1. Basis of preparation
- 1 1. Basis of preparation
- 2 2. Basis of measurement and presentation
- 3 3. Principles of consolidation
- 4 4. Foreign currencies
- 5 5. CO2 emission rights
- 6 6. Government grants
This information was prepared in accordance with European Regulation (EC) 1606/2002 on the application of international accounting standards dated July 19, 2002. The Group’s consolidated financial statements for the year ended December 31, 2016 were prepared in accordance with IFRS (International Financial Reporting Standards) as published by the International Accounting Standards Board (IASB), and endorsed by the European Union.
The accounting standards applied in the consolidated financial statements for the year ended December 31, 2016 are consistent with those used to prepare the consolidated financial statements for the year ended December 31, 2015.
Standards, interpretations, and amendments applicable for the first time in 2016
No new standards, interpretations, or amendments that have a material impact on the Group’s consolidated financial statements have become applicable for the first time in 2016.
Standards, interpretations, and amendments applicable for the first time in 2017
No new standards, interpretations, or amendments that are expected to have a material impact on the Group’s consolidated financial statements are applicable for the first time in 2017.
For annual periods beginning on or after January 1, 2017, in accordance with the amendments to IAS 7 Statement of Cash Flows that are part of the IASB’s Disclosure Initiative, the Group will provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes.
Standards, interpretations, and amendments applicable for the first time after 2017
IFRS 15 Revenue from Contracts with Customers (applicable for annual periods beginning on or after January 1, 2018). IFRS 15 was issued in May 2014 and establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The new revenue standard will supersede all current revenue recognition requirements under IFRS. The Group plans to adopt the new standard on the required effective date. During 2016, the Group performed a preliminary assessment of IFRS 15, which is subject to changes arising from a more detailed ongoing analysis. Furthermore, the Group is considering the clarifications issued by the IASB in April 2016 and will monitor any further developments.
- Sale of goods: As the Group is in the business of selling chemicals, contracts with customers generally concern the sale of goods. The Group expects the revenue recognition to occur at a point in time when control of the chemicals is transferred to the customer, generally on delivery of the goods. In preparing for IFRS 15, the Group is considering the following:
- Distinct elements: The revenue of the Group consists mainly of sales of chemicals, which qualify as separate performance obligations. Value-added services – mainly customer assistance services – corresponding to Solvay’s know-how are rendered predominantly over the period that the corresponding goods are sold to the customer. Ancillary services, such as training, are not material. Based on preliminary results, the Group does not expect a more than insignificant adjustment to its current practice.
- Variable consideration: Some contracts with customers provide trade discounts or volume rebates. Currently, the Group recognizes revenue from the sale of goods measured at the fair value of the consideration received or receivable, net of returns and allowances, trade discounts, and volume rebates. If revenue cannot be measured reliably, the Group defers revenue recognition until the uncertainty is resolved. Such provisions give rise to variable consideration under IFRS 15, and will be required to be estimated at contract inception. IFRS 15 requires the estimated variable consideration to be constrained, to prevent over-recognition of revenue. The Group is assessing individual contracts to determine the estimated variable consideration and related constraints. Based on preliminary results, the Group does not expect a more than insignificant adjustment to its current practice.
- Moment of recognition of revenue: The Group sells its chemicals to its customers, (a) directly, (b) through distributors, and (c) with the assistance of agents. The Group is analyzing whether the moment control of the goods passes, as described in IFRS 15, would result in a different moment to recognize the revenue. Based on preliminary results, the Group does not expect a more than insignificant adjustment to its current practice.
- Presentation and disclosure requirements: IFRS 15 provides presentation and disclosure requirements, which are more detailed than under current IFRSs. The presentation requirements represent a change from current practice and increase the volume of disclosures required in the Group’s financial statements. Many of the disclosure requirements in IFRS 15 are new. The Group is analyzing those disclosure requirements, including the need for policies, procedures, and internal controls to collect and disclose the required information.
During 2017, the Group will decide which of the transitional methods and practical expedients it will retain.
IFRS 9 Financial Instruments (applicable for annual periods beginning on or after January 1, 2018). IFRS 9 brings together all three aspects of the accounting for the financial instruments project: classification and measurement, impairment, and hedge accounting. Except for hedge accounting, retrospective application is required, but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions. The Group plans to adopt the new standard as from January 1, 2018. During 2016, the Group performed a high-level impact assessment of all three aspects of IFRS 9. The assessment is subject to changes arising from a more detailed analysis during 2017.
- Classification and measurement: The Group does not expect a significant impact on its consolidated statement of financial position or equity on applying the classification and measurement requirements of IFRS 9. It expects to continue measuring at fair value all financial assets currently held at fair value. The available for sale financial assets reserve currently presented as accumulated OCI will be opening balance of retained earnings. The equity shares in non-listed companies, currently presented as available for sale, are intended to be held for the foreseeable future. The Group expects to apply the option to present fair value changes in OCI, and therefore believes the application of IFRS 9 would not have a significant impact. In this case, the fair value gains or losses accumulated in the other comprehensive income will no longer be subsequently reclassified to profit or loss, which is different from the current treatment. This would affect the consolidated statement of comprehensive income, yet it would not have an impact on the Group’s comprehensive income for the year. If the Group were not to apply that option, the shares would be held at fair value through profit or loss, which would increase the volatility of recognized profit or loss. Loans and trade receivables are held to collect contractual cash flows and are expected to give rise to cash flows representing solely payments of principal and interest. Thus, the Group expects that these will continue to be measured at amortized cost under IFRS 9. However, the Group will analyze the contractual cash flow characteristics of those instruments in more detail before concluding whether all those instruments meet the criteria for amortized cost measurement under IFRS 9.
- Impairment: IFRS 9 requires the Group to recognize expected credit losses on all of its debt securities, loans, and trade receivables, either on a 12-month basis or a lifetime basis. The Group expects to apply the simplified approach and recognize lifetime expected losses on all trade receivables. The Group does not expect a significant impact on its equity following the unsecured nature of its loans and receivables, but it will perform a more detailed analysis during 2017 that considers all reasonable and supportable information, including forward-looking elements to determine the extent of the impact.
- Hedge accounting: The Group believes that all existing hedge relationships that are currently designated in effective hedging relationships will still qualify for hedge accounting under IFRS 9. As IFRS 9 does not change the general principles of how an entity accounts for effective hedges, the Group does not expect a significant impact as a result of applying IFRS 9. The Group will assess in greater detail in the future any possible changes related to the accounting for the time value of options, forward points, or the currency basis spread.
IFRS 16 Leases (applicable for annual periods beginning on or after January 1, 2019, not yet endorsed by the EU). The impact of the application of this standard is currently being assessed. We expect an impact mainly for leases currently classified as operating leases and for which Solvay is the lessee. In this respect, we refer to note F24 Leases for more information on existing operating leases.
Other standards, interpretation, and amendments applicable for the first time after 2017 are not expected to have a material impact on the Group’s consolidated financial statements.