Accounting policy

Financial assets

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 for 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 pension fund surpluses. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, have original 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

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

 

 

 

2017

 

2016

 

Classification

 

Carrying amount

 

Carrying amount

Non-current assets – Financial instruments

 

 

 

376

 

343

Available for sale financial assets

 

Available-for-sale

 

44

 

44

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

 

Loans and receivables

 

332

 

299

Current assets – Financial instruments

 

 

 

2,695

 

2,878

Trade receivables

 

Loans and receivables

 

1,462

 

1,621

Other financial instrument receivables

 

 

 

89

 

101

Other marketable securities >3 months

 

Loans and receivables

 

56

 

32

Currency swaps

 

Held for trading

 

4

 

12

Other current financial assets

 

Loans and receivables

 

28

 

57

Financial instruments – Operational

 

 

 

153

 

188

Held for trading

 

Held for trading

 

130

 

160

Derivative financial instruments designated in cash flow hedge relationship

 

Cash-flow hedge

 

23

 

28

Cash and cash equivalents

 

Loans and receivables

 

992

 

969

Total assets – Financial instruments

 

 

 

3,071

 

3,221

 

 

 

 

 

 

 

Non-current liabilities – Financial instruments

 

 

 

3,362

 

4,301

Financial debt

 

 

 

3,182

 

4,087

Subordinated loans and bonds

 

Fin liabilities measured at amortized cost

 

2,856

 

3,837

Other non current debts

 

Fin liabilities measured at amortized cost

 

282

 

200

Long-term finance lease obligations

 

Fin lease liabilities measured at amortized cost

 

44

 

50

Other liabilities

 

Fin liabilities measured at amortized cost

 

180

 

214

Current liabilities – Financial instruments

 

 

 

2,652

 

3,221

Financial debt

 

 

 

1,044

 

1,338

Short-term financial debt (excl finance lease obligations)

 

Fin liabilities measured at amortized cost

 

1,015

 

1,277

Currency swaps

 

Held for trading

 

27

 

59

Short-term finance lease obligations

 

Fin lease liabilities measured at amortized cost

 

2

 

2

Trade payables

 

Fin liabilities measured at amortized cost

 

1,330

 

1,547

Financial Instruments – Operational

 

 

 

130

 

195

Held for trading

 

Held for trading

 

123

 

160

Derivative financial instruments designated in cash flow hedge relationship

 

Cash-flow hedge

 

7

 

35

Dividends payables

 

 

 

147

 

139

Total liabilities – Financial instruments

 

 

 

6,014

 

7,522

F32.A. Overview of financial instruments

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

In € million

 

2017

 

2016

 

Carrying amount

 

Carrying amount

Fair value through profit or loss

 

 

 

 

Held for trading

 

134

 

172

Derivative financial instruments designated in a cash flow hedge relationship

 

23

 

28

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

 

2,870

 

2,977

Available for sale financial assets

 

44

 

44

Total financial assets

 

3,071

 

3,221

 

 

 

 

 

Fair value through profit or loss

 

 

 

 

Held for trading

 

(151)

 

(220)

Derivative financial instruments designated in a cash flow hedge relationship

 

(7)

 

(35)

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

 

(5,663)

 

(7,075)

Dividends payable

 

(147)

 

(139)

Finance lease obligations measured at amortized cost

 

(46)

 

(52)

Total financial liabilities

 

(6,014)

 

(7,521)

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 the Solvay share price, but which are not documented as hedging instruments (hedge accounting under IAS 39). 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.

The fair values of other financial assets and financial liabilities 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

 

2017

 

2016

 

Fair value level

 

Carrying amount

 

Fair value

 

Carrying amount

 

Fair value

 

Non-current assets – Financial instruments

 

332

 

332

 

299

 

299

 

 

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

 

332

 

332

 

299

 

299

 

2

Non-current liabilities – Financial instruments

 

(3,362)

 

(3,550)

 

(4,301)

 

(4,504)

 

 

Subordinated loans and bonds

 

(2,856)

 

(3,044)

 

(3,837)

 

(4,040)

 

1

Other non current debts

 

(282)

 

(282)

 

(200)

 

(200)

 

2

Other liabilities

 

(180)

 

(180)

 

(214)

 

(214)

 

2

Long-term finance lease obligations

 

(44)

 

(44)

 

(50)

 

(50)

 

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 on the basis of 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

 

2017

 

Level 1

 

Level 2

 

Level 3

 

Total

Held for trading

 

39

 

95

 

 

 

134

Foreign currency risk

 

 

 

5

 

 

 

5

Energy risk

 

31

 

81

 

 

 

112

CO2 risk

 

8

 

1

 

 

 

9

Solvay share price

 

 

 

8

 

 

 

8

Cash flow hedges

 

1

 

22

 

 

 

23

Foreign currency risk

 

 

 

17

 

 

 

17

Energy risk

 

 

 

3

 

 

 

3

CO2 risk

 

1

 

 

 

 

 

1

Solvay share price

 

 

 

3

 

 

 

3

Available for sale financial assets

 

 

 

 

 

44

 

44

New Business Development

 

 

 

 

 

44

 

44

Total (assets)

 

40

 

118

 

44

 

201

Held for trading

 

(22)

 

(128)

 

 

 

(151)

Foreign currency risk

 

 

 

(24)

 

 

 

(24)

Interest rate risk

 

 

 

(5)

 

 

 

(5)

Energy risk

 

(21)

 

(96)

 

 

 

(117)

CO2 risk

 

(2)

 

(1)

 

 

 

(3)

Solvay share price

 

 

 

(1)

 

 

 

(1)

Cash flow hedges

 

 

 

(6)

 

 

 

(7)

Foreign currency risk

 

 

 

(2)

 

 

 

(2)

Interest rate risk

 

 

 

(1)

 

 

 

(1)

Energy risk

 

 

 

(4)

 

 

 

(4)

Total (liabilities)

 

(23)

 

(135)

 

 

 

(158)

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)

 

 

 

(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)

Movements during the period

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

In € million

 

2017

 

At fair value through profit or loss

 

Available-for-sale

 

Total

 

Derivatives

 

Shares

 

Opening balance at January 1

 

1

 

44

 

45

Total gains or losses

 

 

 

 

 

 

Recognized in the income statement

 

(1)

 

(3)

 

(4)

Recognized in other comprehensive income

 

 

 

(2)

 

(2)

Acquisitions

 

 

 

9

 

9

Disposals

 

 

 

(4)

 

(4)

Closing balance at December 31

 

 

 

44

 

44

In € million

 

2016

 

At fair value through profit or loss

 

Available-for-sale

 

Total

 

Derivatives

 

Shares

 

Opening balance at January 1

 

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 December 31

 

1

 

44

 

45

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

In € million

 

2017

 

2016

Recognized in the income statement

 

 

 

 

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

 

 

 

 

Foreign currency risk

 

19

 

(27)

Energy risk

 

7

 

(3)

CO2 risk

 

(1)

 

(3)

Changes in the fair value of financial instruments held for trading

 

 

 

 

Energy risk

 

6

 

(6)

CO2 risk

 

1

 

(6)

Recognized in the gross margin

 

32

 

(45)

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

 

 

 

 

Solvay share price

 

2

 

 

Changes in the fair value of financial instruments held for trading

 

 

 

 

Solvay share price

 

4

 

5

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

 

 

 

 

Foreign currency risk

 

4

 

4

Foreign operating exchange gains and losses

 

(9)

 

2

Recognized in other operating gains and losses

 

 

 

12

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

 

 

 

 

Foreign currency risk

 

2

 

 

Recognized in results from portfolio management and reassessments

 

2

 

 

Net interest expense

 

(157)

 

(175)

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

 

 

 

 

Foreign currency risk

 

(6)

 

(2)

Interest element of swaps

 

(20)

 

(48)

Others

 

(13)

 

5

Recognized in charges on net indebtedness

 

(196)

 

(220)

Income/loss from available-for-sale financial assets

 

 

 

5

Total recognized in the income statement

 

(162)

 

(249)

The foreign currency gain recognized in the gross margin of €19 million is the result of the recycling of gains and losses of derivative financial instruments designated in a cash flow hedge relationship. 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

 

2017

 

2016

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

 

(1)

 

9

Total available for sale financial assets

 

(1)

 

9

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

 

 

 

 

Foreign currency risk

 

(26)

 

26

Energy risk

 

(7)

 

3

CO2 risk

 

1

 

3

Solvay share price

 

(2)

 

 

Effective portion of changes in fair value of cash flow hedge

 

 

 

 

Foreign currency risk

 

47

 

(15)

Energy risk

 

(1)

 

 

CO2 risk

 

3

 

8

Solvay share price

 

(1)

 

10

Total cash flow hedges

 

15

 

36

Total

 

15

 

45

The recycling from OCI (foreign currency risk) of €(26) million is explained by the result of the recycling of gains of derivative financial instruments designated in a cash flow hedge relationship (€19 million on highly probable sales, €2 million on M&A proceeds, and €5 million on other hedge relationships).

F32.C. Capital management

See the item 2.1 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). The Group 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 is a multi-specialty chemical company which operates in 58 countries and undertakes transactions denominated in foreign currencies. As a consequence, the Group is exposed to exchange rate fluctuations. In 2017, the Group was exposed mainly to US dollar, Chinese renminbi, Thai baht, Brazilian real, Russian ruble, Japanese yen and Korean won.

To mitigate its foreign currency risk, the Group has defined a hedging policy that is based essentially on the principles of financing its activities in local currency and hedges the transactional exchange risk at the time of invoicing (risk which is certain). The Group constantly monitors its activities in foreign currencies and hedges, where appropriate, the exchange rate exposures on expected cash flows.

Exchange rate exposures are managed within approved policy parameters utilizing forward foreign exchange contracts or other derivatives like currency options.

EBITDA sensitivity to the US dollar is about €120 million per (0.10) US$/€ fluctuation, of which 2/3 on conversion and 1/3 on transaction, the latter being mostly hedged. Net debt sensitivity to US dollar is approximately €140 million per (0.10) US$/€ fluctuation.

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

In the course of 2017 the EUR/USD exchange rate moved from 1.0538 at the start of January to 1.1995 at the end of December. 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.

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).

During 2017 and 2016, the 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.

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.

Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are classified into the two categories described below:

Held for trading

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

In comparison to 2016, the trading position decreased by €1 billion in 2017 mainly due to of the optimization of our subsidiaries‘ capital structure, resulting in rationalization of swap needs.

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 2017 for future exposure, the Group had mainly hedged forecast sales (short position) in a nominal amount of US$559 million (€475 million) and JP¥13,381 million (€104 million). All cash flow hedges that exist at the end of December 2017 will be settled within the next 12 months, and will impact profit or loss during that period.

The following table details the notional amounts of the Group's derivatives contracts outstanding at the end of the period:

Notional amounts net(1)

In € million

 

Notional amount(1)

 

Fair value assets

 

Fair value liabilites

 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

(1)

Long/(short) positions.

Held for trading

 

(129)

 

(1,179)

 

5

 

14

 

(24)

 

(61)

Cash flow hedges

 

(579)

 

(472)

 

17

 

11

 

(2)

 

(26)

Total

 

(708)

 

(1,651)

 

22

 

25

 

(26)

 

(88)

Interest rate risks

See the 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 (note that financial debts for which floating interest rates are hedged by interest rate swaps and cross-currency interest rate swaps are presented under fixed rate financial debt):

In € million

 

At December 31, 2017

 

At December 31, 2016

Currency

 

Fixed rate

 

Floating rate

 

Total

 

Fixed rate

 

Floating rate

 

Total

Financial debt

EUR

 

(2,122)

 

(106)

 

(2,228)

 

(1,857)

 

(1,006)

 

(2,863)

USD

 

(1,649)

 

(24)

 

(1,673)

 

(2,227)

 

(30)

 

(2,257)

SAR

 

(116)

 

(17)

 

(133)

 

 

 

 

 

 

THB

 

(16)

 

(18)

 

(34)

 

(34)

 

(25)

 

(59)

BRL

 

(20)

 

(1)

 

(21)

 

(70)

 

(4)

 

(75)

CNY

 

(98)

 

 

 

(98)

 

(104)

 

(4)

 

(109)

Other

 

(2)

 

(37)

 

(39)

 

(14)

 

(49)

 

(63)

Total

 

(4,024)

 

(202)

 

(4,226)

 

(4,307)

 

(1,119)

 

(5,426)

Cash and cash equivalents

EUR

 

 

 

237

 

237

 

 

 

180

 

180

USD

 

 

 

352

 

352

 

 

 

476

 

476

CAD

 

 

 

100

 

100

 

 

 

 

 

 

THB

 

 

 

34

 

34

 

 

 

14

 

14

SAR

 

 

 

16

 

16

 

 

 

 

 

 

BRL

 

 

 

67

 

67

 

 

 

89

 

89

CNY

 

 

 

54

 

54

 

 

 

39

 

39

KRW

 

 

 

23

 

23

 

 

 

61

 

61

JPY

 

 

 

33

 

33

 

 

 

35

 

35

Other

 

 

 

77

 

77

 

 

 

75

 

75

Total

 

 

 

992

 

992

 

 

 

969

 

969

Other financial instrument receivables

EUR

 

 

 

26

 

26

 

 

 

55

 

55

Other

 

 

 

63

 

63

 

 

 

45

 

45

Total

 

 

 

89

 

89

 

 

 

101

 

101

Total

 

(4,024)

 

878

 

(3,146)

 

(4,307)

 

(49)

 

(4,356)

At the end of 2017, around €4.0 billion of the Group’s gross debt was at fixed-rate, including mainly:

  • Remaining part of the EMTN bond issuance of €500 million maturing in 2018 (carrying amount of €381 million),
  • Senior EUR Notes for a total of €1,250 million maturing in 2022 and 2027 (carrying amount of €1,246 million),
  • Remaining part of the Senior Bonds 2023 of US$400 million (carrying amount of €156 million),
  • Remaining part of the Senior Bonds 2025 of US$250 million (carrying amount of €134 million),
  • Senior US$ Notes for a total of US$1,600 million (carrying amount of €1,328 million), and
  • Belgian Treasury notes for a total of €400 million maturing within the year (carrying amount of €400 million).

The decrease in the floating rate debt was due mainly to the repayment of the €1 billion senior notes maturing in 2017 (Euribor plus 82 bps of margin)

The impact of interest rate volatility at the end of 2017 in comparison with 2016 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

 

2017

 

2016

 

2017

 

2016

Profit or loss

 

(1)

 

(10)

 

1

 

10

The volatility on interest rates decreased at the end of 2017 compared to 2016. This is the result of the floating rate notes €1 billion repaid during 2017. The remaining floating rate debt is very limited and part of it is hedged by interest rate swaps and cross-currency interest rate swaps, reducing its volatility even more.

In € million

 

Notional amount

 

Fair value assets

 

Fair value liabilites

 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

Held for trading

 

122

 

 

 

 

 

 

 

(6)

 

 

Cash flow hedge

 

16

 

21

 

 

 

 

 

(1)

 

(1)

Total

 

138

 

21

 

 

 

 

 

(6)

 

(1)

The fair value of €(6) million reported under “held for trading” is explained mainly by a cross currency swap contracted in May 2017 to mitigate the volatility (forex and interest rate) of the external financing set up for the HPPO joint operation (Saudi Hydrogen Peroxide Company) 50/50 with Sadara in the Kingdom of Saudi Arabia (notional amount €117 million at 50%).

The fair value of €(1) million reported under “cash flow hedge” is explained by an interest rate swap structured in 2012, transacted by the joint operation (MTP HP JV) 50/50 between Dow and Solvay in Thailand and designated in a hedge relationship (notional amount €16 million at the end of 2017 at 50%).

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 the 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 tables detail 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

 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

Held for trading

 

920

 

672

 

121

 

156

 

(120)

 

(158)

Cash flow hedge

 

104

 

110

 

4

 

11

 

(5)

 

(8)

Total

 

1,024

 

782

 

124

 

167

 

(124)

 

(166)

Credit risk

See the 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:

2017
In € million

 

 

 

 

 

of which receivables without allowance

 

Total

 

Net of allowance

 

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

 

1,462

 

51

 

1,246

 

135

 

16

 

3

 

10

Financial instruments – operational

 

153

 

 

 

153

 

 

 

 

 

 

 

 

Loans and other non-current assets

 

346

 

78

 

266

 

3

 

 

 

 

 

 

Total

 

1,961

 

129

 

1,665

 

138

 

16

 

3

 

10

2016
In € million

 

 

 

 

 

of which receivables without allowance

 

Total

 

Net of allowance

 

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

The table below presents the allowances on trade receivables:

In € million

 

2017

 

2016

Carrying amount at January 1

 

(53)

 

(75)

Additions

 

(13)

 

(14)

Used

 

5

 

13

Reversal of impairments

 

10

 

11

Currency translation differences

 

3

 

(4)

Transfer to assets held for sale

 

(2)

 

12

Other

 

1

 

5

Carrying amount at December 31

 

(49)

 

(53)

Liquidity risk

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

Liquidity risk relates to the Group'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.

2017
In € million

 

Total

 

Within one year

 

In year two

 

In years three to five

 

Beyond five years

Outflows of cash:

 

 

 

 

 

 

 

 

 

 

Trade liabilities

 

1,330

 

1,330

 

 

 

 

 

 

Dividends payables

 

147

 

147

 

 

 

 

 

 

Financial instruments – operational

 

130

 

130

 

 

 

 

 

 

Other non-current liabilities

 

180

 

 

 

124

 

39

 

17

Current financial debt

 

1,044

 

1,044

 

 

 

 

 

 

Non current financial debt

 

3,182

 

 

 

94

 

1,592

 

1,497

Total

 

6,014

 

2,652

 

218

 

1,631

 

1,514

2016
In € million

 

Total

 

Within one year

 

In year two

 

In years three to five

 

Beyond five years

Outflows of cash:

 

 

 

 

 

 

 

 

 

 

Trade liabilities

 

1,547

 

1,547

 

 

 

 

 

 

Dividends payables

 

139

 

139

 

 

 

 

 

 

Financial instruments – operational

 

195

 

195

 

 

 

 

 

 

Other non-current liabilities

 

214

 

 

 

163

 

35

 

16

Current financial debt

 

1,338

 

1,338

 

 

 

 

 

 

Non current financial debt

 

4,087

 

 

 

521

 

976

 

2,590

Total

 

7,521

 

3,220

 

684

 

1,011

 

2,606

The following table presents undiscounted amounts (nominal value):

(1)

and on short term portion of the non current financial debt.

2017
In € million

Total

Within one year

In year two

In years three to five

Beyond five years

Outflows of cash:

 

 

 

 

 

Trade liabilities

1,330

1,330

 

 

 

Dividends payables

147

147

 

 

 

Financial instruments – operational

130

130

 

 

 

Other non-current liabilities

180

 

124

39

17

Current financial debt

1,044

1,044

 

 

 

Non current financial debt

3,213

 

94

1,602

1,517

Total

6,045

2,652

218

1,641

1,534

Interests on non current financial debt(1)

691

121

104

250

216

Total outflows of cash

6,736

2,773

323

1,890

1,750

The Group has access to the following instruments:

  • an amount of €400 million was issued from the Belgian Treasury Bill program (out of €1 billion). This program was unused at the end of 2016. The US commercial paper program in an amount of US$500 million was unused at the end of 2017 as well as the end of 2016. The two programs are covered by back-up credit lines:
  • A €2 billion syndicated credit facility maturing in 2022 (with extension options to 2024), as well as bilateral credit lines (~€ 994 million) maturing beyond one year. They were all unused at the end of 2017.