SCH2017_DRF_EN_Livre.indb

5 Consolidated financial statements at December 31, 2017 Notes to the consolidated financial statements

Accounting Policies

NOTE 1

1.1 – Accounting standards The consolidated financial statements have been prepared in compliance with the international accounting standards (IFRS) as adopted by the European Union as of December 31, 2017. The same accounting methods were used as for the consolidated financial statements for the year ended December 31, 2016, except for the partial early adoption of the new standard IFRS 9 – Financial instruments . The following standards and interpretations that were applicable during the period did not have a material impact on the consolidated financial statements as of December 31, 2017: E amendments to IAS 7 – Statement of Cash Flows – Disclosure initiative; E amendments to IAS 12 – Recognition of Deferred Tax Assets for Unrealized Losses. The Group did not apply the following standards and interpretations for which mandatory application is subsequent to December 31, 2017: E standards adopted by the European Union: E amendments to IFRS 4: Apply IFRS 9 Financial instruments with IFRS 4 Insurance contracts, E IFRS 16 – Leases, E IFRS 15 – Clarifications, E IFRS 15 – Revenue from Contracts with Customers; E standards not yet adopted by the European Union: E IFRS 17 – Insurance Contracts, E annual Improvements to IFRSs 2014-2016 Cycle (December 2016), E amendments to IAS 40 – Transfers of Investment Property, E IFRIC 23 – Uncertainty over Income Tax Treatments, E IFRIC 22 – Foreign Currency Transactions and Advance Consideration, E amendments to IFRS 2 – Share-based payment – Classification and Measurement, E amendments to IFRS 9 – Prepayment Features with Negative Compensation, E amendments to IAS 28 – Long-term Interests in Associates and Joint Ventures, E annual Improvements to IFRSs 2015-2017 Cycle (December 2017), E amendments to IFRS 10 and IAS 28 – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture. There are no differences in practice between the standards applied by Schneider Electric as of December 31, 2017 and the IFRS issued by the International Accounting Standards Board (IASB). The Group is currently assessing the potential effect on the Group’s consolidated financial statements of the standards not yet applicable (see below). Early application of IFRS 9 – Financial Instruments IFRS 9, “Financial Instruments”, released by the IASB in July 2014 and adopted by the European Union on November 29, 2016, replaces IAS 39 “Financial Instruments: Recognition and Measurement” with

mandatory application from January 1 st , 2018. The new standard introduces new principles for classification and measurement of financial instruments, impairment for credit risk on financial assets, and hedge accounting. The new standard is comprised of several phases (see below). Phase 1 and 2 have been applied retrospectively as of January 1 st , 2017. The 2016 comparative figures have not been restated as permitted by the IFRS 9 standard. Phase 1 - Classification and measurement of financial assets and liabilities The impact of IFRS 9 for the Group is mainly related to the removal of the category financial assets available for sale, which allowed under IAS 39 to record instruments at fair value through “Other Comprehensive Income” with recycling in income statement upon sale. Under IFRS 9, all financial instruments whose cash-flows do not represent solely payment of principal and interests (SPPI), shall be recorded at fair value through income statement. However, IFRS 9 allows an irrevocable option to be made at inception to record equity instruments at fair value through “Other Comprehensive Income” with no subsequent recycling in income statement even upon sale (only dividends are recorded in income statement). The following financial assets are impacted by the removal of the available for sale category: E Portfolio of equity investments: the Group elected to record those investments at fair value through “Other Comprehensive Income” with no subsequent recycling in income statement. E Venture capital (FCPR) / Mutual funds (SICAV): the only accounting treatment allowed by IFRS 9 is to record them at fair value through income statement. The application of this phase had no significant impact on the Group financial statements (note 1.12 and note 15). Phase 2 - Impairment of financial assets IFRS 9 introduces a prospective model based on expected losses ( i.e. the probability that the counterparty will default in a given time horizon) to be applied on financial assets, whereas the previous IAS 39 model required recognition of a provision only when a loss has incurred (non-payment or late payments). The risk analysis and assessment carried out by the Group on the financial assets (especially trade receivables, notes receivables, and loans) has demonstrated that it would be more accurate and appropriate to use IFRS 9 expected losses model rather than IAS 39 incurred losses model. Therefore, the Group has decided to early apply IFRS 9 in 2017. The credit risk of trade receivables was assessed on a collective basis country by country, as the geographical origin of receivables is considered representative of their risk profile. Countries were classified by risk profile using the assessment provided by an external agency. The provision for expected credit losses was evaluated using (i) the probabilities of default communicated by a credit agency, (ii) historical default rates, (iii) ageing balance, (iv) as well as the Group’s assessment of the credit risk taking into account guarantees and credit insurance. For the loans, the IFRS 9 provision has been determined on a case by case basis. The resulting additional bad debt allowance impact on the balance sheet is EUR100 million net of deferred tax (recorded against the opening equity).

2017 REGISTRATION DOCUMENT SCHNEIDER ELECTRIC

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