L'Oréal - 2018 Registration Document

4 2018 Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Operating items – Segment information

NOTE 3

ACCOUNTING PRINCIPLES Net sales Sales are recognised when the goods have been transferred to the customer. Sales incentives, cash discounts and product returns are deducted from sales, as are incentives granted to distributors or consumers resulting in a cash outflow, such as commercial cooperation, coupons, discounts and loyalty programmes. Sales incentives, cash discounts, provisions for returns and incentives granted to customers are recorded simultaneously to the recognition of the sales if they can be estimated in a reasonably reliable manner, based mainly on statistics compiled from past experience and contractual conditions. Cost of sales The cost of goods sold consists mainly of the industrial production cost of products sold, the cost of distributing products to customers including freight and delivery costs, either directly or indirectly through depots, inventory impairment costs, and royalties paid to third parties. Research and development expenditure Expenditure during the research phase is charged to the income statement for the financial year during which it is incurred. Expenses incurred during the development phase are recognised as Intangible assets only if they meet all the following criteria set out in IAS 38: the project is clearly defined and the related costs are s separately identified and reliably measured; the technical feasibility of the project has been s demonstrated; the intention and ability to complete the project and to s use or sell the products resulting from the project have been demonstrated; the resources necessary to complete the project and to s use or sell it are available; the Group can demonstrate that the project will s generate probable future economic benefits, as the existence of a potential market for the production resulting from the project, or its internal usefulness has been demonstrated.

In view of the very large number of development projects and uncertainties concerning the decision to launch products relating to these projects, L’Oréal considers that some of these capitalisation criteria are not met. Advertising and promotion expenses These expenses consist mainly of expenses relating to the advertisement and promotion of products to customers and consumers. They are charged to the income statement for the financial year in which they are incurred. Selling, general and administrative expenses These expenses relate mainly to sales teams and sales team management, marketing teams and administrative services, as well as general expenses and the costs of share-based payment (stock options and free shares). Operating results Operating profit consists of gross profit less research and development expenses, advertising and promotion expenses, and selling, general and administrative expenses. Property, plant and equipment Property, plant and equipment are recorded on the balance sheet at their acquisition cost, and are not subject to revaluation. Significant capital assets financed through capital leases, which transfer to the Group substantially all of the risks and rewards inherent to their ownership, are recorded as assets on the balance sheet. The corresponding debt is recorded within Borrowings and debt on the balance sheet . Investment subsidies are recorded as liabilities under Other current liabilities . The components of property, plant and equipment are recorded separately if their estimated useful lives, and therefore their depreciation periods, are materially different. Property, plant and equipment are depreciated using the straight-line method, over the following useful lives:

Buildings

10-40 years 5-15 years

Industrial machinery and equipment

Point-of-sales advertising: stands and displays

3 years

Other tangible assets

3-10 years

REGISTRATION DOCUMENT / L'ORÉAL 2018

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