HERMÈS - 2018 Registration document

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Consolidated financial statements Notes to the consolidated financial statements

E.

Financial derivatives

F. Cash and cash equivalents Cash and cash equivalents consist of immediately available cash and short-term investments that can be divested within a maximum of three months at the investment date, with minimal risk of any change in value. Thus, investments in listed shares, investments for a term of over three months that are not redeemable before the maturity date and bank accountscoveredbyrestrictions(frozenaccounts)otherthanrestrictions due to country- or sector-specific regulations (e.g. currency controls) are excluded from cash in the statement of cash flows. Bank overdrafts that are deemed to be financing arrangements are also excluded from the cash position. Shares in funds held for the short term and classified as “Cash equiva- lents” are recorded at fair value, with changes in fair value recorded in the statement of profit or loss. 1.9.2 Impairment of financial assets Non-recyclable financial assets at fair value through equity are not sub- ject to impairment, in accordance with IFRS 9. Financial assets valued at amortised cost or at fair value through recy- clable equity, as well as trade receivables,are impaired using an impair- ment model based on expected losses. The Group applies the provisions of IFRS 9 relating to the simplifiedmodel of the original provision over the maturity of the instrument. Credit risk is assessed upon recognition in the statement of financial position at each closing date taking into account reasonable and justi- fiable information available as well as the insurance policy coverage put in place by the Group for the “Wholesale” activity. Due to the nature of the financial assets concerned, the Group deter- mines that the rate of impairment on the receivables is a reasonable approximation of the rate of expected loss. Changes in impairments losses are recognised according to the category of the asset. A. Financial assets recorded at amortised cost Any impairment loss is included in the statement of profit or loss under “Otherfinancial incomeandexpenses”.Ifthe impairment lossdecreases in a subsequent period, it is reversed and recorded as income. B. Financial assets at fair value through non-recyclable equity For these instruments, the gains or losses recorded for expected losses are recognised in the statement of profit or loss. 1.10 Inventories Inventories and work-in-progress held by Group companies are valued at the lower of cost (including indirect production costs) or net realisable value. Cost is generally calculated at weighted average cost or standard cost adjusted for variances, according to each category of inventory.

Scope The Group defines the scope of financial derivatives in accordance with theprovisionsandprinciples introducedby IFRS9 Financial Instruments . In this respect, the Group analyses all its contracts, focusing on both financial and non-financial liabilities, to identify the existence of any “embedded” derivatives. Any component of a contract that affects the cash flows of agiven contract in the sameway as a stand-alonederivative corresponds to the definition of an embedded derivative. If they meet the conditions set out by IFRS 9, embedded derivatives are accounted for separately from the “host” contract at the inception date. According to Group rules, consolidated subsidiaries may not take any Changes in the fair value of these derivatives are recorded in the state- ment of profit or loss, unless they are classified as cash flow hedges, as described below. In this latter case, the effective portion of the changes in fair value of derivative instruments is recognised directly in other comprehensive income in the item “Revaluation adjustments”. These changes in fair value include the portion linked to forward points of forward currency agreements as well as the time value (premium) of currency options qualified as cash flow hedges. The ineffective portion of the changes in the fair value corresponds to the excess of changes in fair value of the hedging instrument compared with the changes in fair value of the hedged item. Whenthehedgedcashflowmaterialise,theamountspreviouslyrecorded in equity flows in the statement of profit and loss symmetrically with the flows of the hedged element, in the statement of operating profit and loss for the effective portion and in the statement of financial profit and loss for the forward points and the time value in the item “Other financial income and expenses”. Financial derivatives classified as hedges The Group uses derivatives to hedge its foreign exchange risks. Hedge accounting is applicablewhen the following conditions are met: 1) the hedge transaction must be supported by appropriate documen- tation of the hedging relationship from the time of its implementation; 2) an economic relationship exists between the hedged element and the hedging instrument; 3) the constraints of effectiveness of the hedging relationship are met: the hedging ratio does not show any imbalance between the hedged element and the hedging instrument generating an ineffective hedge. speculative financial positions. Recognition and Measurement Financial derivatives are initially recorded at fair value.

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2018 REGISTRATION DOCUMENT HERMÈS INTERNATIONAL