L'Oréal - 2018 Registration Document

4 2018 Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Post-employment benefits, termination benefits and other long-term 5.4. employee benefits

ACCOUNTING PRINCIPLES The Group operates pension, early retirement and other benefit schemes depending on local legislation and regulations. For obligatory state schemes and other defined-contribution schemes, the Group recognises in the income statement contributions payable when they are due. No provision has been set aside in this respect as the Group’s obligation does not exceed the amount of contributions paid. The characteristics of the defined benefit schemes in force within the Group are as follows: French regulations provide for specific length-of-service s awards payable to employees on retirement. An early retirement plan and a defined benefit plan have also been set up. In some Group companies there are also measures providing for the payment of certain healthcare costs for retired employees. These obligations are partially funded by an external fund, except those relating to healthcare costs for retired employees; for foreign subsidiaries with employee pension schemes s or other specific obligations relating to defined benefit plans, the excess of the projected benefit obligation over the scheme’s assets is recognised by setting up a provision for charges on the basis of the actuarial value of employees’ vested rights. The charges recorded in the income statement during the year include: service cost, i.e . additional rights vested by employees s during the accounting period; the impact of any change to existing schemes on s previous years or of any new schemes; interest cost, i.e . change in the value of the discounted s rights over the past year; income on external funds calculated on the basis of the s discount rate applied to the benefit obligation.

The latter two items represent the interest component of the pension expense. The interest component is shown within Finance Result on the Other financial income and expenses line. To determine the discounted value of the obligation for each scheme, the Group applies an actuarial valuation method based on the final salary (projected unit credit method). The obligations and the fair value of plan assets are assessed each year using length-of-service, life expectancy, staff turnover by category and economic assumptions (such as inflation rate and discount rate). The calculation method used for 2016 and previous financial years involves discounting the cash flows related to the various plans using a single interest rate. As interest rates have dropped sharply over the past few years, since 2017 the Group has used a simplified granular approach to calculate its service cost for the period. Under this simplified approach, two different discount rates are used to calculate the obligation and the service cost based on the duration of the future cash flows relating to each of these items. This change does not affect the calculation of the overall obligation but reduced service cost, primarily for the US and France in 2017 owing to durations exceeding those of the obligation and the interest rate yield curve in these countries. Interest cost continues to be calculated by applying to plan assets the discount rate used for the obligation and by applying the differential interest rate to service cost for the period. Actuarial gains and losses arising on post-employment defined benefit obligations are recognised in equity. Actuarial gains and losses in relation to other benefits such as jubilee awards and long-serve bonuses are immediately charged to the income statement. The liability corresponding to the Company’s net defined benefit obligation regarding its employees is recorded in the balance sheet on the Provisions for employee retirement obligation and related benefits line.

REGISTRATION DOCUMENT / L'ORÉAL 2018

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