Notes to the condensed financial statements

General information

Akzo Nobel N.V. is a public limited liability company headquartered in Amsterdam, the Netherlands. The interim condensed consolidated financial statements include the financial statements of Akzo Nobel N.V. and its consolidated subsidiaries (in this document 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 “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 2018 annual report as published on March 7, 2019. The financial statements were adopted by the Annual General Meeting of shareholders on April 25, 2019. 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 at the end of June 30, 2019, totaled €7.1 billion, up €0.9 billion from year-end 2018, mainly due to seasonality of operating working capital and the impact of the adoption of IFRS 16.

Operating working capital (Trade)

Operating working capital as percentage of revenue increased to 14.0% in Q2 of 2019 compared to 11.6% in Q2 of 2018, mainly due to higher trade receivables and lower trade payables, including an adverse impact from acquisitions.

Operating working capital (Trade)

In % of revenue

Pension

The net balance sheet position (according to IAS19) of the pension plans at the end of Q2 2019 was a surplus of €0.8 billion (year-end 2018: surplus of €0.4 billion). The development in the first half of 2019 was the result of the net effect of:

• Top-up payments into pension plans
• Higher asset returns in key countries

Offset by:

• Lower discount rates in key countries

In February 2019, negotiations on the triennial review of the main UK defined benefit pension schemes were concluded leading to a total of €639 million of cash payments:

• An amount of £290 million (€333 million) of top-up payments have been made in relation to deficit recovery plans for the ICI Pension Fund and Akzo Nobel (CPS) Pension Scheme
• Top-up payments of £129 million (€146 million) were paid in accordance with the previously agreed recovery plans
• An amount of £142 million (€161 million) of pre-funding was paid into an escrow account for the Akzo Nobel (CPS) Pension Scheme

Workforce

At June 30, 2019, the number of people employed was 34,500 (June 30, 2018: 35,000) including around 850 people added by acquisitions during 2018.

Free cash flows

The cash generation in Q2 2019 improved compared to Q2 2018, mainly due to higher EBITDA and lower working capital outflow.

EBITDA was impacted by the adoption of IFRS 16 as per January 1, 2019. As a result, in the first half-year of 2019, some €54 million of lease expenses were recognized as depreciation of Right-of-use assets (€51 million) and as interest expense (€3 million). The 2018 comparative figures have not been restated.

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, 2018, except for the following changes in accounting policies and disclosures:

IFRS 16 “Leases” is the most important change. IFRS 16 replaces the previous standard 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 previous standard for operating leases, it also impacts the classification and timing of expenses and consequently the classification between cash flow from operating activities and cash flow from financing activities. AkzoNobel has adopted IFRS 16 as per January 1, 2019, applying the modified retrospective approach. All Right-of-use assets are measured at the amount of the lease liability at transition, adjusted for any prepaid or accrued lease expenses. Short-term and low-value leases are exempted. AkzoNobel has not restated its 2018 comparative figures. The adoption did not have an impact on group equity. 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.

The blended incremental borrowing rate applied to the lease liabilities at January 1, 2019, was 2.2%. The table below reflects the reconciliation of the operating lease commitments as at December 31, 2018, and the lease liabilities recognized as at January 1, 2019.

The adoption of the standard as per January 1, 2019, has resulted in the recognition of Right-of-use assets of approximately €355 million, and additional Lease liabilities of approximately €355 million. In addition, assets with a book value of some €65 million have been reclassified to Right-of-use assets, including among others finance leases. In the Consolidated statement of income of the first half-year of 2019, the Operating lease expenses (€54 million), previously recorded in Operating income, are replaced by the depreciation charge of the Right-of-use assets (€51 million; remains recorded in Operating income) and by Interest expenses on the lease liability (€3 million; recorded in Net financing expenses). The effect of these changes on Operating income is €3 million positive. The payments for the Operating leases (€54 million), previously included in the cash flow from operating activities, are now included in the cash flow from financing activities.

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.

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 do not have a material effect on AkzoNobel’s Consolidated financial statements, as to a large extent we already complied with these clarifications on IFRS.

Application of IAS 29 “Financial Reporting in Hyperinflationary economies”

IAS 29, “Financial Reporting in Hyperinflationary Economies” is applied to the financial statements for entities whose 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 subsequent periods 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.

Revenue disaggregation

The table below reflects the disaggregation of revenue. Additional disaggregation of revenue is included on the respective pages of Decorative Paints and Performance Coatings.