II - Provisions: Specific points and Examples

1. Environmental Provisions

Content

1. Principles and Accounting policy

1.1. Principles

Provisions for Environmental liabilities come under standard IAS 37 which deals with provisions in general.

This standard stipulates that the provisions must be established to cover present obligations (legal or constructive) resulting from events which arose in the past (environmental problems, mining damages, litigation linked to occupational health), which will give rise to probable expenses. A reliable estimate of the amounts involved must be able to be made.

1.2. Accounting policy

The overall process of evaluation and posting preparation of environmental liabilities is managed centrally by Group Accounting in close coordination with ERD (Environmental Rehabilitation Department). The postings are communicated quarterly to SBS-Back Office (BO) or to the accounting managers for companies not integrated in BO.

The accounting policies are the following:

• P&L classification
  • Allowances and reversals for provisions related to sites/activities that are closed are posted in "non-recurring" ("R48650 - Environmental expenses and income") under Underlying EBIT.
  • Allowances and reversals for provisions related to on-going site/activities are posted in Underlying EBITDA (the account to be used has to be given by the BU).
  • Changes in discount rates used to discount environmental liabilities are accounted for as financial items in P&L ("R53100 - Accretion of discount / impact of changes of discount rates on provisions (excluding Employee Benefits)").
• Valuation of environmental liabilities
  • Recurring and non-recurring remediation costs are discounted with a single 10-year maturity discount rate per zone.
    • Recurring remediation costs (i.e. remediation work made on a quite linear basis) are discounted over 20 years with the 10-year rate.
    • Non-recurring remediation costs are discounted over 10 years (except for specific cases) with the 10-year rate.
  • The cash flows used take into account the current inflation.
    • Deflated discount rates are used to compute the provisions needed for the foreseen remediation works.
    • The unwinding of discount is computed using inflated rates.
  • The discount rates used are specific to each region (Eurozone, UK, Nafta and Mercosur) and are based on long-term (10 years) interest rates. They are reviewed each quarter and change if the variation reaches +/- 0.5 base point.
    The discount rate for the Eurozone is computed as an average of the corresponding 10-year Government bonds.
• Disclosure: Identification of "contingent liabilities" off balance sheet (i.e. scenarios corresponding to worst cases – with a probability less than 50%).

2. Objectives of the provisions

2.1. Data making up the provisions

Provisions set up to remedy historical pollution can include:

• equipment and installations;
• demolition costs: only demolition linked to a legal or constructive obligation (IAS 37, par 10) can be provided for;
• removal costs for altered asbestos;
• costs of trials and testing;
• operating costs.

They are used as expenses occur. None of these expenses is capitalized.

2.2. Environmental expenses that can be capitalized

Expenses which enable avoidance of future pollution are capitalized, on exception (IAS 16, par 11), even if it is probable that they will not directly increase the future economic advantages of the existing assets.

They are the subject of a capital budget request but are never provided for. These expenses are allocated and tracked using the existing procedure for capital budgets.

In case of doubt about whether expenses linked to future pollution can be capitalized or not, contact DCFi-GAR/Finance Controlling.

2.3 Provisions which are charged to Underlying EBITDA

Allocation by Business Unit is needed only for pollution due to on-going activity. In this case the provisions are charged to Underlying EBITDA (the account to be used has to be given by the BU).

2.4 Orphan sites

A site is called an "orphan" if it meets the following criteria:

• it is a site without operating activity for which expenses must be outlaid;
• the shut-down activity is no longer represented in the Group.

When these two criteria are met, the environmental provisions are allocated to the non-allocated sector (CBS – Corporate Business Sector) and charged to non-recurring items ("R48650 - Environmental expenses and income").

Environmental expenses for an orphan site must be provided for. The set up provisions are used as expenses occur. These expenses are never capitalized.

3. Special cases

3.1. Mines, quarries and drilling (brine fields)

When there is an obligation to remediate these sites still in use or at the end of operation, the IFRS standards stipulate to set up a provision. Two cases appear:

• Asset retirement obligation: The obligation for remediation is linked to creation of the site : in this case, the counterpart of the provision is not a charge for the year, but rather a fixed asset which is added to the value of the initial assets (to be included in the capital budget) and which is amortized at the same rate as they are;
• The obligation for remediation stems from exploitation of the site : in this case, the provision is set up continuously as the work is being done. The counterpart of the recognition is allocated to REBITDA.

For more information, refer to APPENDIX 2 and IAS 37.

3.2. Demolitions that can be provided for

Expenses for demolition cannot be provided for unless there is a legal or constructive obligation to do the work.

3.3. Removal of altered asbestos

Only the removal of altered asbestos portion (disassembly of structures containing asbestos and disposal of the asbestos) can be covered by a provision.

The work for replacement of these structures (purchase and installation of substitute materials) must be subjected to a distinct capital budget.

3.4. Joint-ventures

It is recommended that the procedures above also be applied to joint-ventures.

LIST OF APPENDICES:

• APPENDIX 1 – Example of computation of needed provisions and charge in different situations
• APPENDIX 2 – Specifications for rehabilitation of mines, quarries and solution mining sites
• APPENDIX 3 – Environmental provisions - SBS rule