Note 1: Summary of significant accounting policies

General information

Akzo Nobel N.V. is a company headquartered in the Netherlands. The address of our registered office is Christian Neefestraat 2, Amsterdam. We have filed a list of subsidiaries, associated companies and joint ventures, drawn up in conformity with Article 379 and 414 of Book 2 of the Dutch Civil Code, with the Trade Registry of Amsterdam.

We have prepared the Consolidated financial statements of Akzo Nobel N.V. in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. They also comply with the financial reporting requirements included in Title 9 of Book 2 of the Dutch Civil Code, as far as applicable. The Consolidated financial statements have been prepared on a going concern basis.

The Management report within the meaning of Article 391 of Book 2 of the Dutch Civil Code consists of the following parts of the annual report:

• 2018 facts and figures
• How AkzoNobel performed in 2018
• How AkzoNobel created value in 2018
• CEO statement
• Strategic performance
• Leadership: Statement of the Board of Management
• Governance and compliance: Corporate governance statement
• Governance and compliance: Remuneration report
• Financial information: Note 5 Operating income
• Financial information: Note 25 Financial risk management

The section Strategic performance provides information on the developments during 2018 and the results. This section also provides information on cash flow and net debt, capital expenditures, innovation activities and employees.

On February 12, 2019, the Board of Management authorized the financial statements for issue. The financial statements as presented in this report are subject to adoption by the Annual General Meeting of shareholders.

Consolidation

The Consolidated financial statements include the accounts of Akzo Nobel N.V. and its subsidiaries. Subsi-diaries are companies over which Akzo Nobel N.V. has control, because it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect returns through its power over the subsidiary. Non-controlling interests in equity and in results are presented separately.

Change in accounting policies and first time application

In 2018 the most significant changes in accounting policies relate to adoption of two new standards IFRS 15 “Revenue from contracts with customers” and IFRS 9 “Financial instruments”. Furthermore, AkzoNobel applied IAS 29 “Financial reporting in hyperinflationary economies” for Argentina.

Accounting pronouncements, which became effective for 2018, such as amendments to IFRS 2 “Share-based Payment”, Annual improvements 2014-2016 cycle (IFRS 1 and IAS 28), IAS 40 “Investment property“ and IFRIC 22 “Foreign Currency Transactions and Advance Consideration”, either were not applicable or had no material impact on our Consolidated financial statements.

The table below shows the adjustments recognized for each individual line item. The restatements are explained in more detail per standard below.

IFRS 9 “Financial Instruments”

IFRS 9 introduces new requirements for classifying and measuring financial assets and liabilities, new requirements for impairment of financial assets and for hedge accounting. AkzoNobel adopted the new standard as per January 1, 2018, and did not restate its 2017 comparative figures.

Classification and measurement

The impact on the classification and measurement of financial assets is not significant. The vast majority of Other financial non-current assets as well as the Trade and other receivables were measured at amortized cost, using the effective interest method, less any impairment losses. In accordance with IFRS 9, these Other financial non-current assets and Trade and other receivables will continue to be measured at amortized cost because the criteria of the Solely Payments of Principal and Interest test have been met.

An amount of €32 million of the Other financial non-current assets and Trade and other receivables was recognized at fair value through profit and loss as at December 31, 2017 and relates to derivative financial instruments and securities. The classification and measurement of these financial assets remained unchanged under IFRS 9.

AkzoNobel had certain not significant equity investments, which were measured at their historic cost price. In accordance with IFRS 9, these equity investments are now measured at fair value through profit and loss. The impact of this change is not significant.

Impairment model

IFRS 9 introduces a new impairment model, whereby recognition of an allowance for expected credit losses on financial assets is required, which deviates from the recognition of incurred credit losses under IAS 39. The new impairment model is applicable for debt instrument financial assets measured at amortized cost, for debt instrument financial assets measured at fair value through Other comprehensive income, for lease receivables, contract assets, loan commitments and certain financial guarantee contracts.

As the IFRS 9 impairment model accelerates the timing of recognizing impairment losses, the implementation of IFRS 9 led to recognition of an additional impairment loss of €4 million as per January 1, 2018, mainly relating to trade receivables. The after tax-effect was a charge of €3 million. The part of the restatement related to discontinued operations was not significant.

IFRS 15 “Revenue from contracts with customers”

IFRS 15 replaces existing revenue recognition guidance in IFRS. It introduces a five-step model to determine when to recognize revenue and at what amount, based on transfer of control over goods or services to the customer. New qualitative and quantitative disclosures are also required.

AkzoNobel adopted this new standard as from January 1, 2018, applying the modified retrospective approach only to contracts that were not completed on January 1, 2018, without restatement of its 2017 comparative figures.

Sale of goods

In accordance with IFRS 15, revenue should be recognized when the customer obtains control of the goods. The application of IFRS 15 did not result in a significant impact on our consolidated financial statements, including the accounting treatment of variable consideration, inclusive among others rebates, bonuses, discounts and payments to customers.

Equipment provided to customers

AkzoNobel regularly provides mixing machines, store interior and other assets to its customers in Decorative Paints and Performance Coatings at the start of a paint delivery contract. Previously, such assets were not treated as a separate performance obligation and their costs were expensed during the contract period.

Under IFRS 15, the delivery of such assets qualifies as a separate performance obligation. However, in most cases no revenue can be recognized at the moment of transfer of such assets.

The book value at December 31, 2017, of such assets amounted to €66 million and was written-off in the January 1, 2018, opening balance sheet, which had an after-tax effect of €53 million, of which €5 million related to non-controlling interest.

The impact of application of IFRS 15 on the revenue and the Consolidated statement of income throughout 2018 is not significant.

Services

AkzoNobel provides certain technical services to its customers in Performance Coatings relating to coatings sold, after these products have been delivered. In addition, in certain instances AkzoNobel provides shipping and handling services after control over the products has transferred to the customer. So far, no revenue was attributed to such services and deferred until the services were provided to the customer.

In accordance with IFRS 15, such services are a separate performance obligation to which revenue should be allocated. Such revenue is to be recognized over time when the relating services are being provided. Therefore, an amount of €3 million (€2 million after tax) was recognized as deferred revenue and contract liability for services provided after December 31, 2017.

Application of IAS 29 “Financial reporting in hyperinflationary economies“

Since July 1, 2018, Argentina qualifies as a so-called hyperinflationary country under IFRS. Therefore, special accounting procedures have been applied to eliminate hyperinflation effects from the accounts of the Argentinian operations, starting on January 1, 2018. The revaluation effect on the non-monetary assets at January 1, 2018, was a positive impact of €23 million after taxes, recorded as a restatement to opening shareholders’ equity. Effects during the year were not significant.

Discontinued operations (Note 2)

A discontinued operation is a component of our business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale/held for distribution, or is a subsidiary acquired exclusively with a view to resale. Assets and liabilities are classified as held for sale if it is highly probable that the carrying value will be recovered through a sale transaction within one year rather than through continuing use. Assets and liabilities are classified as held for distribution if it is highly probable that the carrying value will be recovered through a legal demerger transaction within one year rather than through continuing use. When reclassifying assets and liabilities as held for sale/held for distribution, we recognize the assets and liabilities at the lower of their carrying value or fair value less selling costs. Assets held for sale/held for distribution are not depreciated and amortized but tested for impairment.

In case of discontinued operations, the comparative figures in the Consolidated statement of income and Consolidated statement of cash flows are represented. The balance sheet comparative figures are not represented.

Alternative Performance Measures (Note 3)

The Identified items (Alternative Performance Measures (APM) adjustments) are special charges and benefits, results on acquisitions and divestments, major restructuring and impairment charges, and charges and benefits related to major legal, anti-trust, environmental and tax cases, and are generated outside the normal cause of business.

Use of estimates

The preparation of the financial statements in compliance with IFRS requires management to make judgments, estimates and assumptions that affect amounts reported in the financial statements. The estimates and assumptions are based on experience and various other factors that are believed to be reasonable under the circumstances and are used to judge the carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and underlying assumptions are reviewed on an ongoing basis. The most critical accounting policies involving a higher degree of judgment and complexity in applying principles of valuation and for which changes in the assumptions and estimates could result in significantly different results than those recorded in the financial statements are the following:

• Scope of consolidation (Note 2)
• Discontinued operations and held for sale (Note 2)
• Income tax and deferred tax assets (Note 8)
• Impairment of intangible assets and property, plant and equipment (Note 10, 11)
• Post-retirement benefit provisions (Note 17)
• Provisions and contingent liabilities (Note 18)

Statement of cash flows

We have used the indirect method to prepare the statement of cash flows. Cash flows in foreign currencies have been translated at transaction rates. Acquisitions or divestments of subsidiaries are presented net of cash and cash equivalents acquired or disposed of, respectively. Cash flows from derivatives are recognized in the statement of cash flows in the same category as those of the hedged items.

Operating segments

We determine and present operating segments based on the information that is provided to the Executive Committee, our chief operating decision-maker during 2018, to make decisions about resources to be allocated to the segments and assess its performance. Segment results reported to the Executive Committee include items directly attributable to a segment as well as those items that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets and corporate costs and are reported in “Corporate and other”.

Foreign currencies

Transactions in foreign currencies are translated into the functional currency using the foreign exchange rate at transaction date. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency using the exchange rates at the balance sheet date. Resulting foreign currency differences are included in the statement of income. Non-monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rate at acquisition date.

The assets and liabilities of entities with other functional currencies are translated into euros, the functional currency of the parent entity, using the exchange rates at the balance sheet date. The income and expenses of entities with other functional currencies are translated into the functional currency, using the exchange rates at transaction date.

When a subsidiary is operating in a hyper-inflationary country, the financial statements of this entity are restated into the current purchasing power at the end of the reporting period.

Foreign exchange differences resulting from translation into the functional currency of investments in subsidiaries and of intercompany loans of a permanent nature with other functional currencies are recorded as a separate component (cumulative translation reserve) within Other comprehensive income. These cumulative translation adjustments are reclassified (either fully or partly) to the statement of income upon disposal (either fully or partly) or liquidation of the foreign subsidiary to which the investment or the intercompany loan with a permanent nature relates to.

Foreign currency differences arising on the re-translation of a financial liability designated as an effective hedge of a net investment in a foreign operation are recognized in the cumulative translation reserve (in Other comprehensive income).

Exchange rates of key currencies

The principal exchange rates against the euro used in preparing the balance sheet and the statement of income are:

Revenue recognition (Note 4)

2018

As indicated above IFRS 15 replaced revenue recognition guidance in IFRS. In 2018, revenue is recognized for the major business activities using the methods outlined below.

Sale of goods

AkzoNobel’s main business consists of straightforward selling of goods (paints and coatings) to customers at contractually determined prices and conditions without any additional services. Although the transfer of risks and rewards is not the only criterion to be considered to determine whether control over the goods has transferred, it is in most situations considered to be the main indicator of the customer’s ability to direct the use of and obtain the benefits from the asset and largely also coincides with the physical transfer of the goods and the obligation of the customer to pay.

Variable considerations, including among others rebates, bonuses, discounts and payments to customers, are accrued for as performance obligations are satisfied and revenue is recognized. Variable considerations are only recognized when it is highly probable that it is not subject to significant reversal.

In case of expected returns, no revenue is recognized for such products, but a refund liability and an asset for the right to recover the to be returned products are recorded.

A provision for warranties is recognized when the underlying products or services are sold, generally based on historical warranty data.

Revenue is recognized net of rebates, discounts and similar allowances, and net of sales tax.

Equipment provided to customers

AkzoNobel regularly provides mixing machines, store interior and other assets to its customers in Decorative Paints and Performance Coatings at the start of a paint delivery contract. Under IFRS 15, the delivery of such assets qualifies as a separate performance obligation. Revenue can only be recognized at the moment of transfer of such assets, when there is an agreed sales price or when there is a binding take-or-pay commitment for a minimum quantity of paint to be acquired by the customer.

Services

AkzoNobel provides certain training, technical or support services to customers as well as shipping and handling activities for its customers. Service revenue is recognized over time when the relating services are being provided. When not separately invoiced, part of the sales price of paints or coatings is allocated to such services.

2017

The revenue recognition policy below was applied for the comparative figures in relation to 2017.

Revenue is defined as the revenue from the sale and delivery of goods and services and royalty income, net of rebates, discounts and similar allowances, and net of sales tax. Revenue is recognized when the significant risks and rewards have been transferred to a third party, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably and there is no continuing management involvement with the goods. For revenue from sales of goods these conditions are generally met at the time the product is shipped and delivered to the customer, depending on the delivery conditions. Service revenue is generally recognized as services are rendered.

Post-retirement benefits (Note 6, 17)

Contributions to defined contribution plans are recognized in the statement of income as incurred.

Most of our defined benefit pension plans are funded with plan assets that have been segregated in a trust or foundation. We also provide post-retirement benefits other than pensions to certain employees, which are generally not funded. Valuations of both funded and unfunded plans are carried out by independent actuaries based on the projected unit credit method. Post-retirement costs primarily represent the increase in the actuarial present value of the obligation for projected benefits based on employee service during the year and net interest on the net defined benefit liability/asset. When the calculation results in a benefit to AkzoNobel, the recognized asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. An economic benefit is available if it is realizable during the life of the plan, or on the settlement of the plan liabilities. The effect of these so-called asset ceiling restrictions and any changes therein is recognized in Other comprehensive income. Remeasurement gains and losses, which arise in calculating our obligations, are recognized in Other comprehensive income. When the benefits of a plan improve, the portion of the increased benefits related to past service by employees is recognized as an expense in the statement of income immediately. We recognize gains and losses on the curtailment or settlement of a defined benefit plan when the curtailment or settlement occurs.

Net interest on the net defined benefit liability is included in financing expenses related to post-retirement benefits. Other charges and benefits recognized are reported in Operating income, unless recorded in Other comprehensive income.

Other employee benefits (Note 6, 18)

Provisions for other long-term employee benefits are measured at present value, using actuarial assumptions and methods. Any actuarial gains and losses are recognized in the statement of income in the period in which they arise.

Share-based compensation (Note 6)

We have a performance-related and restricted share plan as well as a share-matching plan, under which shares are conditionally granted to certain employees. The fair value is measured at grant date and amortized over the three-year period during which the employees normally become unconditionally entitled to the shares with a corresponding increase in shareholders’ equity. Amortization is accelerated in the event of earlier vesting or settlement. In case of a plan modification, the fair value is increased when the change is beneficial to the employee.

Income tax (Note 8)

Income tax expense comprises both current and deferred tax, including effects of changes in tax rates. In determining the amount of current and deferred tax we also take into account the impact of uncertain tax positions and whether additional taxes and interest may be due. Income tax is recognized in the statement of income, unless it relates to items recognized in Other comprehensive income or equity.

Current tax includes the expected tax payable and receivable on the taxable income for the year, using tax rates enacted or substantially enacted at reporting date, as well as (any adjustments to) tax payables and receivables with respect to previous years.

Deferred tax is recognized using the liability method on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Consolidated financial statements. We do not recognize deferred tax for the initial recognition of goodwill, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences related to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. Deferred tax assets are recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized.

Measurement of deferred tax assets and liabilities is based upon the enacted or substantially enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be reversed. Non-refundable income tax is taken into account in the determination of deferred tax liabilities to the extent earnings are expected to be distributed by subsidiaries in the foreseeable future and AkzoNobel has control over dividend distribution. Deferred tax positions are not discounted.

Earnings per share (Note 9)

Basic earnings per share is calculated by dividing the profit for the period attributable to shareholders of the company by the weighted average number of common shares outstanding during the year adjusted for the repurchased shares. Diluted earnings per share is calculated by adjusting the weighted average number of common shares outstanding during the year for the diluting effect of the shares of the performance-related share plan and for the share-matching plan.

Adjusted earnings per share represents the basic earnings per share from continuing operations excluding identified items, after taxes.

Government grants

Government grants related to costs are deducted from the relevant costs to be compensated in the same period. Government grants to compensate for the cost of an asset are deducted from the cost of the related asset. Emission rights granted by the government are recorded at cost. A provision is recorded if the actual emission is higher than the emission rights granted.

Intangible assets (Note 10)

Intangible assets are valued at cost less accumulated amortization and impairment charges. Intangible assets with an indefinite useful life, such as goodwill and certain brands, are not amortized, but tested for impairment annually using the value in use method. Goodwill in a business combination represents the excess of the consideration paid over the net fair value of the acquired identifiable assets, liabilities and contingent liabilities. If the cost of an acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the statement of income. The effects of all transactions with non-controlling interest shareholders are recorded in equity if there is no change in control.

Intangible assets with a finite useful life, such as licenses, know-how, brands, customer relationships, intellectual property rights, emission rights and capitalized development and software costs, are capitalized at historical cost and amortized on a straight-line basis over the estimated useful life of the assets, which generally ranges from five to 40 years for brands with finite useful lives, five to 25 years for customer lists and three to 15 years for other intangibles. Amortization methods, useful lives and residual values are reassessed annually. Research expenditures are recognized as an expense as incurred.

Property, plant and equipment (Note 11)

Property, plant and equipment are valued at cost less accumulated depreciation and impairment charges. Costs include expenditures that are directly attributable to the acquisition of the asset, including borrowing cost of capital investment projects under construction.

Depreciation is calculated using the straight-line method, based on the estimated useful life of the asset components. The useful life of plant equipment and machinery generally ranges from ten to 25 years, and for buildings ranges from 20 to 50 years. Land is not depreciated. In the majority of cases residual value is assumed to be not significant. Depreciation methods, useful lives and residual values are reassessed annually.

Costs of major maintenance activities are capitalized and depreciated over the estimated useful life. Maintenance costs which cannot be separately defined as a component of property, plant and equipment are expensed in the period in which they occur.

We recognize conditional asset retirement obligations in the periods in which sufficient information becomes available to reasonably estimate the cash outflow.

Impairments (Note 10, 11)

We assess the carrying value of intangible assets and property, plant and equipment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In addition, for goodwill and other intangible assets with an indefinite useful life, the carrying value is at least reviewed annually in the fourth quarter. If the carrying value of an asset or its cash-generating unit exceeds its estimated recoverable amount, an impairment loss is recognized in the statement of income. The assessment for impairment is performed at the lowest level of assets generating largely independent cash inflows. For goodwill and other intangible assets with an indefinite life, we have determined this to be at business unit level (one level below segment).

Except for goodwill, we reverse impairment losses in the statement of income if and to the extent we have identified a change in estimates used to determine the recoverable amount.

Leases (Note 11, 19, 22)

Lease contracts in which we have substantially all the risks and rewards of ownership are classified as financial leases. Upon initial recognition, the leased asset is measured at the lower of its fair value and the present value of minimum lease payments. Subsequent to initial recognition, the asset is depreciated using a straight-line method, based on the lower of the estimated useful life or the lease term. The interest expenses are recognized as other financing expenses over the lease term.

Payments made under operational leases are recognized in the statement of income on a straight-line basis over the term of the lease.

Associates and joint ventures (Note 12)

Associates and joint ventures are accounted for using the equity method and are initially recognized at cost. The Consolidated financial statements include our share of the income and expenses of the associates and joint ventures, whereby the result is determined using our accounting principles. When the share of losses exceeds the interest in the investee, the carrying amount is reduced to nil and recognition of further losses is discontinued, unless we have incurred legal or constructive obligations on behalf of the investee.

Inventories (Note 14)

Inventories are measured at the lower of cost and net realizable value. Costs of inventories comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to the present location and condition. The costs of inventories are determined using weighted average cost.

Provisions (Note 18)

We recognize provisions when a present legal or constructive obligation as a result of a past event exists, it is probable that an outflow of economic benefits is required to settle the obligation and the amount can be reliably estimated. Provisions are measured at net present value. The increase of provisions as a result of the passage of time is recognized in the statement of income under Financing income and expenses.

Provisions for restructuring of activities are recognized when a detailed and formal restructuring plan has been approved, and the restructuring has either commenced or has been announced publicly. We do not provide for future operating costs.

Financial instruments

As indicated in Change in accounting policies, IFRS 9 ‘‘Financial instruments’’ replaced existing standard IAS 39 and had a very limited effect.

Classification

All assets are measured at amortized cost, fair value through profit or loss or fair value through other comprehensive income.

Financial assets are classified according to a model based on:

• A contractual cash flow characteristics test
• A business model dictating how the reporting entity manages its financial assets in order to generate cash flows as either: 1. hold to collect contractual cash flows; 2. collect contractual cash flows and sell; or 3. neither 1 or 2.
• Election of the fair value option in some specific cases in order to eliminate an accounting mismatch

The classification of a financial asset is determined at initial recognition, but if certain conditions are met, an asset might be subject to reclassification.

Valuation and impairment

Financial assets are assessed for impairment either according to the general approach or a simplified approach.

The calculation of impairment under the general approach uses following stages:

• 12-month expected credit losses; taking in account possible default events within one year
• Lifetime expected credit losses in case of an increase in credit risk; through recognition of expected credit losses over the remaining life of the exposure
• Lifetime expected credit losses, where interest is calculated on the net amount of the receivables less impairment loss

In all above stages, the impairment calculation used at AkzoNobel is based on external credit ratings of involved parties or default rates published by well-known credit risk agencies.

The financial assets included in the general impairment approach are long-term loans and other long-term receivables.

The calculation of impairment under the simplified approach requires recognition of lifetime expected credit loss (no tracking of changes in credit risk). The financial assets included in the simplified impairment approach are trade receivables and the remaining financial assets.

Measurement

Since the adoption of IFRS 9 did not have an impact on the measurement of financial instruments, these following policies also were applied for the prior year financial reporting under IAS 39.

Regular purchases and sales of financial assets and liabilities are recognized on trade date. The initial measurement of all financial instruments is at fair value. Except for derivatives, the initial measurement of financial instruments is adjusted for directly attributable transaction costs.

Derivative financial instruments (Note 25)

Derivative financial instruments are recognized at fair value on the balance sheet. Fair values are derived from market prices and quotes from dealers and brokers, or are estimated using observable market inputs. When determining fair values, credit risk for our contract party, as well as for AkzoNobel, is taken into account.

Changes in the fair value are recognized in the statement of income, unless cash flow hedge accounting or net investment hedge accounting is applied. In those cases, the effective part of the fair value changes is deferred in Other comprehensive income and released to the related specific lines in the statement of income or balance sheet at the same time as the hedged item.

Other financial non-current assets (Note 13) and Trade and other receivables (Note 15)

Loans and receivables are measured at amortized cost, using the effective interest method, less any impairment losses.

Cash and cash equivalents and short-term investments (Note 19)

Cash and cash equivalents and short-term investments are measured at fair value. Cash and cash equivalents include all cash balances and other investments that are directly convertible into cash. Changes in fair values are included in Financing income and expenses.

Long-term and short-term borrowings (Note 19, 25) and Trade and other payables (Note 20)

Long-term and short-term borrowings, as well as Trade and other payables, are measured at amortized cost, using the effective interest rate method. The interest expense on borrowings is included in Financing income and expenses. The fair value of borrowings, used for disclosure purposes, is determined on the basis of listed market price, if available. If a listed market price is not available, the fair value is calculated based on the present value of principal and interest cash flows, discounted at the interest rate at the reporting date, taking into account AkzoNobel’s credit risk.

New IFRS accounting standards

IFRS standards and interpretations thereof not yet in force which may apply to our Consolidated financial statements for 2019 and beyond have been assessed for their potential impact. The most important upcoming change relates to IFRS 16 “Leases” which will be implemented as per January 1, 2019.

IFRS 16 “Leases”

IFRS 16 replaces existing guidance on lessee accounting for leases. It requires lessees to bring most leases on balance sheet in a single lease accounting model, recognizing a right-of-use asset and a lease liability. Compared with the existing accounting for operating leases, it will also impact the classification and timing of expenses and consequently the classification between cash flow from operating activities and cash flow from financing activities.

Transition method

AkzoNobel will adopt IFRS 16 as per January 1, 2019, and will apply the modified retrospective approach. All right-of-use assets will be measured at the amount of the lease liability at transition, adjusted for any prepaid or accrued lease expenses. Short-term and low-value leases will be exempted. AkzoNobel will not restate its 2018 comparative figures.

Impact

IFRS 16 requires the right-of-use asset and the lease liability to be recognized at discounted value and assumptions with regards to termination and renewal options should be taken into consideration.

We expect that adoption of the standard as per January 1, 2019, will result in the recognition of Right-of-use assets of approximately €350 million, a financial lease receivable of €20 million and additional lease liabilities of approximately €370 million. In addition, assets with a book value of €59 million will be reclassified to Right-of-use assets, including among others current finance leases.

In the Consolidated statement of income, the operating lease expenses, previously recorded in operating income, will be replaced by the depreciation charge of the right-of-use assets. The interest charge on the lease liability will be recorded in Financing income and expenses. The net effect of these changes will be not significant.

The company is finalizing the review of all input and assumptions for the calculation of the opening balance sheet adjustments, including among others lease contracts concluded in late 2018, discount rates and the assessment whether contracts contain a lease. Finalization of this review may still result in changes to these opening entries in the course of 2019.

AkzoNobel’s activities as a lessor are not truly material and hence the impact on the financial statements is not significant. Additional disclosures will be required as from next year.

Other changes

Several other new accounting standards were issued. These include among others IFRIC 23 ‘‘Uncertainty over income tax treatments” and ‘‘Plan Amendment, Curtailment and Settlement” (Amendments to IAS 19), both effective as from January 1, 2019. These changes are not expected to have a material effect on AkzoNobel’s Consolidated financial statements, as to a large extent we already comply with these clarifications on IFRS.