3. Principles of consolidation
- 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
3.1. Consolidation scope
The consolidated financial statements incorporate the financial statements of the Company, and:
- entities controlled by the Company (including through its subsidiaries) and that hence qualify as subsidiaries (see 3.1.2. below);
- arrangements over which the Company (including through its subsidiaries) exercises joint control, and that qualify as joint operations (see 3.1.3. below);
- arrangements over which the Company (including through its subsidiaries) exercises joint control, and that qualify as joint ventures (see 3.1.4. below);
- entities over which the Company (including through its subsidiaries) has significant influence and that hence qualify as associates (see 3.1.4. below).
Where necessary, adjustments are made to the financial statements of the investees so as to align their accounting policies with those of the Group.
In accordance with the principle of materiality, certain companies which are not of significant size have not been included in the consolidation scope. Companies are deemed not to be significant when, during two consecutive years, they do not exceed any of the three following thresholds in terms of their contribution to the Group’s accounts:
- sales of € 30 million;
- total assets of € 15 million;
- headcount of 150 persons.
Companies that do not meet these criteria are, nevertheless, consolidated where the Group believes that they have a potential for rapid development, or where they hold shares in other companies that are consolidated based on the above criteria.
In the aggregate, the non-consolidated companies have an immaterial impact on the consolidated financial statements of the Group.
The full list of companies is filed with the National Bank of Belgium as an attachment to the Annual Report, and can be obtained from the Company head office.
3.1.2. Investments in subsidiaries
A subsidiary is an entity over which the Group has control. Control is achieved when the Group has (a) power over an investee, (b) exposure, or rights, to variable returns from its involvement with the investee, and (c) the ability to use its power over the investee to affect the amount of the investor’s returns. To assess whether the Group has control, potential voting rights are taken into account. Subsidiaries are fully consolidated. The results of subsidiaries are included in the consolidated income statement from the effective date of acquisition and up to the effective date of disposal.
Intra-group transactions, balances, income, and expenses are eliminated on consolidation.
Non-controlling interests in subsidiaries are presented separately from the Group’s equity. Non-controlling interests are initially measured, either at fair value (full goodwill method), or at the non-controlling interests’ proportionate share in the recognized amounts of the acquiree’s identifiable net assets (proportionate goodwill method). The choice of measurement is made on an acquisition-by-acquisition basis. Subsequent to the acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interests’ share of subsequent changes in equity. Total comprehensive income is attributed to non-controlling interests even if this results in the non-controlling interests having a deficit balance.
Changes in the Group’s equity interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. The carrying amounts of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiary. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity.
When the Group loses control of a subsidiary, the profit or loss on disposal is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest, and (ii) the previous carrying amount of the assets (including goodwill) and liabilities of the subsidiary and any non-controlling interests. Amounts previously recognized in other comprehensive income in relation to the subsidiary are accounted for (i.e. reclassified to profit or loss or transferred directly to retained earnings) in the same manner as would be required if the relevant assets or liabilities were disposed of. The fair value of any investment retained in the former subsidiary at the date when control is lost is considered to be the fair value on initial recognition for subsequent accounting in accordance with IAS 39 Financial Instruments: Recognition and Measurement or, when applicable, the cost on initial recognition of an investment in an associate or joint venture in accordance with IAS 28 Investments in Associates and Joint Ventures.
3.1.3. Investments in joint operations
A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about relevant activities require the unanimous consent of the parties sharing control. In its consolidated financial statements, the Group recognizes its share of the joint operations’ assets, liabilities, revenue, and expenses, based on its ownership interest in the joint operations.
3.1.4. Investments in associates and joint ventures
An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint arrangement. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.
A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about relevant activities require the unanimous consent of the parties sharing control.
The results, assets, and liabilities of associates and joint ventures are incorporated in the consolidated financial statements using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Under the equity method, on initial recognition, investments in associates and joint ventures are recognized in the consolidated statement of financial position at cost, and the carrying amount is adjusted for post-acquisition changes in the Group’s share of the net assets of the associate or joint venture, less any impairment of the value of individual investments. Losses of an associate or joint venture in excess of the Group’s interest in that associate or joint venture (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate or joint venture) are recognized only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture.
Any excess of the cost of acquisition over the Group’s share of the net fair value of the identifiable assets and (contingent) liabilities of the associate or joint venture recognized at the date of acquisition is goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of that investment.
Where a Group entity transacts with an associate or joint venture of the Group, profits and losses are eliminated to the extent of the Group’s interest in the relevant associate or joint venture.
3.1.5. Main changes in consolidation scope in prior year
On July 1, 2015, Solvay sold its chlorovinyls activities to the INOVYN joint venture (50% Solvay, 50% INEOS) (see note F8 Discontinued operations).
On December 9, 2015, Solvay acquired 100% of the shares of Cytec Industries Inc. (see note F22 Goodwill and business combinations).
The main impacts of this acquisition have been finalized within the measurement period (i.e. the 12 months following December 9, 2015) and have been taken into account in the consolidated statement of financial position as of December 31, 2016:
- The Cytec opening balance sheet has been fully consolidated within the Solvay Group as from December 31, 2015 and is based on the following:
- the consideration for Cytec (€ 5,047 million);
- the identifiable assets acquired and liabilities assumed after remeasurement to fair value at acquisition date (€ 2,472 million); and
- the final goodwill (€ 2,575 million versus provisional goodwill of € 2,598 million disclosed at year end 2015) corresponding to the difference between consideration and net assets acquired, measured at fair value.
- Cytec’s results and cash flows for the period between December 9 and December 31, 2015 were not material, except for acquisition-related expenses presented as results from portfolio management and reassessments. Consequently, Cytec did not contribute to the Group’s IFRS net income or cash flows in 2015.
- The acquisition was funded through a capital increase and perpetual hybrid bonds issuance (see note F18 Proceeds from bond issuance classified as equity and capital increase) and debt issuance (see note F33 Net indebtedness).
- In order to provide a reference frame for the results going forward, on March 17, 2016 Solvay published unaudited pro forma consolidated income statement and main cash flow metrics for the year 2015. The figures represent a situation as if the acquisition had taken place on January 1, 2015 – see 2015 Financial Management Report.