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Note 1: Summary of significant accounting policies

General information

Akzo Nobel N.V. is a company headquartered in the Netherlands. The address of our registered office is Christian Neefestraat 2, Amsterdam. We have filed a list of subsidiaries, associated companies and joint ventures, drawn up in conformity with Article 379 and 414 of Book 2 of the Dutch Civil Code, with the Trade Registry of Amsterdam.

We have prepared the Consolidated financial statements of Akzo Nobel N.V. in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. They also comply with the financial reporting requirements included in Title 9 of Book 2 of the Dutch Civil Code, as far as applicable. The Consolidated financial statements have been prepared on a going concern basis.

The Management report within the meaning of Article 391 of Book 2 of the Dutch Civil Code consists of the following parts of the annual report:

The section Strategic performance provides information on the developments during 2017 and the results. This section also provides information on cash flow and , capital expenditures, innovation activities and employees.

On March 7, 2018, the Board of Management authorized the financial statements for issue. The financial statements as presented in this report are subject to adoption by the Annual General Meeting of shareholders.

Consolidation

The Consolidated financial statements include the accounts of Akzo Nobel N.V. and its subsidiaries. Subsidiaries are companies over which Akzo Nobel N.V. has control, because it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect returns through its power over the subsidiary. Non-controlling interests in equity and in results are presented separately.

Change in accounting policies

Accounting pronouncements, which became effective for 2017, such as amendments to IAS 7 “Cash flow statement”, IAS 12 “Income tax” as well as IFRS 12 “Disclosure of interests in other entities”, had no material impact on our Consolidated financial statements.

Discontinued operations (Note 2)

A discontinued operation is a component of our business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale/held for distribution, or is a subsidiary acquired exclusively with a view to resale. Assets and liabilities are classified as held for sale if it is highly probable that the carrying value will be recovered through a sale transaction within one year rather than through continuing use. Assets and liabilities are classified as held for distribution if it is highly probable that the carrying value will be recovered through a legal demerger transaction within one year rather than through continuing use. When reclassifying assets and liabilities as held for sale/held for distribution, we recognize the assets and liabilities at the lower of their carrying value or fair value less selling costs. Assets held for sale/held for distribution are not depreciated and amortized but tested for impairment.

In case of discontinued operations, the comparatives in the Statement of income are represented. The balance sheet comparatives are not represented. The Consolidated statement of cash flows is not represented for discontinued operations. The cash flow statement of discontinued operations is separately disclosed in Note 2.

Alternative Performance Measures (Note 3)

Until 2016, AkzoNobel used the term Incidental items to refer to material items of income or expense. As from 2017, AkzoNobel has changed this term from Incidental items to . These Identified items (Alternative Performance Measures (APM) adjustments) relate to material items of income and expense arising from circumstances outside the normal course of business, such as acquisitions/divestments, realignment of strategy, impairments and legal items.

Use of estimates

The preparation of the financial statements in compliance with IFRS requires management to make judgments, estimates and assumptions that affect amounts reported in the financial statements. The estimates and assumptions are based on experience and various other factors that are believed to be reasonable under the circumstances and are used to judge the carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and underlying assumptions are reviewed on an ongoing basis. The most critical accounting policies involving a higher degree of judgment and complexity in applying principles of valuation and for which changes in the assumptions and estimates could result in significantly different results than those recorded in the financial statements are the following:

  • Scope of consolidation (Note 2)
  • Discontinued operations and held for sale (Note 2)
  • Income tax and deferred tax assets (Note 7)
  • Impairment of intangible assets and property, plant and equipment (Note 9, 10)
  • Post-retirement benefit provisions (Note 16)
  • Provisions and contingent liabilities (Note 17)

Statement of cash flows

We have used the indirect method to prepare the statement of cash flows. Cash flows in foreign currencies have been translated at transaction rates. Acquisitions or divestments of subsidiaries are presented net of cash and cash equivalents acquired or disposed of, respectively. Cash flows from derivatives are recognized in the statement of cash flows in the same category as those of the hedged items.

Operating segments

We determine and present operating segments (Business Areas) based on the information that is provided to the Executive Committee, our chief operating decision-maker during 2017, to make decisions about resources to be allocated to the Business Area and assess its performance. Business Area results reported to the Executive Committee include items directly attributable to a Business Area as well as those items that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets and corporate costs and are reported in Business Area “Corporate and other”.

Foreign currencies

Transactions in foreign currencies are translated into the functional currency using the foreign exchange rate at transaction date. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency using the exchange rates at the balance sheet date. Resulting foreign currency differences are included in the statement of income. Non-monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rate at acquisition date.

The assets and liabilities of entities with other functional currencies are translated into euros, the functional currency of the parent entity, using the exchange rates at the balance sheet date. The income and expenses of entities with other functional currencies are translated into the functional currency, using the exchange rates at transaction date.

Foreign exchange differences resulting from translation into the functional currency of investments in subsidiaries and of intercompany loans of a permanent nature with other functional currencies are recorded as a separate component (cumulative translation reserve) within Other . These cumulative translation adjustments are reclassified (either fully or partly) to the statement of income upon disposal (either fully or partly) or liquidation of the foreign subsidiary to which the investment or the intercompany loan with a permanent nature relates to.

Foreign currency differences arising on the re-translation of a financial liability designated as an effective hedge of a net investment in a foreign operation are recognized in the cumulative translation reserve (in Other comprehensive income).

Exchange rates of key currencies

The principal exchange rates against the euro used in preparing the balance sheet and the statement of income are:

 

Balance sheet

Statement of income

 

2016

2017

%

2016

2017

%

US dollar

1.052

1.197

(12.1)

1.107

1.129

(1.9)

Pound sterling

0.856

0.887

(3.4)

0.821

0.877

(6.4)

Swedish krona

9.562

9.850

(2.9)

9.471

9.629

(1.6)

Chinese yuan

7.339

7.801

(5.9)

7.368

7.621

(3.3)

Brazilian real

3.425

3.964

(13.6)

3.854

3.603

7.0

Revenue recognition

Revenue is defined as the revenue from the sale and delivery of goods and services and royalty income, net of rebates, discounts and similar allowances, and net of sales tax. Revenue is recognized when the significant risks and rewards have been transferred to a third party, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably and there is no continuing management involvement with the goods. For revenue from sales of goods these conditions are generally met at the time the product is shipped and delivered to the customer, depending on the delivery conditions. Service revenue is generally recognized as services are rendered.

Post-retirement benefits (Note 5, 16)

Contributions to defined contribution plans are recognized in the statement of income as incurred.

Most of our defined benefit pension plans are funded with plan assets that have been segregated in a trust or foundation. We also provide post-retirement benefits other than pensions to certain employees, which are generally not funded. Valuations of both funded and unfunded plans are carried out by independent actuaries based on the projected unit credit method. Post-retirement costs primarily represent the increase in the actuarial present value of the obligation for projected benefits based on employee service during the year and net interest on the net defined benefit liability/asset. When the calculation results in a benefit to AkzoNobel, the recognized asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. An economic benefit is available if it is realizable during the life of the plan, or on the settlement of the plan liabilities. The effect of these so-called asset ceiling restrictions and any changes therein is recognized in Other comprehensive income. Remeasurement gains and losses, which arise in calculating our obligations, are recognized in Other . When the benefits of a plan improve, the portion of the increased benefits related to past service by employees is recognized as an expense in the statement of income immediately. We recognize gains and losses on the curtailment or settlement of a defined benefit plan when the curtailment or settlement occurs.

Net interest on the net defined benefit liability is included in financing expenses related to post-retirement benefits. Other charges and benefits recognized are reported in Operating income, unless recorded in Other comprehensive income.

Other employee benefits (Note 5, 17)

Provisions for other long-term employee benefits are measured at present value, using actuarial assumptions and methods. Any actuarial gains and losses are recognized in the statement of income in the period in which they arise.

Share-based compensation (Note 5)

We have a performance-related share plan and a share-matching plan, under which shares are conditionally granted to certain employees. The fair value is measured at grant date and amortized over the three-year period during which the employees normally become unconditionally entitled to the shares with a corresponding increase in shareholders’ equity. Amortization is accelerated in the event of earlier vesting.

Income tax (Note 7)

Income tax expense comprises both current and deferred tax, including effects of changes in tax rates. In determining the amount of current and deferred tax we also take into account the impact of uncertain tax positions and whether additional taxes and interest may be due. Income tax is recognized in the statement of income, unless it relates to items recognized in Other or equity.

Current tax includes the expected tax payable and receivable on the taxable income for the year, using tax rates enacted or substantially enacted at reporting date, as well as (any adjustments to) tax payable and receivable with respect to previous years.

Deferred tax is recognized using the liability method on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Consolidated financial statements. We do not recognize deferred tax for the initial recognition of goodwill, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences related to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. Deferred tax assets are recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized.

Measurement of deferred tax assets and liabilities is based upon the enacted or substantially enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be reversed. Non-refundable income tax is taken into account in the determination of deferred tax liabilities to the extend earnings are expected to be distributed by subsidiaries in the foreseeable future and AkzoNobel has control over dividend distribution. Deferred tax positions are not discounted.

Earnings per share (Note 8)

Basic earnings per share is calculated by dividing the profit for the period attributable to shareholders of the company by the weighted average number of common shares outstanding during the year adjusted for the repurchased shares. Diluted earnings per share is calculated by adjusting the weighted average number of common shares outstanding during the year for the diluting effect of the shares of the performance-related share plan and for the share-matching plan.

represents the basic from continuing operations excluding identified items, amortization of intangible assets and income tax on these adjustments.

Government grants

Government grants related to costs are deducted from the relevant costs to be compensated in the same period. Government grants to compensate for the cost of an asset are deducted from the cost of the related asset. Emission rights granted by the government are recorded at cost. A provision is recorded if the actual emission is higher than the emission rights granted.

Intangible assets (Note 9)

Intangible assets are valued at cost less accumulated amortization and impairment charges. Intangible assets with an indefinite useful life, such as goodwill and certain brands, are not amortized, but tested for impairment annually using the value in use method. Goodwill in a business combination represents the excess of the consideration paid over the net fair value of the acquired identifiable assets, liabilities and contingent liabilities. If the cost of an acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the statement of income. The effects of all transactions with non-controlling interests are recorded in equity if there is no change in control.

Intangible assets with a finite useful life, such as licenses, know-how, brands, customer relationships, intellectual property rights, emission rights and capitalized development and software costs, are capitalized at historical cost and amortized on a straight-line basis over the estimated useful life of the assets, which generally ranges from five to 40 years for brands with finite useful lives, five to 25 years for customer lists and three to 15 years for other intangibles. Amortization methods, useful lives and residual values are reassessed annually. Research expenditures are recognised as an expense as incurred.

Property, plant and equipment (Note 10)

Property, plant and equipment are valued at cost less accumulated depreciation and impairment charges. Costs include expenditures that are directly attributable to the acquisition of the asset, including borrowing cost of capital investment projects under construction.

Depreciation is calculated using the straight-line method, based on the estimated useful life of the asset components. The useful life of plant equipment and machinery generally ranges from ten to 25 years, and for buildings ranges from 20 to 50 years. Land is not depreciated. In the majority of cases residual value is assumed to be insignificant. Depreciation methods, useful lives and residual values are reassessed annually.

Costs of major maintenance activities are capitalized and depreciated over the estimated useful life. Maintenance costs which cannot be separately defined as a component of property, plant and equipment are expensed in the period in which they occur.

We recognize conditional asset retirement obligations in the periods in which sufficient information becomes available to reasonably estimate the cash outflow.

Impairments (Note 9, 10)

We assess the carrying value of intangible assets and property, plant and equipment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In addition, for goodwill and other intangible assets with an indefinite useful life, the carrying value is at least reviewed annually in the fourth quarter. If the carrying value of an asset or its cash-generating unit exceeds its estimated recoverable amount, an impairment loss is recognized in the statement of income. The assessment for impairment is performed at the lowest level of assets generating largely independent cash inflows. For goodwill and other intangible assets with an indefinite life, we have determined this to be at business unit level (one level below segment).

Except for goodwill, we reverse impairment losses in the statement of income if and to the extent we have identified a change in estimates used to determine the recoverable amount.

Leases (Note 10, 18, 21)

Lease contracts in which we have substantially all the risks and rewards of ownership are classified as financial leases. Upon initial recognition, the leased asset is measured at the lower of its fair value and the present value of minimum lease payments. Subsequent to initial recognition, the asset is depreciated using a straight-line method, based on the lower of the estimated useful life or the lease term. The interest expenses are recognized as other financing expenses over the lease term.

Payments made under operational leases are recognized in the statement of income on a straight-line basis over the term of the lease.

Associates and joint ventures (Note 11)

Associates and joint ventures are accounted for using the equity method and are initially recognized at cost. The Consolidated financial statements include our share of the income and expenses of the associates and joint ventures, whereby the result is determined using our accounting principles. When the share of losses exceeds the interest in the investee, the carrying amount is reduced to nil and recognition of further losses is discontinued, unless we have incurred legal or constructive obligations on behalf of the investee. Loans to associates and joint ventures are carried at amortized cost less any impairment losses.

Inventories (Note 13)

Inventories are measured at the lower of cost and net realizable value. Costs of inventories comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to the present location and condition. The costs of inventories are determined using weighted average cost.

Provisions (Note 17)

We recognize provisions when a present legal or constructive obligation as a result of a past event exists, it is probable that an outflow of economic benefits is required to settle the obligation and the amount can be reliably estimated. Provisions are measured at net present value. The increase of provisions as a result of the passage of time is recognized in the statement of income under Financing income and expenses.

Provisions for restructuring of activities are recognized when a detailed and formal restructuring plan has been approved, and the restructuring has either commenced or has been announced publicly. We do not provide for future operating costs.

A provision for warranties is recognized when the underlying products or services are sold, generally based on historical warranty data.

Financial instruments

Regular purchases and sales of financial assets and liabilities are recognized on trade date. The initial measurement of all financial instruments is at fair value. Except for derivatives, the initial measurement of financial instruments is adjusted for directly attributable transaction costs.

Derivative financial instruments (Note 24)

Derivative financial instruments are recognized at fair value on the balance sheet. Fair values are derived from market prices and quotes from dealers and brokers, or are estimated using observable market inputs. When determining fair values, credit risk for our contract party, as well as for AkzoNobel, is taken into account.

Changes in the fair value are recognized in the statement of income, unless cash flow hedge accounting or net investment hedge accounting is applied. In those cases, the effective part of the fair value changes is deferred in Other comprehensive income and released to the related specific lines in the statement of income or balance sheet at the same time as the hedged item.

Other financial non-current assets (Note 12) and Trade and other receivables (Note 14)

Loans and receivables are measured at amortized cost, using the effective interest method, less any impairment losses. An allowance for impairment is established if the collection of a receivable becomes doubtful.

Cash and cash equivalents (Note 18)

Cash and cash equivalents are measured at fair value and include all cash balances and short-term investments that are directly convertible into cash. Changes in fair values are included in Financing income and expenses.

Long-term and short-term borrowings (Note 18, 24) and Trade and other payables (Note 19)

Long-term and short-term borrowings, as well as Trade and other payables, are measured at amortized cost, using the effective interest rate method. The interest expense on borrowings is included in Financing income and expenses. The fair value of borrowings, used for disclosure purposes, is determined on the basis of listed market price, if available. If a listed market price is not available, the fair value is calculated based on the present value of principal and interest cash flows, discounted at the interest at the reporting date, taking into account AkzoNobel’s credit risk.

New IFRS accounting standards

IFRS standards and interpretations thereof not yet in force which may apply to our Consolidated financial statements for 2018 and beyond have been assessed for their potential impact. The most important upcoming changes relate to IFRS 9 “Financial Instruments” and IFRS 15 “Revenue from contracts with Customers” which will be adopted as per January 1, 2018. Another important upcoming change relates to IFRS 16 “Leases” which will be implemented as per January 1, 2019.

IFRS 9 “Financial Instruments”

IFRS 9 introduces new requirements for classifying and measuring financial assets and liabilities. This standard encompasses an overall change of accounting principles for financial instruments and replaces IAS 39 – the current standard on financial instruments. The standard contains new requirements for impairment of financial assets and for hedge accounting. AkzoNobel has decided to implement and adopt IFRS 9 as from January 1, 2018, when it becomes effective. In 2017, we completed the assessment of the impact of the standard, which is set out further below.

Transition method

AkzoNobel will adopt IFRS 9 as per January 1, 2018, and will not restate its 2017 comparative figures. The transition effect on equity as per January 1, 2018, is €3 million after tax.

Classification and measurement

The impact on the classification and measurement of financial assets is not significant.

The vast majority of Other financial non-current assets as well as the Trade and other receivables were measured at amortized cost, using the effective interest method, less any impairment losses. In accordance with IFRS 9, these Other financial non-current assets and Trade and other receivables will continue to be measured at amortized cost.

An amount of €32 million of the Other financial non-current assets and Trade and other receivables is recognized at fair value through profit and loss and relates to derivative financial instruments and securities. The classification and measurement of these financial assets will remain unchanged under IFRS 9.

AkzoNobel has certain minor equity investments, which are currently measured at their historic cost price. In accordance with IFRS 9, these equity investments will be measured at fair value through profit and loss. The impact of this change is insignificant.

Impairment model

IFRS 9 introduces a new impairment model, whereby recognition of an allowance for expected credit losses on financial assets is required, which deviates from the recognition of incurred credit losses under IAS 39. The new impairment model is applicable for debt instrument financial assets measured at amortized cost, for debt instrument financial assets measured at fair value through Other comprehensive income, for lease receivables, contract assets, loan commitments and certain financial guarantee contracts.

Impact of adoption of IFRS 9 and IFRS 15

In € millions

As reported at December 31, 2017

Adjustments due to the adoption of IFRS 9

Adjustments due to the adoption of IFRS 15

Adjusted opening balance at January 1, 2018

Other reserves

5,865

(3)

(43)

5,819

Non-controlling interests

442

(5)

437

Total impact on group equity

6,307

(3)

(48)

6,256

As the IFRS 9 impairment model accelerates the timing of recognizing impairment losses, the implementation of IFRS 9 will lead to recognition of an additional impairment loss of €4 million as per January 1, 2018, mainly relating to trade receivables. The after tax-effect is a charge of €3 million.

IFRS 15 “Revenue from Contracts with Customers”

IFRS 15 replaces existing revenue recognition guidance in IFRS. It introduces a five-step model to determine when to recognize revenue and at what amount, based on transfer of control over goods or services to the customer. New qualitative and quantitative disclosures will also be required.

Transition method

AkzoNobel will adopt IFRS 15 as per January 1, 2018 and will not restate its 2017 comparative figures. The transition effect on equity as per January 1, 2018, is €48 million after tax.

Sale of goods

The vast majority of the company’s revenue is derived from delivery of goods, being paints, coatings and chemical products. Currently, revenue is recognized when the significant risks and rewards have been transferred to the customer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably and there is no continuing management involvement with the goods. For revenue from sales of goods these conditions are generally met at the time the product is shipped and delivered to the customer, depending on the delivery conditions.

In accordance with IFRS 15, revenue should be recognized when the customer obtains control of the goods. Based on our assessment, we do not expect the application of IFRS 15 to result in a significant impact on our consolidated financial statements. We came to the same conclusion for the accounting treatment of variable consideration, including among others rebates, bonuses, discounts and payments to customers.

Equipment provided to customers

AkzoNobel regularly provides mixing machines, store interior and other assets to its customers in Decorative Paints and Performance Coatings at the start of a paint delivery contract. Currently, such assets are not treated as a separate performance obligation and their costs are expensed during the contract period.

Under IFRS 15, the delivery of such assets would qualify as a separate performance obligation. However, in most cases no revenue can be recognized at the moment of transfer of such assets. Although the paint delivery contracts do include target quantities to be purchased by the customer, for nearly all of these contracts such clauses legally do not qualify as a binding take-or-pay commitment for a minimum quantity to be acquired by the customer. Therefore, no revenue can be allocated to these assets when they are transferred.

The book value at December 31, 2017, of such assets amounted to €60 million and will be written-off in the January 1, 2018, opening balance sheet, which has an after-tax effect of €46 million.

Services

AkzoNobel provides certain technical services to its customers in Performance Coatings relating to coatings sold, after these products have been delivered. In addition, in certain instances AkzoNobel provides shipping and handling services after control over the products has transferred to the customer. So far, no revenue was attributed to such services and deferred until the services were provided to the customer.

In accordance with IFRS 15, such services are a separate performance obligation to which revenue should be allocated. Such revenue is to be recognized over time when the relating services are being provided. Therefore, an amount of €3 million (€2 million after tax) will be recognized as deferred revenue and contract liability for services still to be provided after December 31, 2017.

New IFRS accounting standards

Standard

Published

Implemen­tation date of the standard

Endorsed by the European Union

Anticipated impact

IFRS 9 “Financial Instruments”

2009-2014

January 1, 2018

November 22, 2016

More details on impact are provided on the previous page.

IFRS 15 “Revenue from Contracts with Customers”

May 28, 2014

January 1, 2018

September 22, 2016

More details on impact are provided on the previous page.

IFRS 16 “Leases”

January 13, 2016

January 1, 2019

October 31, 2017

IFRS 16 replaces existing guidance on lessee accounting for leases. It requires lessees to bring most leases on balance sheet in a single lease accounting model, recognizing a right-of-use asset and a lease liability. Based on the results of our assessment so far, we expect the impact of the application of IFRS 16 to be below 10 percent of total assets. It should be noted that the actual impact will depend on the number, size and remaining duration of lease contracts and any expected renewals at the moment of implementation. We do not expect the impact on operating income to be significant.

Net debt

Defined as long-term borrowings plus short-term borrowings less cash and cash equivalents.

Identified items

Identified items are special charges and benefits, results on acquisitions and divestments, major impairment charges and charges related to major legal, anti-trust and environmental cases.

Comprehensive income

The change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with shareholders in their capacity as shareholders.

Comprehensive income

The change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with shareholders in their capacity as shareholders.

Comprehensive income

The change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with shareholders in their capacity as shareholders.

Adjusted earnings per share

Basic earnings per share from continuing operations excluding incidentals in operating income, amortization of intangible assets and income tax on these adjustments.

Earnings per share

Net income attributable to shareholders divided by the weighted average number of common shares outstanding during the year.