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

The carrying value of deferred tax assets is reviewed at each closing

date, and revalued or reduced to the extent that it is more or less

probable that a taxable profit will be available to allow the deferred

tax asset to be utilized. When assessing the probability of a taxable

profit being available, account is taken, primarily, of prior years’ results,

forecasted future results, non-recurring items unlikely to occur in the

future and the tax strategy. As such, the assessment of the group’s ability

to utilize tax losses carried forward is to a large extent judgment-based.

If the future taxable results of the group proved to differ significantly from

those expected, the group would be required to increase or decrease the

carrying value of deferred tax assets with a potentially material impact

on the Statement of Financial Position and Statement of Earnings of the

group.

Deferred tax liabilities are recognized for all taxable temporary

differences, except where the deferred tax liability results from goodwill

or initial recognition of an asset or liability in a transaction which is not a

business combination, and that, at the transaction date, does not impact

earnings, tax income or loss.

For taxable temporary differences resulting from investments in

subsidiaries, joint ventures and other associated entities, deferred tax

liabilities are recorded except to the extent that both of the following

conditions are satisfied: the parent, investor or venturer is able to control

the timing of the reversal of the temporary difference and it is probable

that the temporary difference will not be reversed in the foreseeable

future.

Current tax and deferred tax shall be charged or credited directly to

equity, and not earnings, if the tax relates to items that are credited or

charged directly to equity.

1.3.10.

Share-based compensation

With the aim of aligning the interests of its executive management and

employees with its shareholders’ interests by providing them with an

additional incentive to improve the company’s performance and increase

its share price on a long-term basis, Vivendi maintains several share-

based compensation plans (share purchase plans, performance share

plans, and bonus share plans) or other equity instruments based on the

value of the Vivendi share price (stock options), which are settled either

in equity instruments or in cash. Grants under these plans are approved

by the Management Board and the Supervisory Board. In addition, the

definitive grant of stock options and performance shares is contingent

upon the achievement of specific performance objectives set by the

Management Board and the Supervisory Board. Moreover, all granted

plans are conditional upon active employment at the vesting date.

In addition, Universal Music Group maintains Equity Long-Term Incentive

Plans. Under these plans, certain key executives are awarded equity

units, which are settled in cash. These equity units are phantom stock

units whose value is intended to reflect the value of Universal Music

Group.

Please refer to Note 20 for details of the features of these plans.

Share-based compensation is recognized as a personnel cost at the fair

value of the equity instruments granted. This expense is spread over

the vesting period, i.e., three years for stock option plans and two years

for performance shares and bonus share plans at Vivendi, other than in

specific cases.

Vivendi use a binomial model to assess the fair value of such instruments.

This method relies on assumptions updated at the valuation date such

as the calculated volatility of the relevant shares, the discount rate

corresponding to the risk-free interest rate, the expected dividend yield,

and the probability of relevant managers and employees remaining

employed within the group until the exercise of their rights.

However, depending on whether the equity instruments granted are

equity-settled or cash-settled, the valuation and recognition of the

expense will differ:

Equity-settled instruments

the expected term of the option granted is deemed to be the mid-

point between the vesting date and the end of the contractual term;

the value of the instruments granted is estimated and fixed at grant

date; and

the expense is recognized with a corresponding increase in equity.

Cash-settled instruments

the expected term of the instruments granted is deemed to be equal

to one-half of the residual contractual term of the instrument for

vested rights, and to the average of the residual vesting period at

the remeasurement date and the residual contractual term of the

instrument for unvested rights;

the value of instruments granted is initially estimated at grant date

and is then re-estimated at each reporting date until the payment

date and the expense is adjusted

pro rata

taking into account the

vested rights at each such reporting date;

the expense is recognized as a provision; and

moreover, as plans settled in cash are primarily denominated

in US dollars, the value fluctuates based on the EUR/USD exchange

rate.

Share-based compensation cost is allocated to each operating segment,

pro rata to the number of equity instruments or equivalent instruments

granted to their managers and employees.

The dilutive effect of stock options and performance shares settled in

equity through the issuance of Vivendi shares which are in the process

of vesting is reflected in the calculation of diluted earnings per share.

In accordance with IFRS 1, Vivendi elected to retrospectively apply IFRS 2

as of January 1, 2004. Consequently, all share-based compensation

plans for which rights remained to be vested as of January 1, 2004 were

accounted for in accordance with IFRS 2.

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Annual Report 2014