I - Other operating Gains & Losses: General principles

Content

Costs incurred by an entity for the research and development of products sold by the Group.

They are broken down as follows:

• R36100: R&D - gross
• R36200: R&D - grants
• R36300: R&D - depreciation
• R36400: R&D - royalties

One separate division 89 / market NBBD in legal entities where appropriate on which all expenses and revenues related to R&I are booked.

Apart from capitalized expenses, it COVERS expenses related to:

• External costs such as:
  • Expenses relating to R&D carried out by specialized organizations outside the Group, less any grants received for research (State subsidies) and external costs charged back to consolidated companies
  • Fees paid to outside consultancies for scientific support for R&D, less those charged back to consolidated companies
  • Rental paid on rented research facilities
  • Property damage insurance premium when the object covered relates to machinery and equipment that are specific to research
  • They include:
    • Fundamental research (It is not intended to yield immediate commercial benefits)
    • Corporate Research: costs that benefit to the Group or to a large sub-unit of the Group, and that relate to projects falling beyond the scope of the Business
    • 'New Business Development Corporate', i.e. projects related to the development of new industrial activities outside the scope of the Business. They include the perfecting, manufacturing, and marketing of new products.
      The corporate NBD activities may impact other income statement headings, in addition to R&D. Indeed, projects falling beyond the SBU scope could be commercialized and therefore show a turnover, royalties, costs of sales, commercial costs, etc… The follow-up of these activities is made in a specific division.
      They may fall beyond the scope of the Business for one of the following reasons:
      • The project involves a major technology leap or a market that is entirely new to Solvay.
      • No existing Business has the required structure and resources to carry it out, particularly in the case of “transversal” projects that call upon competencies and/or products pertaining to various Businesses and requiring external support.
• Internal costs such as:
  • Operating costs of the Research Department, i.e. costs relating to work carried out by the entity's personnel in a specialized R&D center, including related general expenses (general services, IT costs, etc.) and normal straight-line depreciation and amortization on research facilities
  • ATC and ATU (technical assistance to customers and to production sites) costs, incurred by a research center
  • They include applied research (It accesses and uses some part of the research communities' accumulated theories, knowledge, methods, and techniques, for a specific purpose. Applied research deals with solving practical problems)
  • Development work on (current or future) products and on processes that cannot be capitalized
• The R&D – Royalties account includes R&D royalties between intercompanies as well as margins on international R&D costs reinvoiced between Group entities linked by a contract such as a "Master License Agreement".
  Example: Rhodia Inc has concluded with Rhodia Operations a "Master License Agreement", according to which :
  • Rhodia Operations invoices a royalty calculated upon a percentage of the turnover realized,
  • Rhodia Operations receives an invoice from Rhodia Inc for the purchase of "international" R&D costs. The margin realized by Rhodia Inc on this invoice, should also be included on this line.
    Note : at consolidation level this account should be equal to 0.
• Legal costs linked to patent litigation and more generally legal costs incurred for the protection of intellectual property
  • Other legal costs than the above are generally expensed and reported under "R33310 - Administrative expenses (non functions)" in the period when they are incurred, and allocated to the business involved.
  • This rule applies not only to legal expenses of operating businesses (including those related to Mergers & Acquisitions) but also to past litigation.
  • Legal costs linked to the shutdown or sale of an activity (at Business level) are expensed when incurred and reported under "R48690 - Other non-recurring expenses".
• In deduction of research costs invoiced, license rights received as costs of general interest.
• R&D costs are net of possible tax credits on research.
• Are reported under "R36300: R&D - depreciation" all depreciation related to capitalized R&D costs

 The following are EXCLUDED form R&D costs:

• Research costs that are re-invoiced (services costs)
• Capitalized research costs (the related depreciation is reported under "R36300: R&D - depreciation")
• Customer support (selling, general and administrative expenses)
• The cost of starting-up new manufacturing (miscellaneous production)
• Manufacturing support, or technical assistance (miscellaneous production or non-variable production costs, depending upon the cases)
• Grants for capitalized projects are excluded from R&D grants
• and reported under "R38100 - Other recurring operating income and expenses":
  • Testing and experimental costs
  • Gains and losses on the sale of products at the pre-marketing stage
• and reported under "R33310 - Administrative expenses (non functions)":
  • ATC (Technical Assistance to Customers) costs not incurred by the research center
    However, ATU (Technical Assistance to Production) costs not incurred by this research center are reported in the cost prices under "R25490 - Non-proportional costs of sales".
  • License costs at Solvay SA
• Financial expenses related to research costs ("R53620 - Other financial expenses related to operational")