Notes to the condensed financial statements

Invested capital

Invested capital at year-end 2017 totaled €6.0 billion (year-end 2016: €10.3 billion). Invested capital at year-end 2017 was impacted by the held for sale accounting of the Specialty Chemicals business.

Operating working capital at year-end 2016 of €1,405 million includes Specialty Chemicals operating working capital. At year-end 2017 the operating working capital of Specialty Chemicals amounted to €569 million and was classified as held for sale. Operating working capital of Paints and Coatings at year-end 2017 amounted to €927 million. At year-end 2017 the operating working capital was 10.2% of revenue for Paints and Coatings.

Pensions

The net balance sheet position (IAS19) of the pension plans at year-end 2017 was a surplus of €0.4 billion (year-end 2016: a deficit of €1.0 billion). The development during 2017 was the net effect of:

• Remeasurement effects of liability experience and demographic assumption changes
• The classification as held for sale of the net balance sheet position (IAS19) of the pension plans of Specialty Chemicals, amounting to a deficit of €0.5 billion at year-end 2017
• Top-up payments of €275 million, predominantly into certain UK pension plans

Partly offset by:

• De-risking of pension liabilities through non-cash buy-in transactions totaling £0.4 billion in 2017, all related to the ICI Pension Fund, which led to a €77 million impact in Other comprehensive income

Workforce

At December 31, 2017, the number of people employed was 35,700 people (year-end 2016: 36,300) related to continuing operations and 9,700 people (year-end 2016: 9,800) related to discontinued operations.

Accounting policies and restatements

The full-year 2017 numbers included in the primary statements are derived from the financial statements 2017. These financial statements have been authorized for issue. The financial statements have not yet been published by law and still have to be adopted by the Annual General Meeting of shareholders. In accordance with Article 393 of Book 2 of the Dutch Civil Code, PricewaterhouseCoopers Accountants N.V. has issued an unqualified auditor’s opinion on these financial statements, which will be published on March 15, 2018. All quarterly figures are unaudited. In 2017, some new IFRS accounting standards and interpretations thereof have been implemented, which did not have a material impact on our financial statements. Otherwise the accounting principles are the same as applied in the 2016 financial statements.

IFRS standards and interpretations thereof not yet in force which may apply to our Consolidated financial statements for 2018 and beyond have been assessed for their potential impact. The most important upcoming changes relate to IFRS 9 “Financial Instruments” and IFRS 15 “Revenue from Contracts with Customers”, which will be adopted as from January 1, 2018. For IFRS 9, as well as IFRS 15, AkzoNobel will not restate its 2017 comparative figures. The cumulative effect of applying IFRS 9 and IFRS 15 will be adjusted on the opening equity as per January 1, 2018. For the impact of the adoption of IFRS 9 and IFRS 15, we refer to the table below.

Furthermore, IFRS 16 “Leases” is an important upcoming change, and will be implemented as of January 1, 2019. Based on the results of our assessment so far with respect to IFRS 16, we expect total assets to increase less than 10%. It should be noted that the actual impact will depend on the number, size and remaining duration of lease contracts and any expected renewals at the moment of implementation. We do not expect the impact on operating income to be significant.

Related parties

We purchased and sold goods and services to various related parties in which we hold a 50% or less equity interest (associates and joint ventures). Such transactions were conducted at arm’s length with terms comparable with transactions with third parties. We consider the members of the Executive Committee and the Supervisory Board to be the key management personnel as defined in IAS 24 “Related parties”. In the ordinary course of business, we have transactions with various organizations with which certain of the members of the Supervisory Board and Executive Committee are associated. All related party transactions were conducted at arm’s length.

Seasonality

Revenue and results in Decorative Paints are impacted by seasonal influences. Revenue and profitability tend to be higher in the second and third quarter of the year as weather conditions determine whether paints and coatings can be applied. In Performance Coatings, revenue and profitability vary with building patterns from original equipment manufacturers. In Specialty Chemicals, the Functional Chemicals and the Surface Chemistry businesses experience seasonal influences. Revenue and profitability are affected by developments in the agricultural season and tend to be higher in the first half of the year.

Other activities

In Other activities, we report activities which are not allocated to a particular Business Area. Corporate costs are the unallocated costs of our head office and shared services center in the Netherlands and also include country holdings. Pensions reflects certain pension costs after the elimination of interest cost (reported as financing expenses). Insurances are the results from our captive insurance companies. Other costs include the cost of share-based compensation, the results of treasury and legacy operations.