Annual report 2014

Financial Report | Statutory Auditors’ Report on the Consolidated Financial Statements |

Consolidated

Financial Statements

| Statutory Auditors’ Report on the Financial Statements | Statutory Financial Statements

Note 1. Accounting policies and valuation methods

1.3.7.

Financial liabilities

Long-term and short-term borrowings and other financial liabilities

include:

bonds and credit facilities, as well as various other borrowings

(including commercial paper and debt related to finance leases) and

related accrued interest;

obligations arising out of commitments to purchase non-controlling

interests;

bank overdrafts; and

the negative value of other derivative financial instruments.

Derivatives with positive values are recorded as financial assets in

the Statement of Financial Position.

Borrowings

All borrowings are initially accounted for at fair value net of transaction

costs directly attributable to the borrowing. Borrowings bearing interest

are subsequently valued at amortized cost, applying the effective interest

method. The effective interest rate is the internal yield rate that discounts

future cash flows over the term of the borrowing. In addition, where the

borrowing comprises an embedded derivative (e.g., an exchangeable

bond) or an equity instrument (e.g., a convertible bond), the amortized

cost is calculated for the debt component only, after separation of the

embedded derivative or equity instrument. In the event of a change

in expected future cash flows (e.g., redemption is earlier than initially

expected), the amortized cost is adjusted against earnings to reflect the

value of the new expected cash flows, discounted at the initial effective

interest rate.

Commitments to purchase non-controlling interests

Vivendi has granted commitments to purchase non-controlling interests

to certain shareowners of its fully consolidated subsidiaries. These

purchase commitments may be optional (e.g., put options) or mandatory

(e.g., forward purchase contracts).

The following accounting treatment has been adopted in respect of

commitments granted on or after January 1, 2009:

upon initial recognition, the commitment to purchase non-controlling

interests is recognized as a financial liability for the present value of

the purchase consideration under the put option or forward purchase

contract, mainly offset through the book value of non-controlling

interests and the remaining balance through equity attributable to

Vivendi SA shareowners;

subsequent changes to the value of the commitment are recognized

as a financial liability by an adjustment to equity attributable to

Vivendi SA shareowners; and

upon maturity of the commitment, if the non-controlling interests are

not purchased, the previously recognized entries are reversed; if the

non-controlling interests are purchased, the amount recognized in

financial liabilities is reversed, offset by the cash outflow relating to

the purchase of the non-controlling interests.

Derivative financial instruments

Vivendi uses derivative financial instruments to manage and reduce its

exposure to fluctuations in interest rates, and foreign currency exchange

rates. All instruments are either listed on organized markets or traded

over-the-counter with highly-rated counterparties. These instruments

include interest rate and currency swaps, and forward exchange

contracts. All these derivative financial instruments are used for hedging

purposes.

When these contracts qualify as hedges for accounting purposes,

gains and losses arising on these contracts are offset in earnings

against the gains and losses relating to the hedged item. When the

derivative financial instrument hedges exposures to fluctuations in

the fair value of an asset or a liability recognized in the Statement of

Financial Position or of a firm commitment which is not recognized in the

Statement of Financial Position, it is a fair value hedge. The instrument

is remeasured at fair value in earnings, with the gains or losses arising

on remeasurement of the hedged portion of the hedged item offset on

the same line of the Statement of Earnings, or, as part of a forecasted

transaction relating to a non-financial asset or liability, at the initial

cost of the asset or liability. When the derivative financial instrument

hedges cash flows, it is a cash flow hedge. The hedging instrument

is remeasured at fair value and the portion of the gain or loss that is

determined to be an effective hedge is recognized through charges and

income directly recognized in equity, whereas its ineffective portion is

recognized in earnings, or, as part of a forecasted transaction on a non-

financial asset or liability, they are recognized at the initial cost of the

asset or liability. When the hedged item is realized, accumulated gains

and losses recognized in equity are released to the Statement of Earnings

and recorded on the same line as the hedged item. When the derivative

financial instrument hedges a net investment in a foreign operation, it is

recognized in the same way as a cash flow hedge. Derivative financial

instruments which do not qualify as a hedge for accounting purposes are

remeasured at fair value and resulting gains and losses are recognized

directly in earnings, without remeasurement of the underlying instrument.

Furthermore, income and expenses relating to foreign currency

instruments used to hedge highly probable budget exposures and firm

commitments contracted pursuant to the acquisition of editorial content

rights (including sports, audiovisual and film rights) are recognized

in EBIT. In all other cases, gains and losses arising on the fair value

remeasurement of instruments are recognized in other financial charges

and income.

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Annual Report 2014