SCH2017_DRF_EN_Livre.indb

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

1.6 – Business combinations Business combinations are accounted for using the acquisition method, in accordance with IFRS 3 – Business Combinations . Material acquisition costs are presented under “Other operating income and expenses” in the statement of income. All acquired assets, liabilities and contingent liabilities of the buyer are recognized at their fair value at the acquisition date, the fair value can be adjusted during a measurement period that can last for up to 12 months from the date of acquisition. The excess of the cost of acquisition over the Group’s share in the fair value of assets and liabilities at the date of acquisition is recognized in goodwill. Where the cost of acquisition is lower than the fair value of the identified assets and liabilities acquired, the negative goodwill is immediately recognized in the statement of income. Goodwill is not amortized, but tested for impairment at least annually and whenever there is an indication that it may be impaired (see note 1.11 below). Any impairment losses are recognized under “Amortization and impairment of purchase accounting intangibles”. 1.7 – Translation of the financial statements of foreign subsidiaries The consolidated financial statements are prepared in euros. The financial statements of subsidiaries that use another functional currency are translated into euros as follows: E assets and liabilities are translated at the official closing rates; E income statement and cash flow items are translated at average annual exchange rates. Gains or losses on translation are recorded in consolidated equity under “Cumulative translation reserve”. 1.8 – Foreign currency transactions Foreign currency transactions are recorded using the official exchange rate in effect at the date the transaction is recorded or the hedging rate. At the balance sheet date, foreign currency payables and receivables are translated into the functional currency at the closing rates or the hedging rate. Gains or losses on translation of foreign currency transactions are recorded under “Net financial income/ (loss)”. Foreign currency hedging is described below, in note 1.23.

Intangible assets are generally amortized on a straight-line basis over their useful life or, alternatively, over the period of legal protection. Amortized intangible assets are tested for impairment when there is any indication that their recoverable amount may be less than their carrying amount. Amortization and impairment losses on intangible assets acquired in a business combination are presented on a separate statement of income line item, “Amortization and impairment of purchase accounting intangibles”. Trademarks Trademarks acquired as part of a business combination are not amortized when they are considered to have an indefinite life. The criteria used to determine whether or not such trademarks have indefinite lives and, as the case may be, their lifespan, are as follows: E brand awareness; E outlook for the brand in light of the Group’s strategy for integrating the trademark into its existing portfolio. Non-amortized trademarks are tested for impairment at least annually and whenever there is an indication they may be impaired. When necessary, an impairment loss is recorded. Internally-generated intangible assets Research and development costs Research costs are expensed in the statement of income when incurred. Since 2004, the Group implemented the necessary systems for the follow up and capitalisation of development costs. Consequently, only projects related to products launches after 2004 are capitalised. Development costs for new projects are capitalized if, and only if: E the project is clearly identified and the related costs are separately identified and reliably monitored; E the project’s technical feasibility has been demonstrated and the Group has the intention and financial resources to complete the project and to use or sell the resulting products; E the Group has allocated the necessary technical, financial and other resources to complete the development; E it is probable that the future economic benefits attributable to the project will flow to the Group. Development costs that do not meet these criteria are expensed in the financial year in which they are incurred. Capitalized development projects are amortized over the lifespan of the underlying technology, which generally ranges from three to ten years, from the date of the commercial launch. The amortization of such capitalized projects is included in the cost of the related products and classified into “Cost of sales” when the products are sold.

1.9 – Intangible assets Intangible assets acquired separately or as part of a business combination

Intangible assets acquired separately are initially recognized in the balance sheet at historical cost. They are subsequently measured using the cost model, in accordance with IAS 38 – Intangible Assets. Intangible assets (mainly trademarks and customer lists) acquired as part of business combinations are recognized in the balance sheet at fair value at the combination date, appraised externally for the most significant assets and internally for the rest, and that represents its historical cost in consolidation. The valuations are performed using generally accepted methods, based on future inflows. The assets are regularly tested for impairment.

2017 REGISTRATION DOCUMENT SCHNEIDER ELECTRIC

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