L'Oréal - 2018 Registration Document

Parent company financial statements NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS

Accounting principles

NOTE 1

Research and development costs 1.3. Research and development costs are recognised in expenses in the period in which they are incurred. Income tax 1.4. The Company has opted for the French tax group regime. French companies included in the scope of tax consolidation recognise an income tax charge in their own accounts on the basis of their own taxable profits and losses. L’Oréal, as the parent company of the tax group, recognises as tax income the difference between the aggregate tax charges recognised by the subsidiaries and the tax due on the basis of consolidated taxable profit or loss of the tax group. Intangible assets 1.5. Intangible assets are recorded in the balance sheet at purchase cost, including acquisition costs. Pursuant to Regulation No. 2015-06 issued by the French accounting standards-setter (Autorité des Normes Comptables – ANC), technical merger losses were allocated to the corresponding underlying assets, reclassified to special-purpose accounts at 1 January 2016 and amortised where appropriate. The value of newly acquired trademarks is calculated based on a multi-criteria approach taking into consideration their reputation and their future contribution to profits. In accordance with regulation No. 2004-06 on assets, certain trademarks have been identified as amortisable in accordance with their estimated useful life. Non-amortisable trademarks are tested for impairment at least once a year on the basis of the valuation model used at the time of their acquisition. An impairment is recorded where appropriate. Initial trademark registration costs are recorded as expenses. Patents are amortised over a period ranging from 2 to 10 years. Business goodwill is not amortised. It is written down whenever the present value of future cash flows is less than the book value. Software of material value is amortised using the straight-line method over its probable useful life, generally between 5 and 7 years. It is also subject to accelerated tax-driven amortisation, which is recognised over a 12-month period. Other intangible assets are usually amortised over periods not exceeding 20 years.

The Company’s annual financial statements are prepared in accordance with French law and regulations (French Chart of Accounts) and with French generally accepted accounting principles. Change in accounting method applied at 1 January 2017: ANC Regulation No. 2015-05 relative to derivative financial instruments and hedging operations This regulation notably specifies that: income from hedging instruments be presented on the s same line in the income statement as hedged items, and recognised symmetrically; option premiums and income/discounts must impact profit s and loss at the same time as the hedged items; the overall currency position be calculated on a s currency-per-currency basis, include items with a maturity date effective in the same accounting year, and exclude hedging operations and the items they cover; unrealised gains/losses relative to isolated open positions s be booked under Translation Adjustments; a provision for currency risk be recognised in the event of s an unrealised foreign currency loss. In accordance with regulations, the impact of the change in accounting method was limited to existing operations at 1 January 2017. This change led to a reduction in opening shareholders' equity at 1 January 2017, to the tune of €4.7 million net of tax, which was offset by increases in the amount of unrealised exchange losses (€104.9 million), corporate income tax receivables (€2.5 million), unrealised exchange gains (€11.8 million) and provisions for currency losses (€100.3 million). Sales 1.1. These are comprised of sales of goods (net of returns from distributors and rebates and discounts) and services (including technological assistance fees).

5

Advertising and promotion 1.2. expenses

Expenses relating to the advertisement and promotion of products to customers and consumers are recognised as expenses for the year in which the advertisement or promotional initiative takes place.

REGISTRATION DOCUMENT / L'ORÉAL 2018

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