Accounting policy

As explained in the basis of preparation, the Group adopted IFRS 9 Financial Instruments on January 1, 2018 using the modified retrospective approach. Hereinafter are disclosed the accounting policies applied in 2018 (IFRS 9 Financial Instruments). For accounting policies applied in 2017 (IAS 39 Financial Instruments: Recognition and Measurement), refer to the 2017 Annual Report. Transition impacts have been discussed in the basis of preparation.

2018 – IFRS 9 Financial Instruments

General

Financial assets and liabilities are first recognized when Solvay becomes a party to the contractual provisions of the instrument.

Amortized cost is the amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortization, using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any loss allowance. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset or to the amortized cost of a financial liability. When calculating the effective interest rate, the Group estimates the expected cash flows by considering all the contractual terms of the financial instrument (for example, prepayment, extension, call, and similar options) but does not consider the expected credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts.

Financial assets

Trade receivables are initially measured at their transaction price if they do not contain a significant financing component, which is the case for substantially all trade receivables. Other financial assets are initially measured at fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset.

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

All recognized financial assets will subsequently be measured at either amortized cost or fair value under IFRS 9 Financial Instruments. Specifically:

  • a debt instrument that (i) is held within a business model whose objective is to collect the contractual cash flows and (ii) has contractual cash flows that are solely payments of principal and interest on the principal amount outstanding is measured at amortized cost (net of any write down for impairment), unless the asset is designated at fair value through profit or loss (FVTPL) under the fair value option;
  • a debt instrument that (i) is held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets and (ii) has contractual terms that give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal amount outstanding is measured at fair value through other comprehensive income (FVTOCI), unless the asset is designated at FVTPL under the fair value option;
  • all other debt instruments are measured at FVTPL;
  • all equity investments are measured in the consolidated statement of financial position at fair value, with gains and losses recognized in profit or loss except that if an equity investment is not held for trading, nor contingent consideration recognized by an acquirer in a business combination, an irrevocable election can be made at initial recognition to measure the investment at FVTOCI, with dividend income recognized in profit or loss. This classification is determined on an instrument-by-instrument basis. Equity instruments in non-listed companies previously classified as available-for-sale in accordance with IAS 39 Financial Instruments: Recognition and Measurement are now classified and measured as equity instruments measured at FVTOCI. Upon derecognition, the cumulative gains or losses previously recognized in other comprehensive income are reclassified to retained earnings. The Group elected to classify irrevocably its non-listed investments existing as of December 31, 2017 under this category, as it intends to hold these investments for the foreseeable future.

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, in limited circumstances, cost of equity instruments may be an appropriate estimate of their fair value. That may be the case if insufficient more recent information is available to measure fair value, or if there is a wide range of possible fair value measurements and cost represents the best estimate of fair value within that range.

Impairment of financial assets

The impairment loss of a financial asset measured at amortized cost is calculated based on the expected loss model, representing the weighted average of credit losses with the respective risks of a default occurring as the weight. Expected credit losses are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate.

For trade receivables that do not contain a significant financing component (i.e. substantially all trade receivables), the loss allowance is measured at an amount equal to lifetime expected credit losses. Those are the expected credit losses that result from all possible default events over the expected life of those trade receivables, using a provision matrix that takes into account historical information on defaults adjusted for the forward-looking information per customer. The Group considers a financial asset in default when contractual payments are 60 days past due. However, in certain cases, the Group may also consider a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.

Impairment losses are recognized in the consolidated income statement, except for debt instruments measured at fair value through other comprehensive income. In this case, the allowance is recognized in other comprehensive income.

Financial liabilities

Financial liabilities are initially measured at fair value minus, in the case of a financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the issue of the financial liability. Subsequently, they are measured at amortized cost, except for:

  • financial liabilities at fair value through profit or loss. Such liabilities, including derivatives that are liabilities, are subsequently measured at fair value;
  • financial guarantee contracts. After initial recognition, guarantees are subsequently measured at the higher of the expected losses and the amount initially recognized.

Derivative financial instruments

A derivative financial instrument is a financial instrument or other contract within the scope of IFRS 9 Financial Instruments with all three of the following characteristics:

  • its 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, credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (sometimes called the “underlying”);
  • it requires 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;
  • it is settled at a future date.

The Group enters into a variety of derivative financial instruments (forward, future, option, collars, 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).

As explained above, 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 that could affect profit or loss (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 interest rate risk, foreign exchange rate risk, Solvay share price risk, and commodity risk (mainly energy and CO2 emission rights price risks), as hedging instruments in a cash flow hedge relationship.

At the inception of the hedge relationship, there is a formal designation and documentation of the hedging relationship and the Group’s risk management objective and strategy for undertaking the hedge. So to apply hedge accounting: (a) there is an economic relationship between the hedged item and the hedging instrument, (b) the effect of credit risk does not dominate the value changes that result from that economic relationship, and (c) the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Group actually hedges and the quantity of the hedging instrument that the Group actually uses to hedge that quantity of hedged item.

The requirement under (a) above that an economic relationship exists means that there is an expectation that the value of the hedging instrument and the value of the hedged item will systematically change in opposite direction in response to movements in either the same underlying (or underlyings that are economically related in such a way that they respond in a similar way to the risk that is being hedged).

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.

As long as cash flow hedge qualifies, the hedging relationship is accounted for as follows:

  1. The separate component of equity associated with the hedged item (cash flow hedge reserve) is adjusted to the lower of the following (in absolute amounts):
    i) the cumulative gain or loss on the hedging instrument from inception of the hedge; and
    ii) the cumulative change in fair value (present value) of the hedged item (i.e. the present value of the cumulative change in the hedged expected future cash flows) from inception of the hedge.
  2. The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge (i.e. the portion that is offset by the change in the cash flow hedge reserve calculated in accordance with (a)) is recognized in other comprehensive income.
  3. Any remaining gain or loss on the hedging instrument (or any gain or loss required to balance the change in the cash flow hedge reserve calculated in accordance with (a)) is hedge ineffectiveness that is recognized in profit or loss.
  4. The amount that has been accumulated in the cash flow hedge reserve in accordance with (a) is accounted for as follows:
    i) if a hedged forecast transaction subsequently results in the recognition of a non-financial asset or a non-financial liability, the Group removes that amount from the cash flow hedge reserve and includes it directly in the initial cost or other carrying amount of the asset or the liability. This is not a reclassification adjustment and hence it does not affect other comprehensive income;
    ii) for cash flow hedges other than those covered by (i), that amount is reclassified from the cash flow hedge reserve to profit or loss as a reclassification adjustment in the same period or periods during which the hedged expected future cash flows affect profit or loss (for example, in the periods that interest income or interest expense is recognized or when a forecast sale occurs);
    iii) however, if that amount is a loss and the Group expects that all or a portion of that loss will not be recovered in one or more future periods, it immediately reclassifies the amount that is not expected to be recovered into profit or loss as a reclassification adjustment.

Most hedged items are transaction-related. The time value of options, forward elements of forward contracts, and foreign currency basis spreads of financial instruments that are hedging the items affect profit or loss at the same time as those hedged items.

Hedge accounting is discontinued prospectively when the hedging relationship (or a part of a hedging relationship) ceases to meet the qualifying criteria (after taking into account any rebalancing of the hedging relationship, if applicable). This includes instances when the hedging instrument expires or is sold, terminated, or exercised.

When the Group discontinues hedge accounting for a cash flow hedge it accounts for the amount that has been accumulated in the cash flow hedge reserve as follows:

  • If the hedged future cash flows are still expected to occur, that amount remains in the cash flow hedge reserve until the future cash flows occur. However, if that amount is a loss and the Group expects that all or a portion of that loss will not be recovered in one or more future periods, it immediately reclassifies the amount that is not expected to be recovered into profit or loss as a reclassification adjustment;
  • If the hedged future cash flows are no longer expected to occur, that amount is immediately reclassified from the cash flow hedge reserve to profit or loss as a reclassification adjustment. A hedged future cash flow that is no longer highly probable to occur may still be expected to occur.

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

In € million

 

2018

 

2017

 

Carrying amount

 

Classification

 

Carrying amount

 

Classification

Non-current assets – Financial instruments

 

328

 

 

 

376

 

 

Available-for-sale financial assets

 

 

 

 

 

44

 

Available-for-sale

Equity instruments measured at fair value through other comprehensive income

 

51

 

Financial assets measured at fair value through other comprehensive income

 

 

 

 

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

 

277

 

Financial assets measured at amortized cost

 

332

 

Loans and receivables

Current assets – Financial instruments

 

2,801

 

 

 

2,695

 

 

Trade receivables

 

1,434

 

Financial assets measured at amortized cost

 

1,462

 

Loans and receivables

Other financial instruments

 

101

 

 

 

89

 

 

Other marketable securities >3 months

 

68

 

Financial assets measured at amortized cost

 

56

 

Loans and receivables

Currency swaps

 

1

 

Held for trading

 

4

 

Held for trading

Other current financial assets

 

32

 

Financial assets measured at amortized cost

 

28

 

Loans and receivables

Financial instruments – Operational

 

162

 

 

 

153

 

 

Held for trading

 

151

 

Held for trading

 

130

 

Held for trading

Derivative financial instruments designated in a cash flow hedge relationship

 

12

 

Cash-flow hedge

 

23

 

Cash-flow hedge

Cash and cash equivalents

 

1,103

 

Financial assets measured at amortized cost

 

992

 

Loans and receivables

Total assets – Financial instruments

 

3,128

 

 

 

3,071

 

 

 

 

 

 

 

 

 

 

 

Non-current liabilities – Financial instruments

 

3,301

 

 

 

3,362

 

 

Financial debt

 

3,180

 

 

 

3,182

 

 

Bonds

 

2,937

 

Financial liabilities measured at amortized cost

 

2,856

 

Financial liabilities measured at amortized cost

Other non-current debts

 

208

 

Financial liabilities measured at amortized cost

 

282

 

Financial liabilities measured at amortized cost

Long-term finance lease obligations

 

35

 

Finance lease liabilities measured at amortized cost

 

44

 

Finance lease liabilities measured at amortized cost

Other liabilities

 

121

 

Financial liabilities measured at amortized cost

 

180

 

Financial liabilities measured at amortized cost

Current liabilities – Financial instruments

 

2,416

 

 

 

2,652

 

 

Financial debt

 

630

 

 

 

1,044

 

 

Short-term financial debt (excluding finance lease obligations)

 

616

 

Financial liabilities measured at amortized cost

 

1,015

 

Financial liabilities measured at amortized cost

Currency swaps

 

12

 

Held for trading

 

27

 

Held for trading

Short-term finance lease obligations

 

1

 

Finance lease liabilities measured at amortized cost

 

2

 

Finance lease liabilities measured at amortized cost

Trade payables

 

1,439

 

Financial liabilities measured at amortized cost

 

1,330

 

Financial liabilities measured at amortized cost

Financial instruments – Operational

 

194

 

 

 

130

 

 

Held for trading

 

151

 

Held for trading

 

123

 

Held for trading

Derivative financial instruments designated in a cash flow hedge relationship

 

43

 

Cash-flow hedge

 

7

 

Cash-flow hedge

Dividends payables

 

154

 

Financial liabilities measured at amortized cost

 

147

 

Financial liabilities measured at amortized cost

Total liabilities – Financial instruments

 

5,717

 

 

 

6,014

 

 

F35.A. Overview of financial instruments

The following table gives an overview of the carrying amount of all financial instruments by category as defined by IFRS 9 Financial Instruments and IAS 39 Financial Instruments: Recognition and Measurement.

In € million

 

2018

 

2017

 

Carrying amount

 

Carrying amount

Fair value through profit or loss

 

 

 

 

Held for trading (financial instruments – operational – see note F29)

 

151

 

130

Held for trading (other financial instruments – see note F36, table Changes in financial debt)

 

1

 

4

Derivative financial instruments designated in a cash flow hedge relationship (see note F29)

 

12

 

23

Financial assets measured at amortized cost

 

 

 

 

Financial assets measured at amortized cost (including cash and cash equivalents, trade receivables, loans and other current/non-current assets except pension fund surpluses)

 

2,914

 

2,870

Available-for-sale financial assets (IAS 39)

 

 

 

44

Financial assets measured at fair value through other comprehensive income

 

 

 

 

Equity instruments measured at fair value through other comprehensive income (IFRS 9)

 

51

 

 

Total financial assets

 

3,128

 

3,071

 

 

 

 

 

Fair value through profit or loss

 

 

 

 

Held for trading (financial instruments – operational – see note F37)

 

(151)

 

(123)

Held for trading (financial debt – see note F36, table Changes in financial debt)

 

(12)

 

(27)

Derivative financial instruments designated in a cash flow hedge relationship (see note F37)

 

(43)

 

(7)

Financial liabilities measured at amortized cost

 

 

 

 

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

 

(5,321)

 

(5,663)

Dividends payable

 

(154)

 

(147)

Finance lease obligations (see note F36, section Changes in financial debt)

 

(36)

 

(46)

Total financial liabilities

 

(5,717)

 

(6,014)

The category “Held for trading” only contains derivative financial instruments that are used for management of foreign currency risk, interest rate risk, energy and CO2 emission rights price risks, index and Solvay share price, but which have not been documented as hedging instruments (hedge accounting under IFRS 9 Financial Instruments). Equity instruments measured at fair value through OCI 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. If the Group does not have significant influence or joint control, the investments are measured at fair value according to the valuation guidelines published by the European Private Equity and Venture Capital Association, and impacts are recognized through OCI.

F35.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

 

2018

 

2017

 

Fair value level

 

Carrying amount

 

Fair value

 

Carrying amount

 

Fair value

 

Non-current assets – Financial instruments

 

277

 

277

 

332

 

332

 

 

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

 

277

 

277

 

332

 

332

 

2

Non-current liabilities – Financial instruments

 

(3,301)

 

(3,396)

 

(3,362)

 

(3,550)

 

 

Bonds

 

(2,937)

 

(3,032)

 

(2,856)

 

(3,044)

 

1

Other non-current debts

 

(208)

 

(208)

 

(282)

 

(282)

 

2

Other liabilities

 

(121)

 

(121)

 

(180)

 

(180)

 

2

Long-term finance lease obligations

 

(35)

 

(35)

 

(44)

 

(44)

 

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 mainly 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 equity instruments measured at fair value through OCI 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 non-derivative financial liabilities, (b) the Sustainable Development and Energy department 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

 

2018

 

Level 1

 

Level 2

 

Level 3

 

Total

Held for trading

 

63

 

89

 

 

 

152

Foreign currency risk

 

 

 

3

 

 

 

3

Energy risk

 

39

 

82

 

 

 

121

CO2 risk

 

24

 

 

 

 

 

24

Solvay share price

 

 

 

1

 

 

 

1

Index

 

 

 

3

 

 

 

3

Cash flow hedges

 

 

 

12

 

 

 

12

Foreign currency risk

 

 

 

5

 

 

 

5

Energy risk

 

 

 

6

 

 

 

6

CO2 risk

 

 

 

1

 

 

 

1

Equity instruments measured at fair value through other comprehensive income

 

 

 

 

 

51

 

51

New Business Development

 

 

 

 

 

51

 

51

Total (assets)

 

63

 

100

 

51

 

215

Held for trading

 

(70)

 

(93)

 

 

 

(163)

Foreign currency risk

 

 

 

(11)

 

 

 

(11)

Interest rate risk

 

 

 

(4)

 

 

 

(4)

Energy risk

 

(47)

 

(67)

 

 

 

(114)

CO2 risk

 

(23)

 

(3)

 

 

 

(26)

Solvay share price

 

 

 

(6)

 

 

 

(6)

Index

 

 

 

(3)

 

 

 

(3)

Cash flow hedges

 

 

 

(43)

 

 

 

(43)

Foreign currency risk

 

 

 

(15)

 

 

 

(15)

Energy risk

 

 

 

(18)

 

 

 

(18)

CO2 risk

 

 

 

(2)

 

 

 

(2)

Solvay share price

 

 

 

(7)

 

 

 

(7)

Total (liabilities)

 

(70)

 

(136)

 

 

 

(206)

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

 

0

 

(6)

 

 

 

(7)

Foreign currency risk

 

 

 

(2)

 

 

 

(2)

Interest rate risk

 

 

 

(1)

 

 

 

(1)

Energy risk

 

 

 

(4)

 

 

 

(4)

Total (liabilities)

 

(23)

 

(135)

 

 

 

(158)

Movements during the period

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

In € million

 

2018

 

At fair value through profit or loss

 

At fair value through other compre­hensive income

 

Total

 

Derivatives

 

Equity instruments

 

Opening balance at January 1

 

 

 

44

 

44

Total gains or losses

 

 

 

 

 

 

Recognized in other comprehensive income

 

 

 

3

 

3

Acquisitions

 

 

 

9

 

9

Capital decreases

 

 

 

(5)

 

(5)

Closing balance at December 31

 

 

 

51

 

51

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

 

0

 

44

 

44

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

In € million

 

2018

 

2017

Recognized in the consolidated income statement

 

 

 

 

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

 

 

 

 

Foreign currency risk

 

(12)

 

19

Energy risk

 

(3)

 

7

CO2 risk

 

1

 

(1)

Changes in the fair value of financial instruments held for trading

 

 

 

 

Energy risk

 

20

 

6

CO2 risk

 

5

 

1

Recognized in the gross margin

 

11

 

32

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

 

 

 

 

Solvay share price

 

 

 

2

Changes in the fair value of financial instruments held for trading

 

 

 

 

Solvay share price

 

(13)

 

4

Gains and losses (time value) on derivative financial instruments designated in a cash flow hedge relationship

 

 

 

 

Foreign currency risk

 

3

 

4

Foreign operating exchange gains and losses

 

(4)

 

(9)

Recognized in other operating gains and losses

 

(14)

 

0

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

 

 

 

 

Foreign currency risk

 

 

 

2

Recognized in results from portfolio management and reassessments

 

 

 

2

Net interest expense

 

(117)

 

(157)

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

 

 

 

 

Foreign currency risk

 

(2)

 

(6)

Interest element of swaps

 

5

 

(20)

Others

 

1

 

(13)

Recognized in charges on net indebtedness

 

(114)

 

(196)

Total recognized in the consolidated income statement

 

(117)

 

(162)

The foreign currency loss of € (12) million recognized in gross margin  is the result of the recycling of gains and losses of derivative financial instruments designated in a cash flow hedge relationship on highly probable sales.

The change in fair value of financial instruments held for trading resulting in a gain of € 20 million and recognized in gross margin is due mainly to the price increase of gas and electricity in 2018. The loss of € (13) million recognized in other operating gains and losses is the result of the change in fair value of equity swaps for long-term incentives.

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

In € million

 

Foreign currency risk

 

Interest rate risk

 

Commodity risk

 

Risk on Solvay share price

 

Total

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

Balance at January 1

 

15

 

(7)

 

(1)

 

(1)

 

(2)

 

2

 

3

 

5

 

15

 

0

Recycling from other comprehensive income of derivative financial instruments designated in a cash flow hedge relationship

 

12

 

(26)

 

 

 

 

 

2

 

(6)

 

 

 

(2)

 

14

 

(34)

Effective portion of changes in fair value of cash flow hedge

 

(38)

 

47

 

1

 

 

 

(14)

 

2

 

(9)

 

(1)

 

(61)

 

49

Balance at December 31

 

(12)

 

15

 

0

 

(1)

 

(13)

 

(2)

 

(7)

 

3

 

(32)

 

15

The recycling from OCI (foreign currency risk) of € 12 million is explained by the result of the recycling of gains of derivative financial instruments designated in cash flow hedge relationship on highly probable sales.

F35.C. Capital management

See 2 Capital, shares and shareholders in respect of capital in the Corporate Governance Statement chapter of this report.

The Group manages its funding structure with the objective of safeguarding its ability to continue as a going concern, optimizing the return for shareholders, maintaining an investment-grade rating, and minimizing the cost of debt.

The capital structure of the Group consists of equity (including perpetual hybrid bonds (see note F31 Equity)) and of net debt (see note F36 Net indebtedness). Perpetual hybrid bonds are nevertheless considered as debt in the Group’s underlying metrics.

Besides the statutory minimum equity funding requirements that apply to the Company’s subsidiaries in the different countries, Solvay is not subject to any additional legal capital requirements.

The Treasury department reviews the capital structure on a ongoing basis under the authority and the supervision of the Chief Financial Officer. As appropriate, the Legal department is involved to ensure compliance with legal and contractual requirements.

F35.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’s senior management oversees the management of these risks and is supported by the Treasury department (non-commodity risks) and Solvay Sustainable Development and Energy department, which advise on financial risks and the appropriate financial risk governance framework for the Group. Both departments provide assurance to the Group’s senior management that the Group’s financial risk activities are governed by appropriate policies and procedures and that financial risks are identified, measured, and managed in accordance with the Group’s policies and risk objectives. The Solvay Group uses derivative financial instruments to hedge clearly identified foreign exchange, interest rate, index, energy price, and CO2 emission rights price risks (hedging instruments). All derivative activities for risk management purposes are carried out by specialist teams that have the appropriate skills, experience, and supervision. 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 majority of derivative hedging instruments held by the Group mature in less than one year.

Foreign currency risks

The Group is a multi-specialty chemical company with operations worldwide and hence undertakes transactions denominated in foreign currencies. As a consequence, the Group is exposed to exchange rate fluctuations. In 2018, the Group was exposed mainly to US dollar, Chinese yuan, Brazilian real, Mexican peso, and Japanese yen.

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.

In the course of 2018 the EUR/USD exchange rate moved from 1.1995 at the start of January to 1.1455 at the end of December. 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.

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.

At the end of 2018, a strengthening of the US dollar vs EUR would increase the net debt by approximately € 129 million per 0.10 US$/€ fluctuation. Conversely, a weakening of the US dollar vs EUR would decrease the net debt by approximately € 108 million per 0.10 US$/€ fluctuation.

At the end of 2017, a strengthening of the US dollar vs EUR would increase the net debt by approximately € 146 million per 0.10 US$/€ fluctuation. Conversely, a weakening of the US dollar vs EUR would decrease the net debt by approximately € 123 million per 0.10 US$/€ fluctuation.

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).

During 2018 and 2017, 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.

At the end of 2018, the notional amounts held for trading fluctuated by € 267 million. This evolution is explained mainly by continuous cash centralization efforts (in foreign currencies to be swapped) and internal restructuring activity.

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

In € million

 

Notional amount(1)

 

Fair value assets

 

Fair value liabilites

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

(1)

Long/(short) positions (if the foreign exchange transaction does not involve EUR currency, both notionals are presented net)

Held for trading

 

138

 

(129)

 

3

 

5

 

(11)

 

(24)

Total

 

138

 

(129)

 

3

 

5

 

(11)

 

(24)

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. Most hedges are transaction-related.

At the end of 2018 for future exposure, the Group had mainly hedged forecast sales (short position) in a nominal amount of US$ 852 million (€ 744 million) and JP¥ 12,713 million (€ 101 million). Almost all cash flow hedges that exist at the end of December 2018 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 Solvay’s derivatives contracts outstanding at the end of the period:

Notional amounts net

2018

 

Notional amount of the instrument(1)

 

Notional amount of the hedged item(1)

 

Percentage of exposure hedged

 

Average hedge exchange rate per risk category

 

Cash flow hedge reserve

 

Fair value of the hedging instrument

Cash flow hedges – Forecasted sales and purchases(3)

 

 

 

 

 

 

 

 

 

Equity

 

Assets

 

Liabilities

 

In € million

 

 

 

 

 

In € million

(1)

Long/(short) positions

(2)

In compliance with Group Treasury Policy the percentage of hedged exposure will reach the progressive minimum compliance level of 60% in Q1 2019

(3)

The hedging instruments are located in the line item: "Other Receivables" and "Other Liabilities" in the consolidated statement of financial position.

JPY/EUR

 

(71)

 

(104)

 

68%

 

129.52

 

(2)

 

0

 

(2)

JPY/USD

 

(30)

 

(53)

 

57%(2)

 

109.32

 

0

 

0

 

0

USD/BRL

 

(142)

 

(244)

 

58%(2)

 

3.94

 

(1)

 

3

 

(2)

USD/CNY

 

(128)

 

(283)

 

45%(2)

 

6.71

 

(3)

 

0

 

(3)

USD/EUR

 

(408)

 

(501)

 

81%

 

1.18

 

(8)

 

0

 

(8)

USD/MXN

 

(47)

 

(86)

 

55%(2)

 

20.78

 

1

 

1

 

0

USD/THB

 

(19)

 

(35)

 

54%(2)

 

32.54

 

0

 

0

 

0

Total

 

(845)

 

(1,305)

 

 

 

 

 

(12)

 

5

 

(15)

2017

 

Notional amount of the instrument(1)

 

Notional amount of the hedged item(1)

 

Percentage of exposure hedged

 

Average hedge exchange rate per risk category

 

Cash flow hedge reserve

 

Fair value of the hedging instrument

Cash flow hedges – Forecasted sales and purchases(3)

 

 

 

 

 

 

 

 

 

Equity

 

Assets

 

Liabilities

 

In € million

 

 

 

 

 

In € million

(1)

Long/(short) positions

(2)

In compliance with Group Treasury Policy the percentage of hedged exposure has reached the progressive minimum compliance level of 60% in Q1 2018

(3)

The hedging instruments are located in the line item: "Other Receivables" and "Other Liabilities" in the consolidated statement of financial position.

JPY/EUR

 

(67)

 

(89)

 

76%

 

128.35

 

3

 

3

 

 

JPY/USD

 

(37)

 

(59)

 

63%

 

110.63

 

0

 

0

 

 

USD/BRL

 

(83)

 

(188)

 

44%(2)

 

3.35

 

(2)

 

0

 

(1)

USD/CNY

 

(103)

 

(176)

 

59%(2)

 

6.71

 

2

 

2

 

 

USD/EUR

 

(288)

 

(505)

 

57%(2)

 

1.17

 

10

 

11

 

(1)

Total

 

(579)

 

(1,016)

 

 

 

 

 

15

 

17

 

(2)

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, 2018

 

At December 31, 2017

Currency

 

Fixed rate

 

Floating rate

 

Total

 

Fixed rate

 

Floating rate

 

Total

Financial debt

EUR

 

(1,709)

 

(60)

 

(1,769)

 

(2,122)

 

(106)

 

(2,228)

USD

 

(1,731)

 

(12)

 

(1,744)

 

(1,649)

 

(24)

 

(1,673)

SAR

 

(112)

 

0

 

(112)

 

(116)

 

(17)

 

(133)

THB

 

(13)

 

(13)

 

(27)

 

(16)

 

(18)

 

(34)

BRL

 

(16)

 

(1)

 

(17)

 

(20)

 

(1)

 

(21)

CNY

 

(81)

 

0

 

(82)

 

(98)

 

0

 

(98)

Other

 

(27)

 

(32)

 

(59)

 

(2)

 

(37)

 

(39)

Total

 

(3,690)

 

(120)

 

(3,810)

 

(4,024)

 

(202)

 

(4,226)

Cash and cash equivalents

EUR

 

 

 

391

 

391

 

 

 

237

 

237

USD

 

 

 

382

 

382

 

 

 

352

 

352

CAD

 

 

 

7

 

7

 

 

 

100

 

100

THB

 

 

 

17

 

17

 

 

 

34

 

34

SAR

 

 

 

4

 

4

 

 

 

16

 

16

BRL

 

 

 

67

 

67

 

 

 

67

 

67

CNY

 

 

 

77

 

77

 

 

 

54

 

54

KRW

 

 

 

32

 

32

 

 

 

23

 

23

JPY

 

 

 

38

 

38

 

 

 

33

 

33

Other

 

 

 

89

 

89

 

 

 

77

 

77

Total

 

 

 

1,103

 

1,103

 

 

 

992

 

992

Other financial instruments

CNY

 

 

 

67

 

67

 

 

 

57

 

57

EUR

 

 

 

17

 

17

 

 

 

26

 

26

SAR

 

 

 

15

 

15

 

 

 

0

 

0

Other

 

 

 

3

 

3

 

 

 

6

 

6

Total

 

 

 

101

 

101

 

 

 

89

 

89

Total

 

(3,690)

 

1,085

 

(2,605)

 

(4,024)

 

878

 

(3,146)

At the end of 2018, around € 3.7 billion of the Group’s gross debt was at fixed-rate, including mainly:

  • Senior EUR Notes for a total of € 1,250 million maturing in 2022 and 2027 (carrying amount of € 1,241 million);
  • Remaining part of the Senior Bonds 2023 of US$ 400 million (carrying amount of € 165 million);
  • Remaining part of the Senior Bonds 2025 of US$ 250 million (carrying amount of € 140 million);
  • Senior US$ Notes for a total of US$ 1,600 million (carrying amount of € 1,392 million);
  • Belgian Treasury notes (commercial papers) for a total of € 246 million maturing within the year (carrying amount of € 246 million).

The impact of interest rate volatility at the end of 2018 in comparison with 2017 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

 

2018

 

2017

 

2018

 

2017

Profit or loss

 

(1)

 

(1)

 

1

 

1

The sensitivity to interest rates’ volatility remains stable at the end of 2018 compared to 2017. The floating rate debt is very limited and part of it is hedged by interest rate swaps and cross-currency interest rate swaps reducing even more its volatility.

In € million

 

Notional amount

 

Fair value assets

 

Fair value liabilites

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

Held for trading

 

109

 

122

 

 

 

 

 

(4)

 

(6)

Total

 

109

 

122

 

 

 

 

 

(4)

 

(6)

The fair value of € (4) 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 our HPPO joint operation (Saudi Hydrogen Peroxide Company) 50/50 with Sadara in Saudi Arabia (notional amount € 104 million at 50%).

2018
In € million (except where indicated)

 

Notional amount of the instrument(1)

 

Notional amount of the hedged item(1)

 

Percentage of exposure hedged

 

Hedge interest rate per risk category

 

Cash flow hedge reserve

 

Fair value of the hedging instrument

 

 

 

 

 

 

 

 

 

Equity

 

Assets

 

Liabilities

(1)

The hedging instruments are located in the line item: “Other Receivables” and “Other Liabilities” in the consolidated statement of financial position.

(2)

The hedged item is located in the line items: “Non-current and current financial debt” in the consolidated statement of financial position.

Cash flow hedges – Floating rate debt

 

(13)

 

(26)

 

50%

 

Pay Fix 3.125% Receive THBFIX6M

 

 

 

 

 

 

Total

 

(13)

 

(26)

 

 

 

 

 

 

 

 

 

 

2017
In € million (except where indicated)

 

Notional amount of the instrument(1)

 

Notional amount of the hedged item(1)

 

Percentage of exposure hedged

 

Hedge interest rate per risk category

 

Cash flow hedge reserve

 

Fair value of the hedging instrument

 

 

 

 

 

 

 

 

 

Equity

 

Assets

 

Liabilities

(1)

The hedging instruments are located in the line item: “Other Receivables” and “Other Liabilities” in the consolidated statement of financial position.

(2)

The hedged item is located in the line items: “Non-current and current financial debt” in the consolidated statement of financial position.

Cash flow hedges – Floating rate debt

 

(16)

 

(32)

 

50%

 

Pay Fix 3.125% Receive THBFIX6M

 

(1)

 

 

 

(1)

Total

 

(16)

 

(32)

 

 

 

 

 

(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 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 (except where indicated)

 

Notional amount of the instrument(1)

 

Notional amount of the instrument (in units)

 

Fair value of the instrument – Asset

 

Fair value of the instrument – Liability

Held for trading

 

2018

 

2017

 

2018

 

2017

 

 

 

2018

 

2017

 

2018

 

2017

(1)

The hedging instruments are located in the line item "Other Receivables" and "Other Liabilities" in the consolidated statement of financial position.

Coal

 

15

 

14

 

120,000

 

258,000

 

Tons

 

2

 

4

 

(2)

 

(4)

Power

 

613

 

421

 

15,850,229

 

11,827,898

 

MWh

 

87

 

63

 

(85)

 

(63)

Standard Quality Gas

 

416

 

453

 

18,962,646

 

14,659,141

 

MWh

 

32

 

46

 

(27)

 

(43)

CO2

 

45

 

32

 

5,594,159

 

5,266,000

 

Tons

 

24

 

8

 

(26)

 

(10)

Total

 

1,089

 

920

 

 

 

 

 

 

 

145

 

121

 

(140)

 

(120)

The amounts presented in the tables hereafter include hedging needs of GBUs of the Group that sourced through Energy Services, and not the full Group energy hedging needs.

2018
In € million (except where indicated)

 

Notional amount of the instrument(1)

 

Notional amount of the instrument (in units)

 

Notional amount of the hedged item

 

Notional amount of the hedged item (in units)

 

Percentage of exposure hedged

 

Average hedge price per risk category

 

Cash flow hedge reserve

 

Fair value of the instrument – Asset

 

Fair value of the instrument – Liability

(1)

The hedging instruments are located in the line item "Other Receivables" and "Other Liabilities" in the consolidated statement of financial position.

Cash flow hedge

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Benzene

 

7

 

9,088

 

Tons

 

43

 

50,000

 

Tons

 

18%

 

796

 

EUR/ton

 

 

 

 

 

 

Coal

 

17

 

252,000

 

 Tons

 

54

 

624,800

 

Tons

 

40%

 

77

 

USD/ton

 

2

 

2

 

 

Power

 

104

 

1,765,121

 

MWh

 

104

 

1,765,000

 

MWh

 

100%

 

59

 

EUR/MWh

 

(8)

 

2

 

(10)

Standard Quality Gas

 

129

 

6,904,347

 

MWh

 

210

 

13,938,999

 

MWh

 

50%

 

19

 

EUR/MWh

 

(7)

 

3

 

(10)

Total

 

257

 

 

 

 

 

411

 

 

 

 

 

 

 

 

 

 

 

(13)

 

7

 

(20)

2017
In € million (except where indicated)

 

Notional amount of the instrument(1)

 

Notional amount of the instrument (in units)

 

Notional amount of the hedged item

 

Notional amount of the hedged item (in units)

 

Percentage of exposure hedged

 

Average hedge price per risk category

 

Cash flow hedge reserve

 

Fair value of the instrument – Asset

 

Fair value of the instrument – Liability

(1)

The hedging instruments are located in the line item "Other Receivables" and "Other Liabilities" in the consolidated statement of financial position.

Cash flow hedge

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Coal

 

16

 

195,000

 

Tons

 

116

 

1,315,201

 

Tons

 

15%

 

84 

 

USD/ton

 

2

 

1

 

 

Power

 

13

 

235,900

 

MWh

 

22

 

400,960

 

MWh

 

59%

 

47 

 

EUR/MWh

 

(8)

 

 

 

 

Standard Quality Gas

 

48

 

3,522,016

 

MWh

 

103

 

3,663,973

 

MWh

 

96%

 

12 

 

EUR/MWh

 

(7)

 

3

 

(5)

CO2

 

27

 

7,208,000

 

Tons

 

67

 

8,383,346

 

Tons

 

86%

 

 

EUR/ton

 

 

 

 

 

 

Total

 

104

 

 

 

 

 

308

 

 

 

 

 

 

 

 

 

 

 

(13)

 

4

 

(5)

Performance Share Units Plan (PSU) risk on Solvay share price

In order to neutralize the volatility of the Solvay share price which will impact the debt valuation relating to the PSUs (with related employer charges), the Group entered into equity swaps.

2018
In € million (except where indicated)

 

Notional amount of the instrument(1)

 

Notional amount of the instrument (number of PSUs)

 

Notional amount of the hedged item(2)

 

Notional amount of the hedged item (number of PSUs)(2)

 

Percentage of exposure hedged

 

Hedged strike price per risk category (in €)

 

Cash flow hedge reserve

 

Fair value of the hedging instrument

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

Assets

 

Liabilities

(1)

The hedging instruments (equity swaps) are located in the line item: "Other receivables" and "Other liabilities" in the consolidated statement of financial position.

(2)

Including social charges

Cash flow hedges – PSU Solvay share price

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PSU Plan 2017 – Solvay share price (forecast)

 

(8)

 

260,470

 

(9)

 

288,863

 

90%

 

111.95

 

(2)

 

 

 

(2)

PSU Plan 2018 – Solvay share price (forecast)

 

(16)

 

246,255

 

(18)

 

279,853

 

88%

 

113.10

 

(5)

 

 

 

(5)

Total

 

(24)

 

506,725

 

(27)

 

568,716

 

 

 

 

 

(7)

 

 

 

(7)

2017
In € million (except where indicated)

 

Notional amount of the instrument(1)

 

Notional amount of the instrument (number of PSUs)

 

Notional amount of the hedged item(2)

 

Notional amount of the hedged item (number of PSUs)(2)

 

Percentage of exposure hedged

 

Hedged strike price per risk category (in €)

 

Cash flow hedge reserve

 

Fair value of the hedging instrument

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

Assets

 

Liabilities

(1)

The hedging instruments (equity swaps) are located in the line item: "Other receivables" and "Other liabilities" in the consolidated statement of financial position.

(2)

Including social charges

Cash flow hedges – PSU Solvay share price

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PSU Plan 2016 – Solvay share price (forecast)

 

(7)

 

166,235

 

(9)

 

209,394

 

79%

 

82.30

 

2

 

2

 

 

PSU Plan 2017 – Solvay share price (forecast)

 

(22)

 

260,470

 

(25)

 

298,982

 

87%

 

111.95

 

1

 

1

 

 

Total

 

(29)

 

426,705

 

(34)

 

508,376

 

 

 

 

 

3

 

3

 

 

Credit risk

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

The Group continuously monitors the credit risk of important business partners.

The Group engages in transactions only with financial institutions with a good credit rating. The Group monitors and manages exposures to financial institutions within approved counterparty credit limits and credit risk parameters in order to mitigate the risk of default.

The Group recognizes expected credit losses on all of its trade receivables: it applies the simplified approach and recognizes lifetime expected losses on all trade receivables, using a provision matrix in order to calculate the lifetime expected credit losses for trade receivables, using historical information on defaults adjusted for the forward-looking information.

The Group classifies the customers and their related receivables in various rating classes, based on the risks’ grading attributed to the customers and on the ageing balance of receivables. As such, for all receivables overdue fewer than six months, the Group considers percentages within a range between 0.01% and 4.56%, depending on the rating class. For all receivables overdue in excess of six months, the Group considers a rate of 50% or of 100%, depending on the rating class. The customer’s grading is reviewed annually for customers assessed as low risk profile, and every six months for customers assessed as higher risk profile.

There is no significant concentration of credit risk at Group level because the receivables’ credit 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:

2018
In € million

 

Total

 

Credit-impaired

 

With expected loss allowance, not credit-impaired

 

 

 

 

 

not past due

 

less than 30 days past due

 

between 30 and 60 days past due

 

between 60 and 90 days past due

 

more than 90 days past due

Trade receivables

 

1,486

 

52

 

1,297

 

112

 

9

 

3

 

12

Trade receivables – allowance

 

(52)

 

(49)

 

(2)

 

 

 

 

 

 

 

(1)

Trade receivables – net

 

1,434

 

3

 

1,296

 

112

 

9

 

3

 

11

Financial instruments – operational

 

162

 

 

 

162

 

 

 

 

 

 

 

 

Loans and other non-current assets

 

344

 

152

 

192

 

 

 

 

 

 

 

 

Loans and other non-current assets – allowance

 

(62)

 

(62)

 

 

 

 

 

 

 

 

 

 

Loans and other non-current assets – net

 

282

 

89

 

192

 

 

 

 

 

 

 

 

Total

 

1,878

 

92

 

1,650

 

112

 

9

 

3

 

11

2017
In € million

 

Total

 

Credit-impaired

 

Not credit-impaired

 

 

 

 

 

not past due

 

less than 30 days past due

 

between 30 and 60 days past due

 

between 60 and 90 days past due

 

more than 90 days past due

Trade receivables

 

1,510

 

51

 

1,246

 

135

 

16

 

3

 

10

Trade receivables – allowance

 

(49)

 

(49)

 

 

 

 

 

 

 

 

 

 

Trade receivables – net

 

1,462

 

3

 

1,246

 

135

 

16

 

3

 

10

Financial instruments – operational

 

153

 

 

 

153

 

 

 

 

 

 

 

 

Loans and other non-current assets

 

405

 

147

 

197

 

3

 

 

 

 

 

 

Loans and other non-current assets – allowance

 

(59)

 

(59)

 

 

 

 

 

 

 

 

 

 

Loans and other non-current assets – net

 

346

 

87

 

197

 

3

 

 

 

 

 

 

Total

 

1,961

 

90

 

1,596

 

138

 

16

 

3

 

10

The table below presents the allowances on trade receivables:

In € million

 

2018

 

2017

Carrying amount at January 1, before IFRS 9 adoption

 

(49)

 

(53)

IFRS 9 adoption

 

(6)

 

 

Carrying amount at January 1, after IFRS 9 adoption

 

(55)

 

(53)

Additions

 

(12)

 

(13)

Uses

 

3

 

5

Reversal of impairments

 

10

 

10

Currency translation differences

 

2

 

3

Transfer to assets held for sale

 

(1)

 

(2)

Other

 

1

 

1

Carrying amount at December 31

 

(52)

 

(49)

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 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.

The following tables present discounted amounts (carrying amounts):

2018
In € million

 

Total

 

Within one year

 

In year two

 

In years three to five

 

Beyond five years

Outflows of cash:

 

 

 

 

 

 

 

 

 

 

Trade liabilities

 

1,439

 

1,439

 

 

 

 

 

 

Dividends payables

 

154

 

154

 

 

 

 

 

 

Financial instruments – operational

 

194

 

194

 

 

 

 

 

 

Other non-current liabilities

 

121

 

 

 

37

 

85

 

 

Current financial debt

 

630

 

630

 

 

 

 

 

 

Non-current financial debt

 

3,180

 

 

 

799

 

1,011

 

1,369

Total

 

5,717

 

2,416

 

836

 

1,096

 

1,369

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

The following tables present undiscounted amounts (nominal value):

2018
In € million

 

Total

 

Within one year

 

In year two

 

In years three to five

 

Beyond five years

(1)

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

Outflows of cash:

 

 

 

 

 

 

 

 

 

 

Trade liabilities

 

1,439

 

1,439

 

 

 

 

 

 

Dividends payables

 

154

 

154

 

 

 

 

 

 

Financial instruments – operational

 

194

 

194

 

 

 

 

 

 

Other non-current liabilities

 

121

 

 

 

37

 

85

 

 

Current financial debt

 

630

 

630

 

 

 

 

 

 

Non-current financial debt

 

3,205

 

 

 

802

 

1,024

 

1,381

Total

 

5,743

 

2,416

 

838

 

1,108

 

1,381

Interests on non-current financial debt(1)

 

577

 

108

 

103

 

209

 

157

Total outflows of cash

 

6,320

 

2,524

 

942

 

1,317

 

1,538

2017
In € million

 

Total

 

Within one year

 

In year two

 

In years three to five

 

Beyond five years

(1)

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

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 € 246 million (as against € 400 million at the end of 2017) was issued from the Belgian Treasury Bill program (out of € 1.5 billion (as against € 1 billion in 2017) subsequent to the 2018 update of the program).  The US commercial paper program in an amount of US$ 500 million was unused at the end of 2018 as well as the end of 2017. The two programs are covered by back-up credit lines;
  • A € 2 billion syndicated credit facility maturing in 2023 (with a further extension option to 2024). Solvay has also secured bilateral credit lines (~ € 994 million) maturing beyond one year. They were all unused at the end of 2018.