Hermès - Registration Document 2016

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CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.6 First-time consolidation and goodwill

1.3.2 Conversion of foreign companies’ financial statements Financial statements expressed in foreign currencies are converted in accordance with the following principles: s statement of financial position items are converted at the year-end exchange rate for each currency; s statement of profit or loss items are converted at the average annual exchange rate for each currency; s statement of cash flows items are converted at the average annual exchange rate for each currency; s the foreign currency adjustment attributable to owners of the parent arising from the impact on equity of the difference between historical exchange rates and year-end exchange rates, and from the use of different exchange rates for the statement of profit or loss and state- ment of financial position, is shown separately in consolidated equity. The same principle is applied to non-controlling interests. Any goodwill and any fair value adjustments arising on the acquisition of a foreign entity are considered to be assets and liabilities of that foreign entity. Therefore, they are expressed in the entity’s functional currency and converted at closing rates. 1.4 Eliminations of intra-group transactions The effect on the statement of profit or loss of intra-group transactions suchasmargins on inventories, gains or losses ondisposals, impairment of shares in consolidated companies, and impairment of loans to conso- lidated companies, has been eliminated. These transactions are also subject to income tax. Dividends and interim dividends received by the Group from consoli- dated companies are eliminated on consolidation. A matching amount is recorded in consolidated reserves. In the case of companies accounted for using the full consolidation method, reciprocal payables and receivables as well as reciprocal income and expenses are fully eliminated. 1.5 Structure of the consolidated statement of financial position InaccordancewithIAS1 PresentationofFinancialStatements, theGroup classifies its assets and liabilities on its statement of financial position as current and non-current. An asset or liability is classified as current: s when theGroupplans to realise anasset or pay a liabilitywithin twelve months or within the Group’s normal operating cycle; s when the relevant asset or liability is held for the purpose of being traded. In particular, IAS 12 Income Taxes specifies that deferred tax balances shall be classified as non-current.

1.6.1 Subsidiaries Business combinations, in the event that the Group gains control over one or several other activities, are accounted for using the purchase method. Business combinations completed on or after 1 January 2010 are mea- sured and recognised in accordance with IFRS 3 revised: the conside- ration transferred (acquisition cost) is measured at the fair value of the assets delivered, the equity issued and the liabilities incurred on the date of the transfer. The identifiable assets and liabilities of the company that are acquired are measured at fair value on the acquisition date. The costs that can be directly attributed to the acquisition are recorded as an expense. The resulting valuation adjustments are recognized under the related assets and liabilities, including the share attributable to non-controlling interests, and not just the share of net assets acquired. The residual difference, which is the difference between the transferred counterparty and the share of net assets and liabilities measured at fair value, is recognised under goodwill. This valuation is carried out within no more than a year following the date of acquisition and in the currency of the acquired entity. This period is applicable to the valuation of identifiable assets and liabilities, to the transferred counterparty and to the non-controlling interests. Purchases or sales of non-controlling interests that do not lead to a change in control are recorded as equity transactions among sharehol- ders. Consequently, any difference between the fair value of the coun- terparty paid or received and the corresponding book value of the equity interest acquired or sold (without resulting in a loss of control), but that does not provide control, is directly recorded in equity. The valuation of identifiable intangible assets recognized upon first-time consolidation is basedmainly on thework of independent experts, taking into account sector-specific criteria that enable such valuations to be subsequently monitored. In accordance with IFRS 3 revised, goodwill is not amortised. Goodwill is reviewed annually, when the budget is drawn up, to ensure that the residual net value does not exceed the recoverable amount in respect of the expected return on the investment in the related subsidiary (deter- minedon thebasis of discounted future cash flows). If internal or external events or circumstances bring to light indications of lost value, the fre- quency of the impairment tests may be revised (see Note 1.8). Impairment of the goodwill of subsidiaries is not reversible. Any impair- ment charge is included in “Other incomeandexpenses” of the operating income.

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2016 REGISTRATION DOCUMENT HERMÈS INTERNATIONAL