LOREAL_Registration_Document_2017

2 Corporate governance *

RISK FACTORS AND CONTROL ENVIRONMENT

Financial and market risks 2.8.5.3.7.

FINANCIAL AND MARKET RISKS \ INTEREST RATE RISK Risk identification For the requirements of its development and its capital expenditure policy, L’Oréal uses borrowings and short-term marketable instruments. The Group mainly refinances at floating rates, as mentioned in note 8.1.5. Breakdown of fixed rate and floating rate debt of the Consolidated Financial Statements.

Risk management

None of the Group’s borrowings or debt contains an early repayment clause linked to financial ratios (covenants). In order to limit the negative impact of interest rate fluctuations, the Group has a non-speculative interest rate management policy using derivatives as appropriate, as described in notes 9.3. Hedging of interest rate risk and 9.4 . Sensitivity to changes in interest rates of the Consolidated Financial Statements. Other details with regard to debt and interest rates are also provided in notes 8.1.6. Effective interest rates , 8.1.7. Average interest rates on debt and 8.1.8. Fair value of borrowings and debt of the Consolidated Financial Statements.

FINANCIAL AND MARKET RISKS \ CURRENCY RISK Risk identification Due to its international presence, L’Oréal is naturally exposed to currency fluctuations. Fluctuations between the main currencies may therefore have an impact on the Group’s results when translating the foreign currency financial statements of subsidiaries into euros, and may therefore make it difficult to compare performances between two financial years. In addition, commercial flows resulting from purchases and sales of items, products, royalties and services arise between subsidiaries in different countries. Procurement by subsidiaries is mainly in the currency of the supplier’s country.

Risk management

The Financial Code and the exchange risk management standard specify, in particular, the principles to be applied by Group entities to ensure that management of currency risk is both prudent and centralised. To limit currency risk, the Group adopts a conservative approach whereby it hedges a significant portion of its annual requirements for the following year through currency forward contracts (purchases or sales) or through options. Requirements are established for the following year on the basis of the operating budgets of each subsidiary. These requirements are then reviewed regularly throughout the year in progress. In order to obtain better visibility over the flows generated, currency risk management is centralised through the Treasury Department at head office (Group Corporate Finance Department), which uses a specific tool for centralising the subsidiaries’ requirements by currency (FX report). The system of foreign exchange risk hedging is presented to the Audit Committee. The hedging methodology and the values involved are described in note 9.1. Hedging of currency risk of the Consolidated Financial Statements. The analysis of sensitivity to currency fluctuations and the impact on equity are set out in detail in note 10.3. Other comprehensive income of the Consolidated Financial Statements. Finally, the impact of foreign exchange gains and losses on the income statement is described in note 9.2. Foreign exchange gains and losses of the Consolidated Financial Statements.

Significant changes in the monetary environment could have an impact on the Group’s results and shareholders’ equity.

FINANCIAL AND MARKET RISKS \ RISK RELATING TO THE IMPAIRMENT OF INTANGIBLE ASSETS Risk identification Risk management

As described in note 7 Intangible assets of the Consolidated Financial Statements, brands with an indefinite useful life and goodwill are not amortised but are tested for impairment at least once a year. Where the recoverable amount of a brand is lower than its net book value, an impairment loss is recognised. Similarly, any difference between the recoverable amount of each cash-generating unit and the net book value of the assets including goodwill would lead to an impairment loss in respect of the asset, recorded in the income statement. The amounts for the last three financial years are provided in note 4 Other operational income and expenses of the Consolidated Financial Statements. The data and assumptions used in impairment tests carried out on cash-generating units that comprise material amounts of goodwill and non-amortisable brands are set out in note 7.3 . Impairment tests on intangible assets of the Consolidated Financial Statements.

As stated in the section on legal risks, L’Oréal’s brands are a strategic asset for the Group and may be subject to impairment.

FINANCIAL AND MARKET RISKS \ EQUITY RISK Risk identification

Risk management

If the Sanofi share price suffered a significant or prolonged decline in value below its initial share price, this would potentially lead L’Oréal to write down its asset through the income statement as explained in note 9.7. Shareholding risk of the Consolidated Financial Statements.

L’Oréal does not invest its cash in shares. The main equity risk for L’Oréal is the 9.43% stake it held in Sanofi at 31 December 2017, for an amount described in note 8.3. Non-current financial assets of the Consolidated Financial Statements

REGISTRATION DOCUMENT / L'ORÉAL 2017

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