Accounting policy

General

Financial assets include available-for-sale securities, loans and receivables, and derivative financial instruments. All financial assets are recognized and derecognized on trade date where the purchase or sale of a financial asset is under a contract whose terms require delivery of the financial asset within the time frame established by the market concerned, and are initially measured at fair value plus transaction costs, except for financial assets classified as at fair value through profit or loss, which are initially measured at fair value.

A financial asset is classified as current when the cash flows expected to flow from the instrument mature within one year.

At initial recognition, Solvay classifies financial assets into one of the four categories provided in IAS 39 Financial Instruments: Recognition and Measurement. This classification determines the method for measuring financial assets at subsequent reporting dates: amortized cost or fair value.

Amortized cost is the amount at which the financial asset is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount, minus any reduction for impairment or uncollectibility. The effective interest method is a method of calculating the amortized cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs, and other premiums or discounts) through the expected life of the debt instrument or, when appropriate, a shorter period, to the net carrying amount on initial recognition.

Income is recognized on an effective interest basis for debt instruments other than those financial assets classified as at fair value through profit or loss.

For instruments quoted in an active market, the fair value corresponds to a market price (level 1). For instruments that are not quoted in an active market, the fair value is determined using valuation techniques including reference to recent arm’s length market transactions or transactions involving instruments which are substantially the same (level 2), or discounted cash flow analysis including, to the greatest possible extent, assumptions consistent with observable market data (level 3). However, if the fair value of an equity instrument that does not have a quoted price in an active market cannot be reliably estimated, it is measured at cost.

Financial assets at fair value through profit or loss

Financial assets are measured at fair value with any resulting gains or losses recognized in profit or loss if they are held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also classified as held for trading. In this case, resulting gains and losses are recognized in profit or loss unless they are designated and effective as hedging instruments in a cash flow hedge.

Available-for-sale financial assets

Available-for-sale financial assets include equity investments in entities, which were not acquired principally for the purpose of selling in the short term, and which are not subsidiaries, joint operations, joint ventures, or associates. Assets classified in this category are measured at fair value, with any resulting gains or losses recognized in other comprehensive income. If there is objective evidence that the asset is impaired, any cumulative loss that had been recognized in other comprehensive income is reclassified from equity to profit or loss.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments which are not quoted in an active market. The Group’s loans and receivables category comprises cash and cash equivalents, trade receivables, and other non-current receivables except for pension fund surpluses. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, have maturities of three months or less from the date of acquisition, and are subject to insignificant risk of change in value. Loans and receivables are measured at amortized cost using the effective interest method, less any impairment.

Impairment of financial assets

The impairment loss of a financial asset measured at amortized cost equals the difference between the carrying amount and the estimated future cash flows, discounted at the initial effective interest rate. The impairment of an available-for-sale financial asset is calculated with reference to its current fair value.

An impairment test is performed, on an individual basis, for each material financial asset. Other assets are tested as groups of financial assets with similar credit risk characteristics.

Impairment losses are recognized in the consolidated income statement.

The impairment loss is reversed if the reversal can be objectively related to an event occurring after the impairment was recognized. For financial assets measured at amortized cost, the reversal is recognized in profit or loss. After reversal, the carrying amount of the financial asset measured at amortized cost shall not exceed what the amortized cost would have been, had the impairment not been recognized. Impairment losses with respect to an equity instrument classified as available for sale are not reversed through profit or loss. Impairment losses with respect to debt instruments classified as available for sale are reversed through profit or loss to the extent of the impairment loss previously recognized in profit or loss. Impairment losses relating to assets measured at cost cannot be reversed.

Financial liabilities are classified as either “financial liabilities at fair value through profit or loss” or “financial liabilities measured at amortized cost”.

Financial liabilities at fair value through profit or loss

Financial liabilities are measured at fair value with any resulting gains or losses recognized in profit or loss if they are held for trading. A financial liability is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also classified as held for trading. In this case, resulting gains and losses are recognized in profit or loss unless they are designated and effective as hedging instruments in a cash flow hedge.

Financial liabilities measured at amortized cost using the effective interest method

Financial liabilities measured at amortized cost, including borrowings, are initially measured at fair value, net of transaction costs. They are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on an effective yield basis.

The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.

The Group’s financial liabilities measured at amortized cost comprise long-term financial debt, other current and non-current liabilities, short-term financial debt, trade liabilities and dividends payable.

Derivative financial instruments

Derivative financial instruments are financial instruments with all three of the following characteristics:

  • their value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, etc.;
  • they require no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and
  • they are settled at a future date.

The Group enters into a variety of derivative financial instruments (forward, future, option, and swap contracts) to manage its exposure to interest rate risk, foreign exchange rate risk, and commodity risk (mainly energy and CO2 emission rights price risks).

Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognized in income or expense, unless the derivative is designated and effective as a hedging instrument. The Group designates certain derivatives as hedging instruments of the exposure to variability in cash flows with respect to a recognized asset or liability or a highly probable forecast transaction (cash flow hedges).

A derivative with a positive fair value is recognized as a financial asset whereas a derivative with a negative fair value is recognized as a financial liability. Derivative instruments (or portions of them) are presented as non-current assets or non-current liabilities if the remaining maturity of the underlying settlements is more than twelve months after the reporting period. Other derivative instruments (or portions of them) are presented as current assets or current liabilities.

Hedge accounting

The Group designates certain derivatives and embedded derivatives, in respect of foreign currency risk, interest rate risk, energy price risk, and CO2 emission rights price risk, as hedging instruments in a cash flow hedge relationship.

At the inception of the hedge relationship, the entity documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking the hedge transaction. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument is highly effective in offsetting changes in cash flows of the hedged item.

Cash flow hedges

The effective portion of changes in the fair value of hedging instruments that are designated in a cash flow hedge is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in profit or loss.

Amounts previously recognized in other comprehensive income are reclassified to profit or loss in the periods when the hedged item is recognized in profit or loss, in the same line of the consolidated income statement as the recognized hedged item. When the hedged forecast transaction results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously recognized in other comprehensive income are transferred from other comprehensive income and included in the initial measurement of the cost of the non-financial asset or non-financial liability.

Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. Any gain or loss accumulated in other comprehensive income at that time remains in other comprehensive income and will affect profit or loss as described in the paragraph above. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in other comprehensive income is recognized immediately in profit or loss as a reclassification adjustment. If all or a portion of a loss recognized in other comprehensive income will not be recovered in one or more future periods, the amount that is not expected to be recovered is immediately reclassified into profit or loss.

The following table presents the financial instruments by category, split into current and non-current assets and liabilities.

In € million

 

 

 

2016

 

2015

 

Classification

 

Carrying amount

 

Carrying amount

Non-current assets - Financial instruments

 

 

 

343

 

452

Available for sale financial assets

 

Available-for-sale

 

44

 

34

Loans and other non-current assets (except pension fund surpluses)

 

 

 

299

 

418

INOVYN derivative financial instrument

 

Held for trading

 

0

 

244

Others

 

Loans and Receivables

 

299

 

174

Current assets - Financial instruments

 

 

 

2,878

 

3,846

Trade receivables

 

Loans and Receivables

 

1,621

 

1,615

Other financial instrument receivables

 

 

 

101

 

111

Other marketable securities > 3 months

 

Loans and Receivables

 

32

 

21

Currency swaps

 

Held for trading

 

12

 

49

Other current financial asset

 

Loans and Receivables

 

57

 

40

Financial instruments - Operational

 

 

 

188

 

90

Held for trading

 

Held for trading

 

160

 

76

Derivative financial instruments designated in a cash flow hedge relationship

 

Cash flow hedges

 

28

 

14

Cash and cash equivalents

 

Loans and Receivables

 

969

 

2,030

Total assets - Financial Instruments

 

 

 

3,221

 

4,298

 

 

 

 

 

 

 

Non-current liabilities - Financial instruments

 

 

 

4,301

 

5,911

Financial debts

 

 

 

4,087

 

5,628

Subordinated loans and bonds

 

Financial liabilities measured at amortized cost

 

3,837

 

5,337

Other non current debts

 

Financial liabilities measured at amortized cost

 

200

 

240

Long-term finance lease obligations

 

Financial lease liabilities measured at amortized cost

 

50

 

51

Other liabilities

 

Financial liabilities measured at amortized cost

 

214

 

282

Current liabilities - Financial instruments

 

 

 

3,221

 

2,729

Financial debts

 

 

 

1,338

 

891

Short-term financial debt (excluding finance lease obligations)

 

Financial liabilities measured at amortized cost

 

1,277

 

885

Currency swaps

 

Held for trading

 

59

 

4

Short-term finance lease obligations

 

Financial liabilities measured at amortized cost

 

2

 

2

Trade payables

 

 

 

1,547

 

1,559

Financial instruments - Operational

 

 

 

195

 

135

Held for trading

 

Held for trading

 

160

 

90

Derivative financial instruments designated in a cash flow hedge relationship

 

Cash flow hedges

 

35

 

45

Dividends payable

 

 

 

139

 

144

Total liabilities - Financial Instruments

 

 

 

7,522

 

8,640

F32.A. Overview of financial instruments

The following table gives an overview of the carrying amount of all financial instruments by class and by category as defined by IAS 39 Financial Instruments: Recognition and Measurement.

In € million

 

2016

 

2015

 

Carrying amount

 

Carrying amount

Fair value through profit or loss

 

 

 

 

Held for trading

 

172

 

369

Derivative financial instruments designated in a cash flow hedge relationship

 

28

 

14

Loans and receivables (including cash and cash equivalents, trade receivables, loans and other current/non-current assets except pension fund surpluses)

 

2,977

 

3,881

Available for sale financial assets

 

44

 

34

Total financial assets

 

3,221

 

4,298

 

 

 

 

 

Fair value through profit or loss

 

 

 

 

Held for trading

 

(220)

 

(90)

Derivative financial instruments designated in a cash flow hedge relationship

 

(35)

 

(45)

Financial liabilities measured at amortized cost (including long-term financial debt, other non-current liabilities, short-term financial debt and trade liabilities)

 

(7,075)

 

(8,308)

Dividends payable

 

(139)

 

(144)

Finance lease obligations measured at amortized cost

 

(52)

 

(53)

Total financial liabilities

 

(7,521)

 

(8,640)

The category “Held for trading” contains only derivative financial instruments that are used for management of foreign currency risk, interest rate risk, energy and CO2 emission rights price risks, and Solvay share price risk, but which are not documented as hedging instruments. In 2015, they also include the Inovyn derivative financial instrument (see detail in section F32.B). Available-for-sale financial assets pertain to Solvay’s New Business Development (NBD) activity: the Group has built a Corporate Venturing portfolio which is made up of direct investments in start-up companies and of investments in venture capital funds. The available-for-sale financial assets are measured at fair value according to the valuation guidelines published by the European Private Equity and Venture Capital Association.

F32.B. Fair value of financial instruments

Valuation techniques and assumptions used for measuring fair value

Accounting policy

Quoted market prices are available for financial assets and financial liabilities with standard terms and conditions that are traded on active markets. The fair values of derivative financial instruments are equal to their quoted prices, if available. If such quoted prices are not available, the fair value of the financial instruments is determined based on a discounted cash flow analysis using the applicable yield curve derived from quoted interest rates matching maturities of the contracts for non-optional derivatives. Optional derivatives are measured at fair value based on option pricing models, taking into account the present value of probability-weighted expected future payoffs, using market reference formulas.

Solvay’s right to an additional, performance-based payment following its exit from Inovyn qualified as a derivative financial instrument. Its fair value amounted to € 244 million at December 31, 2015 and was largely based on level 3 inputs, namely REBITDA multiples, comparing the expected exit price with the fair value of Solvay’s 50% equity share held in Inovyn.

The fair values of other financial assets and financial liabilities (other than those described above) are determined in accordance with generally accepted pricing models based on discounted cash flow analysis.

Fair value of financial instruments measured at amortized cost

In € million

 

2016

 

2015

 

Fair value level

 

Carrying amount

 

Fair value

 

Carrying amount

 

Fair value

 

Non-current assets - Financial instruments

 

299

 

299

 

174

 

174

 

 

Loans and other non-current assets (except pension fund surpluses)

 

299

 

299

 

174

 

174

 

2

Non-current liabilities - Financial instruments

 

(4,301)

 

(4,504)

 

(5,911)

 

(6,005)

 

 

Subordinated loans and bonds

 

(3,837)

 

(4,040)

 

(5,337)

 

(5,431)

 

1

Other non current debts

 

(200)

 

(200)

 

(240)

 

(240)

 

2

Other liabilities

 

(214)

 

(214)

 

(282)

 

(282)

 

2

Long-term finance lease obligations

 

(50)

 

(50)

 

(51)

 

(51)

 

2

The carrying amounts of current financial assets and liabilities are estimated to reasonably approximate their fair values, such in light of short terms to maturity.

Financial instruments measured at fair value in the consolidated statement of financial position

The table “Financial instruments measured at fair value in the consolidated statement of financial position” provides an analysis of financial instruments that, subsequent to their initial recognition, are measured at fair value, grouped in Levels 1 to 3 based on the degree to which the fair value is observable. Financial instruments classified as held for trading and as hedging instruments in cash flow hedges are generally grouped in Levels 1 and 2. They are measured at fair value based on forward pricing and swap models using present value calculations. The models incorporate various inputs including foreign exchange spot and interests rates of the respective currencies, currency basis spreads between the respective currencies, interest rate curves, and forward rate curves of the underlying commodity. The available-for-sale financial assets fall within Level 3 and are measured based on a discounted cash flow approach.

In accordance with the Group internal rules, the responsibility for measuring the fair value level resides with (a) the Treasury department for the non-energy derivative financial instruments, and the financial liabilities, (b) Energy Services business unit for the energy derivative financial instruments and (c) the Finance department for non-derivative financial assets.

Financial instruments measured at fair value in the consolidated statement of financial position

In € million

 

2016

 

Level 1

 

Level 2

 

Level 3

 

Total

Held for trading

 

59

 

112

 

2

 

172

Foreign currency risk

 

 

 

14

 

 

 

14

Energy risk

 

51

 

94

 

2

 

147

CO2 risk

 

8

 

1

 

 

 

9

Solvay share price

 

 

 

2

 

 

 

2

Cash flow hedges

 

1

 

26

 

 

 

28

Foreign currency risk

 

 

 

11

 

 

 

11

Energy risk

 

 

 

9

 

 

 

9

CO2 risk

 

1

 

 

 

 

 

1

Solvay share price

 

 

 

6

 

 

 

6

Available for sale financial assets

 

 

 

 

 

44

 

44

New Business Development

 

 

 

 

 

44

 

44

Total (assets)

 

61

 

138

 

46

 

244

Held for trading

 

(49)

 

(169)

 

(1)

 

(220)

Foreign currency risk

 

 

 

(61)

 

 

 

(61)

Energy risk

 

(47)

 

(100)

 

(1)

 

(148)

CO2 risk

 

(3)

 

(7)

 

0

 

(10)

Cash flow hedges

 

(4)

 

(31)

 

 

 

(35)

Foreign currency risk

 

 

 

(26)

 

 

 

(26)

Interest rate risk

 

 

 

(1)

 

 

 

(1)

Energy risk

 

 

 

(3)

 

 

 

(3)

CO2 risk

 

(4)

 

 

 

 

 

(4)

Solvay share price

 

 

 

(1)

 

 

 

(1)

Total (liabilities)

 

(54)

 

(200)

 

(1)

 

(255)

In € million

 

2015

 

Level 1

 

Level 2

 

Level 3

 

Total

Held for trading

 

2

 

123

 

244

 

369

Foreign currency risk

 

 

 

49

 

 

 

49

Energy risk

 

 

 

55

 

 

 

55

CO2 risk

 

2

 

19

 

0

 

22

INOVYN derivative financial instrument

 

 

 

 

 

244

 

244

Cash flow hedges

 

6

 

8

 

 

 

14

Foreign currency risk

 

 

 

8

 

 

 

8

Energy risk

 

 

 

1

 

 

 

1

CO2 risk

 

6

 

 

 

 

 

6

Available for sale financial assets

 

 

 

 

 

34

 

34

New Business Development

 

 

 

 

 

34

 

34

Total (assets)

 

8

 

131

 

278

 

417

Held for trading

 

 

 

(90)

 

0

 

(90)

Foreign currency risk

 

 

 

(12)

 

 

 

(12)

Energy risk

 

 

 

(46)

 

 

 

(46)

CO2 risk

 

 

 

(28)

 

0

 

(28)

Solvay share price

 

 

 

(4)

 

 

 

(4)

Cash flow hedges

 

0

 

(45)

 

 

 

(45)

Foreign currency risk

 

 

 

(23)

 

 

 

(23)

Interest rate risk

 

 

 

(1)

 

 

 

(1)

Energy risk

 

 

 

(16)

 

 

 

(16)

Solvay share price

 

 

 

(5)

 

 

 

(5)

Total (liabilities)

 

0

 

(135)

 

0

 

(135)

Movements during the period

Reconciliation of level 3 fair value measurements of financial assets and liabilities

In € million

 

2016

 

At fair value through profit or loss

 

Available-for-sale

 

Total

 

Derivatives

 

Shares

 

Opening balance at 1 January

 

244

 

34

 

277

Total gains or losses

 

 

 

 

 

 

Recognized in the income statement

 

1

 

 

 

1

Recognized in other comprehensive income

 

 

 

10

 

10

Acquisitions

 

 

 

6

 

6

Disposals

 

(244)

 

(6)

 

(250)

Closing balance at 31 December

 

1

 

44

 

45

In € million

 

2015

 

At fair value through profit or loss

 

Available-for-sale

 

Total

 

Derivatives

 

Shares

 

Opening balance at 1 January

 

(1)

 

43

 

43

Total gains or losses

 

 

 

 

 

 

Recognized in the income statement

 

0

 

(9)

 

(9)

Recognized in other comprehensive income

 

 

 

3

 

3

Acquisitions

 

244

 

4

 

248

Disposals

 

 

 

(8)

 

(8)

Closing balance at 31 December

 

244

 

34

 

277

Income and expenses of financial instruments recognized in the consolidated income statement and in other comprehensive income

In € million

 

2016

 

2015

Recognized in the income statement

 

 

 

 

Recycling from OCI of derivative financial instruments designated in cash flow hedge relationship

 

 

 

 

Foreign currency risk

 

(27)

 

(112)

Energy risk

 

(3)

 

(19)

CO2 risk

 

(3)

 

(3)

Changes in the fair value of financial instruments held for trading

 

 

 

 

Energy risk

 

(6)

 

(2)

CO2 risk

 

(6)

 

4

Recognized in the gross margin

 

(45)

 

(132)

Changes in the fair value of financial instruments held for trading

 

 

 

 

Solvay share price

 

5

 

(4)

Ineffective portion of gains and losses on derivative financial instruments designated in cash flow hedge relationship

 

 

 

 

Foreign currency risk

 

4

 

7

Foreign operating exchange gains and losses

 

2

 

(5)

Recognized in other operating gains and losses

 

12

 

(2)

Changes in the fair value of financial instruments held for trading

 

 

 

 

Solvay share price

 

0

 

5

Ineffective portion of gains and losses on derivative financial instruments designated in cash flow hedge relationship

 

 

 

 

Foreign currency risk

 

0

 

(33)

Recognized in results from portfolio management and reassessments

 

0

 

(27)

Net interest expense

 

(175)

 

(99)

Other gains and losses on net indebtedness (excluding gains and losses on hyperinflation and other items not related to financial instruments)

 

 

 

 

Foreign currency risk

 

(2)

 

(1)

Interest element of swaps

 

(48)

 

(19)

Others

 

5

 

2

Recognized in charges on net indebtedness

 

(220)

 

(117)

Income/loss from available-for-sale financial assets

 

5

 

(8)

Total recognized in the income statement

 

(249)

 

(286)

The foreign currency expense recognized in gross margin of € 27 million is the result of the recycling of gains and losses of derivative financial instruments designated in cash flow hedge relationships. Their purpose was to offset a portion of the foreign exchange differences on sales. The main currencies hedged by the Group are US dollar, Japanese yen, Brazilian real, and Chinese renminbi.

Income and expenses on financial instruments recognized in other comprehensive income include the following:

In € million

 

2016

 

2015

Conventionally, (+) indicates an increase and (-) a reduction in equity.

Net change in the fair value of available-for-sale financial assets

 

9

 

2

Total available-for-sale financial assets

 

9

 

2

Recycling from OCI of derivative financial instruments designated in cash flow hedge relationship

 

 

 

 

Foreign currency risk

 

26

 

112

Energy risk

 

3

 

19

CO2 risk

 

3

 

3

Interest rate risk

 

0

 

0

Basis adjustments

 

 

 

 

Foreign currency risk

 

 

 

(77)

Effective portion of changes in fair value of cash flow hedge

 

 

 

 

Foreign currency risk

 

(15)

 

(15)

Energy risk

 

0

 

(19)

CO2 risk

 

8

 

(3)

Solvay share price

 

10

 

(5)

Total cash flow hedges

 

36

 

15

Total

 

45

 

17

The recycling from OCI (foreign currency risk) of € 26 million is explained above. In 2015, the amount of € (77) million represented the designated portion of the derivative financial instrument (intrinsic value) related to the acquisition of Cytec that had been reclassified to goodwill at acquisition date as a basis adjustment.

F32.C. Capital management

See the policy in respect of capital in the Corporate governance statement section of this report.

F32.D. Financial risk management

The Group is exposed to market risks from movements in foreign exchange rates, interest rates, and other market prices (energy prices, CO2 emission rights prices, and equity prices). Solvay uses derivative financial instruments to hedge clearly identified foreign exchange, interest rate, energy price, and CO2 emission rights price risks (hedging instruments). However, the required criteria to apply hedge accounting are not met in all cases.

Furthermore, the Group is exposed to liquidity risks and credit risks.

The Group does not enter into or trade financial instruments (including derivative financial instruments) for speculative purposes.

Foreign currency risks

The Group’s foreign exchange risk hedging policy is based essentially on the principles of financing its activities in local currency, systematically hedging transactional exchange risk (risk that is certain) at the time of invoicing, as well as on monitoring and hedging where appropriate exchange rate exposures generated by the Group’s activities, based on expected cash flows. See Financial risk in the Management of risks section of this report for additional information on the foreign currency risks management.

The Group undertakes transactions denominated in foreign currencies. Consequently, exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters utilizing forward foreign exchange contracts or other derivatives like currency options.

In 2015, the currency risk of the Cytec acquisition was partially hedged.

The Group’s currency risk can be split into two categories: translation and transactional risk.

Translation risk

The translation exchange risk is the risk affecting the Group’s consolidated financial statements relating to investees operating in a currency other than the EUR (the Group’s presentation currency). The main other currencies are the US dollar, Chinese renminbi, Brazilian real and Japanese yen.

Exchange rate fluctuations, particularly of the US dollar, can affect earnings. In the course of 2016 the EUR/USD exchange rate moved from 1.0887 at the start of January to 1.0538 at the end of December. In the course of 2015 the EUR/USD exchange rate moved from 1.2141 at the start of January to 1.0887 at the end of December. During 2016 and 2015, the Solvay Group did not hedge the currency risk of foreign operations.

Transactional risk

The transactional risk is the exchange risk linked to a specific transaction, such as a Group company buying or selling in a currency other than its functional currency.

To the largest extent possible, the Group manages the transactional risk on receivables and borrowings centrally; it is managed locally when centralization is not possible.

The choice of borrowing currency depends mainly on the opportunities offered by the various markets. This means that the selected currency is not necessarily that of the country in which the funds will be invested. Nonetheless, operating entities are financed essentially in their functional currencies, with this currency being obtained, where appropriate, by currency swaps against the currency held by the financing company. The cost of these currency swaps is included in the cost of borrowings. They enable the Group to limit the exchange risk both in the financial company and in the company finally using the funds.

In emerging countries it is not always possible to borrow in local currency, either because funds are not available in local financial markets, or because the financial conditions are too onerous. In such a situation the Group has to borrow in a different currency. Nevertheless, the Group considers opportunities to refinance its borrowings in emerging countries with local currency debt.

Cash flow hedge

The Group uses derivatives to hedge identified foreign exchange rate risks. It documents those as hedging instruments unless it hedges a recognized financial asset or liability when generally no cash flow hedge relationship is documented.

At the end of 2016 for future exposure, the Group had mainly hedged forecast sales (short position) in a nominal amount of US$ 680 million (€ 624 million) and JP¥ 15,545 million (€ 132 million), as well as the sale of its 58.77% stake in its Thai subsidiary Vinythai PCL of CHF 297 million (€ 276 million). Most of cash flow hedges that exist at the end of December 2016 will be settled within the next 12 months, and will mainly impact profit or loss during that period.

Held for trading

The transactional risk is managed on a day-to-day basis by either spot or forward contracts. Unless documented as hedging instruments (see above), those forward contracts are classified as held for trading.

In comparison with 2015, the trading position (mainly due to financing constraints) remains stable.

The following table details the forward exchange contracts outstanding at the end of the period:

Notional amounts net(1)

In € million

 

Notional amount(1)

 

Fair value assets

 

Fair value liabilites

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

(1)

Long/(short) positions.

Held for trading

 

(1,179)

 

(1,174)

 

14

 

49

 

(61)

 

(12)

Cash flow hedges

 

(472)

 

(683)

 

11

 

8

 

(26)

 

(23)

Total

 

(1,651)

 

(1,857)

 

25

 

57

 

(88)

 

(34)

The Group is not subject to material sensitivity to variations in exchange rates in profit or loss and equity.

Hedging aims to limit the fluctuation of the Group’s forecast gross margin. Exchange rates variations could lead to changes in the value of financial instruments and adverse changes in future cash flows from planned transactions.

Group Treasury acts to mitigate the transactional risk at Group level in order to avoid impact of foreign exchange rates fluctuations on profit or loss.

Interest rate risks

See Financial risk in the Management of risks section of this report for additional information on the interest rate risk management.

Interest rate risk is managed at Group level.

The Group is exposed to interest rate risk because entities in the Group borrow funds at both fixed and floating interest rates. Interest rate risk is managed at Group level by maintaining an appropriate mix between fixed and floating rate borrowings.

Interest rate exposure by currency is summarized below:

In € million

 

At December 31, 2016

 

At December 31, 2015

Currency

 

Fixed rate

 

Floating rate

 

Total

 

Fixed rate

 

Floating rate

 

Total

Financial debt

EUR

 

(1,857)

 

(1,006)

 

(2,863)

 

(2,539)

 

(1,461)

 

(4,000)

USD

 

(2,227)

 

(30)

 

(2,257)

 

(2,170)

 

(74)

 

(2,244)

THB

 

(34)

 

(25)

 

(59)

 

(43)

 

(61)

 

(104)

BRL

 

(70)

 

(4)

 

(75)

 

(20)

 

(4)

 

(24)

CNY

 

(104)

 

(4)

 

(109)

 

(103)

 

0

 

(103)

Other

 

(14)

 

(49)

 

(63)

 

(22)

 

(23)

 

(45)

Total

 

(4,307)

 

(1,119)

 

(5,426)

 

(4,897)

 

(1,623)

 

(6,520)

Cash and cash equivalents

EUR

 

 

 

180

 

180

 

 

 

1,083

 

1,083

USD

 

 

 

476

 

476

 

 

 

455

 

455

THB

 

 

 

14

 

14

 

 

 

99

 

99

BRL

 

 

 

89

 

89

 

 

 

74

 

74

CNY

 

 

 

39

 

39

 

 

 

40

 

40

KRW

 

 

 

61

 

61

 

 

 

22

 

22

JPY

 

 

 

35

 

35

 

 

 

21

 

21

Other

 

 

 

75

 

75

 

 

 

236

 

236

Total

 

 

 

969

 

969

 

 

 

2,030

 

2,030

Other financial instrument receivables

EUR

 

 

 

55

 

55

 

 

 

29

 

29

Other

 

 

 

45

 

45

 

 

 

83

 

83

Total

 

 

 

101

 

101

 

 

 

111

 

111

Total

 

(4,307)

 

(49)

 

(4,356)

 

(4,897)

 

518

 

(4,379)

At the end of 2016, around € 4.3 billion of the Group’s gross debt was at a fixed rate, including mainly:

  • the EMTN bond issuance of € 500 million maturing in 2018 (carrying amount € 496 million);
  • senior € notes for a total of € 1,250 million (carrying amount of € 1,237 million);
  • senior US$ notes for a total of US$ 1,600 million (nominal amount of € 1,518 million, carrying amount of € 1,511 million); and
  • senior US$ notes assumed through the acquisition of Cytec of US$ 732 million (nominal amount of € 695 million, carrying amount € 675 million) with mainly three bonds maturing in 2017, 2023 and 2025.

The floating rate debt (€ 1.1 billion) includes the € 1 billion senior notes (carrying amount of € 998 million) maturing in 2017 (Euribor plus 82 bps of margin).

The impact of interest rate volatility at the end of 2016 in comparison with 2015 is as follows:

In € million

 

Sensitivity to a +100 bp movement in EUR market interest rates

 

Sensitivity to a (100) bp movement in EUR market interest rates

 

2016

 

2015

 

2016

 

2015

Profit or loss

 

(10)

 

(15)

 

10

 

15

The fair value of the interest rate swap of the MTP HP joint operation 50/50 between Dow and Solvay in Thailand, structured in 2012 for hedging purpose (notional amount € 42 million at the end of 2016 at 100%), is € (1) million (the same as in 2015), included in the net financial charges (only 50%, Solvay share).

In € million

 

Notional amount

 

Fair value assets

 

Fair value liabilites

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

Cash flow hedge

 

21

 

32

 

0

 

0

 

(1)

 

(1)

Total

 

21

 

32

 

0

 

0

 

(1)

 

(1)

Other market risks

Energy price risks

The Group purchases a large portion of its coal, gas, and electricity needs in Europe and the United States, based on fluctuating liquid market indices. In order to reduce the cost volatility, the Group has developed a policy for exchanging variable price for fixed price through derivative financial instruments. Most of these hedging instruments can be documented as hedging instruments of the underlying purchase contracts. Purchases of physical energy at fixed price contracts that qualify as “own use” contracts (not derivatives) constitute a natural hedge, and are not included in this note. Similarly, the Group’s exposure to CO2 price is hedged partly by forward purchases of European Union Allowance (EUA), which either can be documented as hedging instruments, or qualify as own use contracts.

Finally some exposure to gas-electricity or coal-electricity spreads may arise from the production of electricity on Solvay sites (mostly from cogeneration units in Europe), which can be hedged by forward purchases and forward sales or optional schemes. In this case, cash flow hedge accounting is applied.

Energy Services

Financial hedging of energy and CO2 emission rights price risks is managed centrally by Energy Services on behalf of the Group entities.

Energy Services also carries out trading transactions with respect to energy and CO2, for which the residual price exposure is maintained close to zero.

The following table details the notional principal amounts and fair values of energy and CO2 derivative financial instruments outstanding at the end of the reporting period:

In € million

 

Notional amount

 

Fair value assets

 

Fair value liabilites

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

Held for trading

 

672

 

624

 

156

 

76

 

(158)

 

(75)

Cash flow hedge

 

110

 

73

 

11

 

6

 

(8)

 

(16)

Total

 

782

 

697

 

167

 

82

 

(166)

 

(91)

Credit risk

See Financial risk in the Management of risks section of this report for additional information on the credit risk management.

There is no significant concentration of credit risk at Group level to the extent that the receivables risk is spread over a large number of customers and markets.

The ageing of trade receivables, financial instruments - operational, loans, and other non-current assets is as follows:

2016
In € million

 

 

 

 

 

of which receivables without write-down

 

Total

 

with write-down

 

Not past due

 

less than 30 days past due

 

between 30 & 60 days past due

 

Between 60 & 90 days past due

 

more than 90 days past due

Trade receivables

 

1,621

 

61

 

1,454

 

82

 

11

 

4

 

9

Financial instruments – operational

 

188

 

 

 

188

 

 

 

 

 

 

 

 

Loans and other non-current assets

 

312

 

88

 

222

 

2

 

 

 

 

 

 

Total

 

2,120

 

149

 

1,864

 

84

 

11

 

4

 

9

2015
In € million

 

 

 

 

 

of which receivables without write-down

 

Total

 

with write-down

 

Not past due

 

less than 30 days past due

 

between 30 & 60 days past due

 

Between 60 & 90 days past due

 

more than 90 days past due

Trade receivables

 

1,615

 

102

 

1,389

 

95

 

13

 

2

 

14

Financial instruments – operational

 

90

 

 

 

90

 

 

 

 

 

 

 

 

Loans and other non-current assets

 

427

 

35

 

392

 

1

 

 

 

 

 

 

Total

 

2,133

 

137

 

1,871

 

95

 

13

 

2

 

14

The table below presents the write-downs on trade receivables:

In € million

 

2016

 

2015

Carrying amount at January 1

 

(75)

 

(76)

Additions

 

(14)

 

(14)

Used

 

13

 

4

Reversal of impairments

 

11

 

10

Currency translation differences

 

(4)

 

4

Transfer to assets held for sale

 

12

 

 

Other

 

5

 

(3)

Carrying amount at December 31

 

(53)

 

(75)

Liquidity risk

See Financial risk in the Management of risks section of this report for additional information on the liquidity risk management.

Liquidity risk relates to Solvay’s ability to service and refinance its debt (including notes issued) and to fund its operations.

This depends on its ability to generate cash from operations and not to over-pay for acquisitions.

The Finance Committee gives its opinion on the appropriate liquidity risk management for the Group’s short, medium and long-term funding and liquidity management requirements.

The Group manages liquidity risk by maintaining adequate reserves, banking facilities, and reserve borrowing facilities, by continuously monitoring forecast and actual cash flows, and by matching the maturity profiles of financial assets and liabilities.

The Group staggers the maturities of its financing sources over time in order to limit the amounts to be refinanced each year.

The following tables detail the Group’s remaining contractual maturity for its financial liabilities with contractual repayment periods.

The tables have been prepared using the discounted cash flows of financial liabilities, based on the earliest date on which the Group can be required to pay.

2016
In € million

 

Total

 

within one year

 

in year two

 

in years three to five

 

beyond five years

Outflows of cash related to financial liabilities:

 

7,521

 

 

 

 

 

 

 

 

Other non-current liabilities

 

214

 

214

 

 

 

 

 

 

Current financial debt

 

1,338

 

1,338

 

 

 

 

 

 

Trade liabilities

 

1,547

 

1,547

 

 

 

 

 

 

Dividends payables

 

139

 

139

 

 

 

 

 

 

Financial instruments – operational

 

195

 

195

 

 

 

 

 

 

Non current financial debt

 

4,087

 

 

 

521

 

976

 

2,590

Total financial debt (current and non current)

 

5,426

 

1,338

 

521

 

976

 

2,590

2015
In € million

 

Total

 

within one year

 

in year two

 

in years three to five

 

beyond five years

Outflows of cash related to financial liabilities:

 

8,640

 

 

 

 

 

 

 

 

Other non-current liabilities

 

282

 

282

 

 

 

 

 

 

Current financial debt

 

891

 

891

 

 

 

 

 

 

Trade liabilities

 

1,559

 

1,559

 

 

 

 

 

 

Dividends payables

 

144

 

144

 

 

 

 

 

 

Financial instruments – operational

 

135

 

135

 

 

 

 

 

 

Non current financial debt

 

5,628

 

 

 

1,101

 

1,334

 

3,193

Total financial debt (current and non current)

 

6,520

 

891

 

1,101

 

1,334

 

3,193

In addition to the above-mentioned financing sources, the Group has access to the following instruments:

  • a Belgian Treasury Bill program in an amount of € 1 billion, with no outstanding issues at the end of 2016 as against € 324 million at the end of 2015, and alternatively a US commercial paper program in an amount of US$ 500 million, unused at the end of 2016 and 2015. The two programs are covered by back-up credit lines:
  • a € 1.5 billion and a € 550 million multilateral credit line, maturing respectively in 2021 and in 2018, as well as bilateral credit lines (€ 350 million). They were all unused at the end of 2016 and 2015.