Notes to the condensed financial statements

General information

AkzoNobel N.V. is a public limited liability company headquartered in Amsterdam, the Netherlands. The interim condensed consolidated financial statements include the financial statements of AkzoNobel N.V. and its consolidated subsidiaries (hereafter referred to as „AkzoNobel“, „Group“ or „the company“).

The company was incorporated under the laws of the Netherlands and is listed on Euronext Amsterdam.

Basis of preparation

All quarterly figures are unaudited. The interim condensed financial statements have been prepared in accordance with IAS 34 „Interim financial reporting“.

The interim condensed consolidated financial statements were discussed and approved by the Board of Management and Supervisory Board. The interim condensed consolidated financial statements should be read in conjunction with AkzoNobel’s consolidated financial statements in the 2017 annual report as published on March 15, 2018. The financial statements were adopted by the Annual General Meeting of shareholders on April 26, 2018. 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.

Invested capital

Invested capital of continuing operations at the end of September 30, 2018, totaled €6.4 billion, up €0.4 billion from year-end 2017, mainly due to seasonality of operating working capital. Operating working capital as % of revenue increased to 14.1% in Q3 2018 compared with 12.0% in Q3 2017, mainly due to higher trade receivables and increased inventories, driven by higher raw material costs.

Operating working capital (continuing operations)

In % of revenue

Pension

The net balance sheet position (IAS19) of the pension plans at the end of Q3 2018 was a surplus of €0.5 billion (year-end 2017: a surplus of €0.4 billion). The development in the first nine months of 2018 was the result of the net effect of:

• Top-up payments of €186 million
• Higher discount rates in key countries

Partially offset by:

• Lower asset returns and higher inflation in key countries

Workforce

At September 30, 2018, the number of people employed in the continuing operations was 34,300 (year-end 2017: 35,700).

Accounting policies and restatements

The significant accounting policies applied in the condensed consolidated interim financial statements are consistent with those applied in AkzoNobel’s consolidated financial statements for the year ended December 31, 2017, except for the following changes in accounting policies and disclosures:

IFRS 15, „Revenue from contracts with customers“, replaces pre-existing revenue recognition guidance in IFRS. Further information on the implementation of IFRS 15, is included below.

IFRS 9, „Financial Instruments“ introduces new requirements for classifying and measuring financial assets and liabilities. This standard encompasses an overall change of accounting principles for financial instruments and replaces IAS 39 – the current standard on financial instruments. The standard contains new requirements for impairment of financial assets and for hedge accounting. AkzoNobel has adopted IFRS 9 as per January 1, 2018, and has not restated its 2017 comparative figures. The transition effect on group equity as per January 1, 2018, is €3 million after tax. The impact on the interim condensed consolidated financial statements is not significant.

The impact of the adoption of IFRS 9 and IFRS 15, has been reflected in the table below „Impact of adoption of IFRS 9 and IFRS 15“ as included in this report.

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.

IAS 29, „Financial Reporting in Hyperinflationary Economies“ is applied to the financial statements for entities who’s functional currency is the currency of a hyperinflationary economy. Since July 1, 2018, Argentina qualifies as a so-called hyperinflationary country under IFRS. As a consequence, 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 gain of €23 mln after taxes, recorded as an adjustment to opening shareholders’ equity.

Effects during the year were limited so far.

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 segment.

Adoption of 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. AkzoNobel has adopted IFRS 15 as per January 1, 2018, and has not restated its 2017 comparative figures.

The transition effect on group equity as per January 1, 2018, is €48 million after tax. For further information, reference is made to Note 1 of the 2017 Financial Statements. The impact on the interim condensed consolidated financial statements is not significant. The table below reflects the dissaggregation of revenue. Additional disaggregation of revenue is included for Decorative Paints and for Performance Coatings.