Solvay Group 2002 IFRS pro forma financial statements (insert to annual report 2002)
2 Solvay Group/2002 IFRS pro forma financial statements Content 2002 IFRS PRO FORMA FINANCIAL STATEMENTS page 3 NOTES TO THE FINANCIAL STATEMENTS IN IFRS page 7 IFRS VALUATION RULES page 10
2002 IFRS pro forma financial statements 3 The Solvay group has decided to anticipate in 2003 the adoption of the International Accounting Standards (IAS), recently renamed International Financial Reporting Standards (IFRS). These standards will become mandatory in 2005 for the consolidated financial statements of all companies listed on stock exchanges within the European Union. To familiarize shareholders and potential shareholders with this change, the Group s consolidated financial statements for 2002 have been restated on an IFRS basis. The following tables compare the Group s consolidated income statement, cash flow statement and balance sheet for 2002 stated in accordance with the accounting standards imposed by Belgian law ( Belgian accounting ) and then restated in accordance with IFRS standards. This is provided for information only, even though it has undergone a limited review by the Group s external auditors. It should also be pointed out that Solvay will publish its 2003 annual accounts according to IFRS standards only if standard ED1 First Time Application of IFRS has by then been published by the IASB. Publication of this standard is currently scheduled for the second quarter of 2003. With this in view, the 2002 pro forma accounts have been prepared based on the provisions of the draft version of standard ED1 First Time Application of IFRS, published in July 2002, as if approved without amendments. As the draft version of the standard, which encourages the early adoption of its content, was not finalized at the time this insert went to press, the statements cannot therefore be considered as being in compliance with IFRS standards. Strictly speaking, compliance with IFRS standards in the context of a first time application would require the application of standard SIC 8 First Time Application of IAS as the Primary Basis of Accounting, which was in force at the time this insert went to press. It should also be noted that the following information is substantially in accordance with the requirements of the European directives. Following IFRS rules, the modifications to Belgian accounting principles involved in the changeover to IFRS have been recorded in the opening equity as at 1 January 2002. Examination of total equity at the end of 2002 (shareholders equity + minority interests) shows that this changes from EUR 3,796 million under Belgian accounting to EUR 3,573 million under IFRS accounting. The main components of this EUR 223 million decrease are: the systematic recording of deferred taxes, leading to an increase in deferred tax assets of EUR 382 million and a reduction of deferred tax liabilities of EUR 115 million. Net impact on equity: EUR +497 million; presentation of equity prior to the distribution of the remaining dividend for the previous year. Impact on equity: EUR +121 million; evaluation of listed investments and certain financial instruments at their market value. Impact on equity: EUR +17 million; valuation of pension liabilities and similar obligations based on compensation at the time of retirement rather than current compensation. Impact on equity: EUR 372 million; write-downs of assets based on the criteria of standard IAS 36 impairment of assets. This applies to the natural soda ash production facilities in the USA (EUR 187 million) and the chloromethane production facilities in Europe (EUR 10 million). Impact on equity: EUR 197 million; creation of provisions, mainly for environment-related expenses, partially offset by the reversal of provisions not allowed under IFRS (mainly for major repairs). Impact on equity: EUR 92 million); deduction from equity of Solvay shares purchased to cover the possible exercise of options issued to senior Group management. Impact on equity: EUR 101 million; reversal of capitalisation of development costs, goodwill items, formation expenses and other intangible items (including EUR 51 million for ACEON launch costs). Impact on equity: EUR 84 million; non-recognition in IFRS of the inflation accounting applied to our Argentine activities. Impact on equity: EUR 38 million.
4 Solvay Group/2002 IFRS pro forma financial statements Consolidated income statement 2002 EUR million Belgian accounting Sales 7 918 7 919 Net sales Cost of sales 5 275 5 240 Cost of goods sold Gross margin 2 643 2 679 Gross margin (1) Sales and administrative expenses 1 433 1 412 Commercial and administrative costs (2) R&D expenditures 397 399 R&D costs Other operating income and expenses 81 69 Other operating gains & losses Other financial income and expenses 40 45 Other financial gains & losses (3) EBIT 772 844 REBIT (4) IFRS 87 Non-recurring items (5) 757 EBIT Net borrowing costs 68 88 Charges on net indebtedness (6) Current taxes 170 151 Income taxes (7) Share in earnings of companies accounted for using the equity method 38 39 Equity earnings Net current income 496 Net extraordinary income/loss 0 15 Income from investments (3) Net Group income 496 494 Net income of the Group of which minority interests 28 30 Minority interests of which Solvay's share 468 464 Net income (Solvay share) Earnings per share 5,53 5,59 Earnings per share (8) 5,58 Diluted earnings per share (9) Figures (--) refer to notes on page 7.
5 Consolidated cash flow statement 2002 EUR million Belgian accounting Cash flow from operations 548 661 Cash flow from operating activities (10) Net income 496 758 EBIT Depreciation and amortization 604 554 Depreciation and amortization (11) Changes in working capital 460 398 Changes in working capital Changes in provisions 60 51 Changes in provisions IFRS 114 Income taxes paid (12) Non cash items 32 88 Other non-cash items Cash flow from investment activities 392 379 Cash flow from investing activities Acquisition of assets and investments 625 13 Acquisition/sale of investments (13) Sales of assets and investments 250 376 Acquisition/sale of assets 15 Income from investments Changes in long-term notes receivable 17 66 Changes in financial receivables (14) Effect of changes in method 35 of consolidation (15) Cash flow from financing activities 341 426 Cash flow from financing activities Increase in capital 10 10 Variation of capital (increase/decrease) 9 Acquisition/sale of own shares (16) Changes in borrowings 121 120 Changes in borrowings 88 Charges on net indebtedness (17) Dividends 230 219 Dividends Net change in cash and cash equivalents 185 144 Net change in cash and cash equivalents Currency translation differences and changes in scope of consolidation 11 42 Currency translation differences (15) Cash and cash equivalents at beginning of year 716 630 Opening cash balance Cash and cash equivalents at end of year 520 444 Ending cash balance Figures (--) refer to notes on page 7.
6 Solvay Group/2002 IFRS pro forma financial statements Consolidated Balance Sheet 2002 EUR million Belgian accounting IFRS ASSETS ASSETS Fixed assets 5 532 5 738 Non-current assets Start-up expenses and intangible assets 377 264 Intangible assets (18) Consolidation differences 198 178 Consolidation differences (19) Tangible assets 3 814 3 589 Tangible assets (20) Financial assets 1 143 318 Investments - equity accounting (21) 466 Other investments (22) 477 Deferred tax assets (23) 363 Financial receivables (24) 83 Other non-current assets (25) Current assets 3 613 3 688 Current assets Inventories 1 096 1 095 Inventories Trade receivables 1 485 1 543 Trade receivables (26) Other receivables and adjustments 512 606 Other receivables Cash and cash equivalents 520 444 Cash and cash equivalents (27) TOTAL ASSETS 9 145 9 426 TOTAL ASSETS EQUITY & LIABILITIES EQUITY & LIABILITIES Total equity 3 796 3 573 Shareholders equity Shareholders' equity 2 887 2 695 Capital and Reserves (28) Minority interests 909 878 Minority interests 3 256 Non-current liabilities Provisions and deferred taxes 1 689 1 775 Long-term provisions (29) 228 Deferred tax liabilities (30) Liabilities 3 660 Financial liabilities due in more than one year 1 086 1 198 Long-term financial debt (31) 55 Other non-current liabilities 2 597 Current liabilities 96 Short-term provisions (29) Financial liabilities due within one year 487 565 Short-term financial debt (31) Trade liabilities 1 109 1 141 Trade liabilities 31 Income tax payable (32) Other liabilities and adjustments 978 764 Other current liabilities (33) TOTAL EQUITY & LIABILITIES 9 145 9 426 TOTAL EQUITY & LIABILITIES Figures (--) refer to notes on pages 8-9.
Notes to the financial statements under IFRS 7 (1) Gross margin: Is EUR 36 million higher under IFRS than under Belgian accounting standards, owing to: lower depreciation charges related to the impairment of the natural soda ash (trona) assets in the USA (see note 20); certain reclassifications (commissions to agents, included in gross margin in Belgian accounting, are recorded under commercial and administrative costs under IFRS, whilst investory write-downs, included in commercial costs under Belgian accounting, are included in the gross margin under IFRS). (2) Commercial and administrative costs: The reversal of the capitalization of the ACEON medication launch costs in the IFRS opening balance sheet, and the resulting absence of amortization, explains the reduction in this item. These expenses are also, to a lesser extent, affected by the different classification of certain expenses (see note 1). (3) Other financial gains and losses: In Belgian accounting, these items contain income from investments, which are recorded after EBIT under IFRS (EUR 15 million). Under IFRS these items also include the cost of annually discounting pensions and provisions (EUR 28 million), whereas in Belgian accounting a portion of these charges is placed under other operating gains and losses. Finally, a financial gain of EUR 39 million has been recorded under this item to reflect the increase in the value of the put option to BP of our share in the polyethylene joint venture. (4) REBIT: Given that under IFRS extraordinary items can be recognized only in extremely rare cases, the Group has, out of a concern to clearly identify non-recurring elements and maintain the comparability of the operating results, created an additional earnings level, labelled Recurring Earnings before Interest and Taxes. (5) Non-recurring items: These correspond to the extraordinary income and charges under Belgian accounting, but without the tax impact. With the tax impact, these are nil, whereas under IFRS they are negative. This is because the extraordinary items under Belgian accounting contain a tax credit of EUR 96 million, including a EUR 53 million reversal of deferred tax liabilities, which has already been posted to equity in the restated IFRS opening balance sheet. The difference improves the taxes item under IFRS. (6) Charges on net indebtedness: This item is higher under IFRS, owing mainly to the non-application of inflation accounting for Argentina which is not authorized under IFRS (in inflation accounting, earnings are revalued and converted at the closing rather than the average exchange rate). (7) Income taxes: Under IFRS these include the tax credits relating to extraordinary charges (in Belgian accounting these are recorded in extraordinary income), along with deferred taxes (changes over the year of deferred tax assets and liabilities). (8) Earnings per share: Under IFRS, own shares purchased to cover stock option plans are deducted from the total number of shares, whilst under Belgian accounting they are not. (9) Diluted earnings per share: This figure reflects the potential dilutive effect on earnings per share of stock options. (10) Cash flow from operating activities: Under IFRS this does not include the impact of charges on net indebtedness, which are recorded in cash flow from financing activities, nor the impact of income from investments, which is included in cash flow from investing activities. (11) Depreciation and amortization: These amounts are lower under IFRS, owing mainly to the impairment write-downs of both tangible and intangible assets recorded when switching accounting standards (see notes 1 and 2). (12) Income taxes paid: This item consists of the current tax charge, without deferred taxes, adjusted by the variation in income tax payable so as to precisely reflect the cash outflow. (13) Acquisition/sale of investments: IFRS rules require separate reporting of acquisitions and sales of investments which are already consolidated, or which are intended to be consolidated at a future date. (14) Changes in financial receivables: Under IFRS this item contains only changes in financial receivables, whilst in Belgian accounting this item also includes changes in other non-current assets.
8 Solvay Group/2002 IFRS pro forma financial statements (15) Effect of changes in consolidation method: This appears under IFRS in the cash flow from investing activities, as it is related to the acquisition and sale of financial investments. In Belgian accounting it appears under currency translation differences and changes in scope of consolidation at the bottom of the table. (16) Acquisition/sale of own shares: This is a new heading under IFRS; it is recorded in cash flow from financing activities to the extent that own shares are deducted from equity under IFRS, whilst they are included in cash and cash equivalents under Belgian accounting. (17) Charges on net indebtedness: In Belgian accounting these are included in net income under cash flow from operating activities. Under IFRS they are included in cash flow from financing activities, along with the other sources of financing, particularly borrowings. (18) Intangible assets: A series of charges capitalized under this heading in Belgian accounting do not fulfil the criteria for capitalization under IFRS. These are essentially: certain development costs, including the ACEON launch costs (EUR 51 million); trona mining leases in the USA following the recording of an impairment (EUR 34 million). (19) Consolidation differences: They are lower under IFRS, essentially owing to the impairment of the acquisition goodwill on the natural soda ash in the USA (EUR 15 million). (20) Tangible assets: The impairment on the natural soda ash in the USA and chloromethanes in Europe reduce this item by EUR 148 million in all. This also has the effect of reducing the depreciation to be charged under IFRS. The absence of inflation accounting under IFRS for Argentina also explains a EUR 50 million reduction of this item under IFRS compared with Belgian accounting. Finally, the revaluations undertaken in prior years, which are not authorized under IFRS, have been eliminated. On the other hand, some leased assets must be capitalized under IFRS (EUR +25 million), with an offsetting entry in financial debts. The most important case here is the Inergy USA production plant (EUR 15 million). (21) Investments accounted for under the equity method: IFRS rules require these to be clearly distinguished from the other investments. With the exception of a small number of minor classification changes, financial assets in the Belgian summary balance sheet include this items as well as other financial investments and financial receivables. (22) Other investments: This item varies slightly (EUR +13 million) as the IFRS standards require listed equities to be valued at their stock market closing price. The offsetting item to this is included in a new subdivision of equity. This value adjustment relates to the Fortis, Sofina, Innogenetics and Arqule securities. (23) Deferred tax assets: The introduction of a generalized system of deferred taxes produces under IFRS an additional asset of EUR 382 million (in Belgian accounting, deferred tax assets are deducted from liabilities). The most significant amount is linked to the goodwill on the Ausimont acquisition, which will be tax deductible in the future (EUR 268 million). (24) Financial receivables: These are included in financial assets in Belgian accounting. These are EUR 75 million higher under IFRS, due essentially to the way the financing of our joint ventures is accounted for. The fact that these are financed by the respective shareholders proportionally to their holding percentages permits a total elimination of joint ventures loans and borrowings in Belgian accounting. Under IFRS, elimination is permitted only pro rata to the holding percentage, with financial debts increasing by the same amount. (25) Other non-current assets: This heading includes an asset item reflecting the increase in the fair value of our put option to BP covering our share in the polyethylene joint venture. (26) Trade receivables: Under IFRS this includes EUR 59 million of securitized receivables, which in Belgian accounting are deducted from debt. (27) Cash and cash equivalents: This item is lower under IFRS as own shares purchased to meet commitments under stock option plans (EUR 101 million) are deducted from equity.
9 (28) Capital and reserves: Under IFRS this item includes the offsetting items to all the adjustments linked to the change in accounting standards, and which are commented on in the notes above and below. The net effect is a reduction of EUR 223 million. (29) Provisions: Under IFRS these are divided into longterm provisions (more than one year) and short-term provisions (under one year). In Belgian accounting, these amount to EUR 1,441 million (EUR 1,689 million with 248 million of deferred taxation). Under IFRS they are EUR 430 million higher at EUR 1,871 million. The largest single variation relates to pension provisions, which increase by EUR 372 million. Under IFRS standards, these are based on the projected compensation at the time of retirement. In Belgian accounting projected compensation at retirement is applied only to our activities in Anglo-Saxon countries, with current compensation figures used elsewhere. For the remainder, the supplementary environmental provisions required by IFRS standards are partly offset by the non-deductible provisions, such as those for major repairs or for restructuring where the notification process has not formally begun. Finally, several provisions in Belgian accounting have been reclassified under other debts or deducted from asset headings. (30) Deferred tax liabilities: The introduction of a generalized deferred tax system leads under IFRS to a reduction in deferred tax liability of EUR 115 million compared with Belgian accounting. (31) Financial debt: Overall is higher under IFRS, since it includes EUR 75 million relating to the financing of our joint ventures (see note 24), the EUR 59 million of securitized receivables (see note 26) and EUR 31 million of financial leases that are now required to be capitalized. (32) Income tax payable: Is included in other liabilities under Belgian accounting. (33) Other current liabilities: Under Belgian accounting, this heading in the summary balance sheet includes the EUR 121 million balance of the dividend (not recognised under IFRS), the EUR 55 million of other long-term liabilities classified under non-current liabilities under IFRS and the income tax payable of EUR 31 million (see note 32).
10 Solvay Group/2002 IFRS pro forma financial statements IFRS valuation rules The principal accounting policies used in preparing these consolidated financial statements are set out below: 1. Accounting system The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), under the historical cost convention, except for certain financial instruments that are valued at their fair value. Application of International Accounting Standards Board (IASB) standards should be soon approved by the Banking and Finance Commission (expected during 2 nd quarter 2003). The financial statements also include all the information required by the 4 th and 7 th European directives. 2. Adoption of the IFRS The IFRS standards will be adopted for the first time for the consolidated financial statements for the year ending on December 31, 2003. The draft standard relating to the first-time application of the IFRS, published by the IASB on July 31, 2002, has been utilized in the pro forma consolidated IFRS balance sheet, income statement and cash flow statement published for the year ending on December 31, 2002. 3. Consolidation Companies controlled by the Group (i.e. in which the Group has, directly, or indirectly, an interest of more than one half of the voting rights or is able to exercise control over the operations) have been fully consolidated. Separate disclosure is made of minority interests; All significant intercompany transactions between Group companies have been eliminated on consolidation; Companies over which the Group exercises joint control with a limited number of partners (joint ventures) are consolidated by the proportionate consolidation method; Investments in companies over which the Group exercises significant influence, but which it does not control, are accounted for by the equity method. 4. Goodwill Goodwill represents the difference in the cost of acquisition and the Group s interest in the fair value of the identifiable assets and liabilities of an acquired subsidiary, associated company or joint venture, at the date of acquisition. Where this difference is positive, the goodwill is recognized as an asset and amortized on a straight line basis according to its estimated useful life. Where this difference is negative, the treatment is as follows: the negative goodwill attributable to losses or charges already anticipated at the date of acquisition is released to income as these losses or charges are recognized. The remaining negative goodwill is recognized as income over the remaining average useful life of the acquired non-monetary assets. 5. Foreign currencies Foreign currency transactions in Group companies are recorded initially at the rates of exchange prevailing on the dates of the transactions. Monetary assets and liabilities denominated in such currencies are retranslated at closing exchange rates, with the resulting gains and losses recorded in the income statement for the period. Assets and liabilities of foreign entities included in the consolidation are translated into EUR at the closing exchange rates. Income statement items are converted into EUR at the average exchange rates for the period. The resulting translation differences are posted to the equity item currency translation differences. 6. Retirement benefit costs The Group operates a number of defined benefit and defined contribution retirement benefit plans. Payments to defined contribution benefit plans are charged as an expense as they fall due. The Group s commitments under defined benefits plans, and the related costs, are valued using the projected unit credit method in order to determine the present value of the obligation at closing date. The amount recorded in the balance sheet represents the present value of the defined benefit obligations, adjusted for actuarial differences, for unrecognised past services cost, and for the fair value of external plan assets, limited in the case of a surplus to the present value of available refunds and/or reductions in future contributions. Actuarial differences exceeding the higher of 10% of the present value of the retirement benefit obligations and 10% of the fair value of the external plan assets at balance sheet closing date, are amortized over the expected average remaining working life of the participating employees. 7. Income taxes Income taxes on profits for the period include both current and deferred taxes. They are recorded in the income statement except where they relate to items recorded directly in equity, in which case they are also recorded in equity.
11 Current taxes are taxes payable on the taxable profit for the period, calculated at the tax rates prevailing at the balance sheet closing date, as well as adjustments relating to previous periods. Deferred taxes are calculated on any temporary differences between the carrying amount of assets and liabilities and their tax basis using enacted tax rates. Deferred tax liabilities relating to the income of subsidiaries that the Group does not intend distributing in the foreseeable future are not accounted for. Deferred tax assets are recognized only where taxable profits are likely to be realized, against which the deferred tax assets will be applied. 8. Tangible assets Tangible assets are carried at their historical cost less depreciation. Depreciation is calculated on a straight-line basis, according to the useful life listed below: Buildings IT equipment Machinery and equipment Transportation equipment 30 years 3-5 years 10-20 years 5-20 years Assets held under finance leases are recognized as assets at their fair value, with the corresponding liability included in financial debts. Financial charges, representing the difference between the full amount of the lease obligations and the fair value of the assets acquired, are charged to the income statement over the duration of the contract; Borrowing costs directly attributable to the acquisition, construction or production of an asset requiring a long preparation period are added to the cost of this asset until it is ready for use; Assets purchased with the help of grants are recorded net of the grants. 9. Research and Development costs Research costs are charged in the period in which they are incurred. Development costs are capitalized only if all of the following conditions are fulfilled: the product or process is clearly defined and the related costs are measured reliably and can be separately identified; the technical feasibility of the product has been demonstrated; the product or process will be placed on the market or used internally; the assets will generate future economic benefits (a potential market exists for the product or, where it is to be used internally, its future utility is demonstrated); the technical, financial and other resources required to complete the project are available. The capitalized development costs are amortized on a straight-line basis over their useful lives. 10. Impairment At each balance sheet date, the Group reviews the carrying amounts of goodwill, investments and tangible and intangible assets to determine whether there is any indication that any of these assets might have suffered a reduction in value. Where such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. The recoverable amount is the higher of the net selling price of the asset and its value in use. The value in use is the net present value of the estimated future cash flows from the use of an asset. The recoverable amount is calculated at the level of the cash-generating unit of which the asset is a part. Where the recoverable amount is below the carrying amount, the latter is reduced to the recoverable amount. This impairment is immediately charged to the income statement. Where a previously recorded impairment no longer exists, the carrying amount is partially or totally re-established. Any impairment reversal is taken into income immediately. 11. Inventories Inventories are stated at the lower of purchasing cost (raw materials and merchandise) or production cost (work in progress and finished goods) and net realizable value. Net realizable value represents the estimated selling price, less all estimated costs of making the product ready for sale, including marketing, selling and distribution costs. Inventories are generally valued by the weighted average cost method. Cost of inventories includes the cost of purchase, conversion and other costs incurred to bring the inventories to their present location and condition. 12. Financial instruments Trade receivables Trade receivables are carried at their nominal value less estimated non-recoverable amounts.
12 Solvay Group/2002 IFRS pro forma financial statements Listed financial assets Listed financial assets not considered as trading assets are valued at the stock market price on each closing date. Unrealized profits and losses are recorded directly to equity. Where such assets are sold, any profit or loss on a sale already taken into equity is then included in the net earnings for the period. Bank borrowings Bank loans and overdrafts are accounted for at the net proceeds received. The financial charges, including any settlement or redemption premiums, are charged over the term of the facility. Trade liabilities Trade liabilities are stated at their nominal value. Derivative financial instruments Derivative financial instruments are initially recorded at cost and re-measured to their fair value at every closing date. Changes in fair value linked to designated and effective cash flow hedges are recognized immediately in equity. Changes in fair value not linked to cash flow hedging operations are recorded in the income statement. Cash and cash equivalents The cash and cash equivalents heading consists of cash and sight deposits, short-term deposits (under 3 months) and highly liquid investments which are easily convertible into a known cash amount and where the risk of a change in value is negligible. 13. Provisions A provision is set up whenever the Group has a legal or implicit obligation at a balance sheet date: resulting from a past event and which is likely to result in charges and where the amount of such charges can be reliably estimated. Commitments resulting from restructuring plans are recognized at the time these plans are announced to the persons concerned. 14. Segment information Segment information is produced according to two distinct criteria: primary business segments based on the Group s Sectors of activity and secondary geographical segments based on the main regions. 15. Revenue recognition A revenue is recognized once it is probable that it will be acquired and its amount can be reliably measured. Net sales consist of sales to third parties, less trade discounts. They are recognized when the significant risks and rewards attached to the ownership of the goods are transferred to the buyer. Dividends are recorded in the income statement when declared by the Shareholders Meeting of the distributing company. Interest income is recognized on a time-proportion basis that takes into account the effective yield of the asset. Brussels, March 26, 2003 SOLVAY S.A. 33, rue du Prince Albert, 1050 Brussels (Belgium) Tel.: +32 2 509 6111 Fax: +32 2 509 6617 www.solvay.com a Passion for Progress