Critical accounting judgments and key sources of estimation uncertainty

Impairment

The Group performs annual impairment tests on (groups of) cash-generating units (CGUs) to which goodwill has been allocated, and each time there are indicators that their carrying amount might be higher than their recoverable amount. This analysis requires management to estimate the future cash flows expected to be generated by the CGUs and a suitable discount rate in order to calculate present value.

Further details are provided in note F28 Impairment of property, plant and equipment, intangible assets, and equity method investees.

Taxes

Deferred tax assets

The carrying amount of the deferred tax assets is reviewed at each reporting date. The carrying amount of a deferred tax asset is reduced to the extent that it is no longer probable that the Group will earn sufficient taxable profits against which the deductions can be utilized. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available.

Deferred tax assets other than tax loss carryforwards are analyzed on a case-by-case basis, taking into account all relevant facts and circumstances. For example, a zero taxable profit, after deducting the amounts paid to retirees under a defined benefit plan and for which a deductible temporary difference existed, can justify the recognition of the underlying deferred tax assets. Recognition of deferred tax assets for tax loss carryforwards require a positive taxable profit during the year that enables the utilization of tax losses that originated in the past. Because of uncertainties inherent to predicting such positive taxable profit, recognition of deferred tax assets from tax loss carryforwards is based on a case-by-case analysis, which is usually based on five-year profit forecasts, except with respect to financial companies for which ten-year financial profit forecasts are considered highly predictable and are consequently used.

The corporate tax reporting team, which has the overview of the Group deferred tax positions, is involved in assessing deferred tax assets.

Tax reform in the United States

The enactment of the tax reform in the United States at the end of 2017 necessitated key estimates related to the recognition of foreign tax credits and the transitional tax on unremitted earnings, due to the transition from a global to a territorial taxation system.

Further details are provided in note F7.B. Deferred taxes in the consolidated statement of financial position.

Provisions

Employee benefits obligations

The actuarial assumptions used in determining the defined benefit obligations at December 31, as well as the annual cost, can be found in note F31 Provisions. All main employee benefits plans are assessed annually by independent actuaries. Discount rates and inflation rates are defined centrally by management. The other assumptions (such as future salary increases and expected rates of medical care cost increases) are defined at a local level. All plans are supervised by the Group’s central Human Resources department with the help of a central actuary to check the acceptability of the results and ensure consistency in reporting.

Further details are provided in note F31.A. Provisions for employee benefits.

Environmental provisions

Environmental provisions are managed and coordinated jointly by the Environmental Rehabilitation department and the Finance department.

The forecasts of expenses are discounted to their present value.

The discount rates fixed by geographical area correspond to the average risk-free rate on 10-year government bonds. These rates are set annually by the Finance department and can be revised based on the evolution of economic parameters of the country involved.

To reflect the passage of time, the provisions are increased each year at the discount rates described above.

Further details are provided in note F31.B. Provisions other than for employee benefits.

Provisions for litigations

Any significant litigation (tax and other, including threat of litigation) is reviewed by Solvay’s in-house lawyers with the support, when appropriate, of external counsels at least every quarter. This review includes an assessment of the need to recognize provisions and/or remeasure existing provisions together with the Finance department and the Insurance department.

Further details are provided in note F31.B. Provisions other than for employee benefits.

Classification as held for sale

Assets are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its present condition. Amongst other conditions, management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. However, in some cases, an asset may remain classified as held for sale for a period exceeding one year if it remains unsold due to events or circumstances beyond the Group’s control.

Polyamides

On September 19, 2017, Solvay announced that it had entered into a binding agreement with German chemical company BASF for the sale of its Polyamides business. In this context, management concluded that the conditions to classify the business as held for sale and as a discontinued operation were met as of that date. In particular, management considers the Polyamides business as a separate major line of business and expects the transaction to be completed during the second half of 2018, after customary regulatory approvals have been obtained.

Under the proposed terms of the agreement, the transaction is based on an enterprise value of €1.6 billion. The expected net cash proceeds are estimated to be around €1.1 billion. As a result of the discontinuation, the retained Latin American polyamide business incurred an impairment of €(91) million recognized at the end of September. This impairment is expected to be more than compensated by the capital gain on the transaction at the closing.

Further details are provided in note F25 Assets held for sale.

Control assessment

During the second quarter of 2017, Solvay deconsolidated its investment in Venezuela triggered by the political situation in the country. Consequently a loss of €72 million, related mainly to the €(60) million recycling of CTAs, has been recognized in the second quarter.