Notes to the condensed financial statements

General information

Akzo Nobel N.V. is a public limited liability company headquartered in Amsterdam, the Netherlands. The condensed consolidated financial statements include the financial statements of Akzo Nobel 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 consolidated financial statements have been prepared in accordance with IAS 34. The condensed consolidated financial statements were discussed and approved by the Board of Management and Supervisory Board. These condensed financial statements have been authorized for issue.

The full-year 2018 numbers included in the condensed consolidated financial statements are derived from the financial statements 2018. 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 7, 2019.

Invested capital

Invested capital of continuing operations at the end of December 31, 2018, totaled €6.2 billion, up €0.2 billion from year-end 2017. Operating working capital as percentage of revenue increased to 12.3% in Q4 2018 compared with 10.2% in Q4 2017, mainly due to higher trade receivables and increased inventories, driven by higher raw material costs.

Operating working capital (continuing operations)

In % of revenue

Pensions

The net balance sheet position (IAS19) of the pension plans at the year-end 2018 was a surplus of €0.4 billion (year-end 2017: a surplus of €0.4 billion).

The development during 2018 was the result of the net effect of:

• Top-up payments of €187 million
• Higher discount rates in key countries
• Net demographic assumption gains

Offset by:

• Lower asset returns and higher inflation in key countries
• Cost of equalizing benefits due to Guaranteed Minimum Pensions (regulations in the UK following a precedent set in court (€57 million)

In February 2019, negotiations on the triennial review of the main UK defined benefit pension schemes were concluded. A total of £432 million (€481 million) of cash payments have been agreed in relation to deficit recovery plans for the ICI Pension Fund and Akzo Nobel (CPS) Pension Scheme, including £142 million (€158 million) of pre-funding into an escrow account for the Akzo Nobel (CPS) Pension Scheme. This is in addition to a top-up payment of £125 million (€139 million) which was paid in January 2019, in accordance with the previously agreed recovery plan.

Workforce

At December 31, 2018, the number of people employed in the continuing operations was 34,500 (year-end 2017: 35,700), including around 850 employees added from acquisitions during the year.

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 negative after tax. The impact on the interim condensed consolidated financial statements is not significant.

The impact of the adoption of IFRS 9, IFRS 15 and application of IAS 29 has been reflected in the table below “Impact of adoption of IFRS 9 and IFRS 15 and application of IAS 29”.

Furthermore, IFRS 16 “Leases” is an important upcoming change. We expect that adoption of the standard as per January 1, 2019, will result in recognition of the Right-of-use assets of approximately €350 million, a financial lease receivable of €20 million and additional lease liabilities of €370 million. In addition, assets with a book value of €59 million will be reclassified to Right-of-use assets, including amongst others current finance leases. 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 payments for the operating leases, currently in the cash flow from operating activities, will be included in the cash flow from financing activities. The company is still in the process of 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.

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 million after taxes, recorded as an adjustment to opening shareholders’ equity.

Effects during the year were not 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.

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 €53 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.