 The Group derecognises a financial asset when: the contractual rights to the cash flows generated by the asset expire; or ■ the Group transfers the rights to receive contractual cash flows related to the ■ financial asset through the transfer of substantially all of the risks and rewards associated with ownership of the asset. Any interest created or retained by the Group in transferred financial assets is recorded as a separate asset or liability. The Group derecognises a financial liability when its contractual obligations are ■ extinguished, cancelled or expire. When a debt is renegotiated with a lender on substantially different terms, a new liability is recognised. Assignment of receivables 1.3.16.5 When it can be demonstrated that the Group has transferred substantially all the risks and benefits related to assignment of receivables, particularly the credit risk, the items concerned are derecognised. Otherwise, the operation is considered as a financing operation, and the receivables remain in the balance sheet assets, with recognition of a corresponding financial liability. 1.3.17 Inventories are recognised at the lower of acquisition cost or net realisable value, except for inventories held for trading activities, which are carried at market value. Inventories consumed are generally valued by the weighted average unit cost method. Cost includes all direct material costs, labour costs, and a share of indirect production costs. Nuclear fuel and materials 1.3.17.1 Inventory accounts include: nuclear materials, whatever their form during the fuel production cycle; ■ and fuel components in the warehouse or in the reactor. ■ The stated value of nuclear fuel and materials and work-in-progress is determined based on direct processing costs including materials, labour and subcontracted services (e.g. fluoration, enrichment, production, etc.). In accordance with regulatory obligations specific to each country, inventories of fuel (new or not entirely consumed) may also comprise expenses for spent fuel management and long-term radioactive waste management, with corresponding provisions or debts in the liabilities, or full and final payments made when the fuel is loaded. In France, in application of the concept of “loaded fuel” as defined in the decision of 21 March 2007, the cost of inventories for fuel loaded in the reactors but not yet irradiated includes expenses for spent fuel management and long-term radioactive waste management. The corresponding amounts are taken into account in the relevant provisions. In compliance with IAS 23, interest expenses incurred in financing inventories of nuclear fuels are charged to expenses for the period provided these inventories are manufactured in large quantities on a repetitive basis. Nuclear fuel consumption is determined by component (natural uranium, fluoration, enrichment, fuel assembly production) as a proportion of the expected output when the fuel is loaded in the reactor. These quantities are valued at weighted average cost of inventories. Inventories are periodically corrected in view of forecast spent quantities based on neutronic measurements and physical inventories. Inventories

Measurement and recognition 1.3.16.3.2 Derivatives are initially recorded at fair value, based on quoted prices and market data available from external sources. If no quoted prices are available, the Group may refer to recent comparable transactions or if no such transactions exist base its valuation on internal models that are recognised by market participants, giving priority to information directly derived from observable data, such as over-the-counter listings. Changes in the fair value of these derivatives are recorded in the income statement, unless they are designated as hedges for a cash flow or net investment. Changes in the fair value of such hedging instruments are recorded directly in equity, excluding the ineffective portion of the hedge. In the specific case of financial instruments entered into as part of the trading business, realised and unrealised gains and losses are reported net under the heading “Sales”. In application of IFRS 13, the fair value of derivatives incorporates the counterparty credit risk for derivative assets and the own credit risk for derivative liabilities. The probabilities of default used to calculate these credit risks are based on historical data. Derivatives classified as hedges 1.3.16.3.3 The EDF group uses derivatives to hedge its foreign exchange and interest rate risks, as well as risks related to certain commodity contracts. The Group applies the criteria defined by IFRS 9 to identify operations subject to hedge accounting: the hedging relationship must only concern eligible hedging instruments and ■ hedged items; the hedging relationship must be formally designated as such and have ■ structured documentation from its inception; the hedging relationship must meet hedging efficiency requirements, particularly ■ respect of a hedging ratio. In the case of cash flow hedges, the future transaction being hedged must be highly probable. The hedging relationship ends when it ceases to satisfy the above criteria. This includes situations in which the hedging instrument expires or is sold, terminated or exercised, or when the risk management objectives initially documented are no longer met. Only derivatives external to the Group, and internal derivatives that are matched with similar transactions external to the Group, qualify for hedge accounting. The Group uses the following categories for hedges: (A) Fair value hedges These instruments hedge the exposure to changes in the fair value of an asset or liability recorded in the balance sheet, or a firm commitment to purchase or sell an asset. Changes in the fair value of the hedged item attributable to the hedged component of that item are recorded in the income statement and offset by corresponding variations in the fair value of the hedging instrument. Only the ineffective portion of the hedge has an impact on income. Some loans and financial liabilities are covered by a fair value hedge. In application of hedge accounting, their balance sheet value is adjusted for changes in fair value attributable to the hedged risks (foreign exchange and interest rate risks). (B) Cash flow hedges These instruments hedge exposure to variability in cash flows associated with an asset or liability, or a highly probable future transaction, for which variations in cash flows generated by the hedged item are offset by changes in the value of the hedging instrument. The effective portion of accumulated changes in the hedge’s fair value is recorded in equity, and the ineffective portion (i.e. changes in the fair value of the hedging instrument in excess of changes in the fair value of the hedged item) is recorded in the income statement. When the hedged cash flows materialize, the amounts previously recognised in equity are recycled to profit and loss in the same way as for the hedged item, or are treated as an adjustment to the value of the asset acquired.

6.

333

EDF I Reference Document 2018