L'Oréal - 2018 Registration Document

2018 Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Other intangible assets 7.2.

ACCOUNTING PRINCIPLES Intangible assets are recorded on the balance sheet at cost. Intangible assets identified following an acquisition as well as internally generated intangible assets are also included in this item. Intangible assets acquired through business a) combinations They mainly consist of trademarks, customer relationships and formulas and patents. With regard to trademarks, the use of the discounted cash flow method is preferred to enable the value in use to be monitored more easily following the acquisition. Two approaches have been adopted to date: premium-based approach: this method involves s estimating the portion of future cash flows that could be generated by the trademark, compared with the future cash flows that the activity could generate without the trademark; royalty-based approach: this involves estimating the s value of the trademark by reference to the levels of royalties demanded for the use of similar trademarks based on sales forecasts drawn up by the Group. These approaches are based on a qualitative analysis of the trademark in order to ensure that the assumptions selected are relevant. The discount rate used is based on the weighted average cost of capital (WACC) for the target acquired. Terminal growth rates are consistent with available market data (generally 2.5% for Europe and 3% for the rest of the world, except in specific cases). A trademark may have a finite or an indefinite useful life span. Local trademarks which are to be gradually replaced by an international trademark already existing within the Group have a finite useful life span. They are amortised over their useful lives as estimated at the date of acquisition.

International trademarks are trademarks which have an indefinite life span. They are tested for impairment at least once a year during the fourth quarter, and whenever an adverse event occurs. Adverse events may result among other things from an increase in market interest rates or from a decrease in actual sales or operational profit compared to forecasts. The impairment test consists of calculating the recoverable amount of the trademark based on the model adopted when the acquisition took place. Customer relationships refer to relations developed with customers either through contractual arrangements or by non-contractual means through constant revenue streams resulting from the target’s competitive position or reputation in its market. The useful life of a customer relationship is limited and varies depending on the estimated attrition rate of existing customers at the time of the acquisition. The Group may decide to identify and value patents and formulas that it intends to develop. The value of a patent or a formula is assessed on the basis of the future profits expected from its ownership in the future, in accordance with the royalty-based approach. The amortisation period applicable to patents corresponds to the period during which they enjoy legal protection. Formulas, which are not protected by legal means, are

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amortised over a maximum period of 5 years. Internally generated intangible assets b) These mainly consist of software.

The development costs of software for internal use are capitalised for the programming, coding and testing phases. The costs of substantial updates and upgrades resulting in additional functions are also capitalised. Capitalised development costs are amortised from the date the software is made available in the entity concerned and over its probable useful life, which, in most cases, is between 5 and 8 years.

REGISTRATION DOCUMENT / L'ORÉAL 2018

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