353 Life Is On | Schneider Electric www.se.com Financial Statements 5. Chapter 5 – Consolidated financial statements at December 31, 2021 Climate-related matters The impacts of potential climate-related matters (including risks & opportunities, and legislation changes) which may affect the measurement of assets & liabilities in the financial statements, as well as the impacts from the group Carbon Pledge to reach carbon neutral operations in 2025, have been analysed. The Group will adjust the key assumptions used in value-in-use calculations and sensitivity, should a change be required. At present, the impact of climate-related matters is not material to the Group’s financial statements. 1.2 – Basis of presentation The financial statements have been prepared on a historical cost basis, except for derivative instruments and certain financial assets, which are measured at fair value. Financial liabilities are measured using the amortized cost model. The book value of hedged assets and liabilities, under fair-value hedge, corresponds to their fair value, for the part corresponding to the hedged risk. 1.3 – Use of estimates and assumptions The preparation of financial statements requires Group and subsidiary management to make estimates and assumptions that are reflected in the amounts of assets and liabilities reported in the consolidated balance sheet, the revenues and expenses in the statement of income and the commitments created during the reporting period. Actual results may differ. These assumptions mainly concern: • the measurement of the recoverable amount of goodwill, property, plant and equipment and intangible assets (Note 1.8 and 1.9) and the measurement of impairment losses (Note 1.11); • the measurement of the recoverable amount of non-current financial assets (Note 1.12 and 13); • the realizable value of inventories and work in progress (Note 1.13); • the recoverable amount of trade and other operating receivables (Note 1.14); • the valuation of share-based payments (Note 1.20); • the calculation of provisions or risk contingencies (Note 1.21); • the measurement of pension and other post-employment benefit obligations (Note 1.19 and Note 20); • the recoverability of deferred tax assets related to tax loss carryforward (Note 14). 1.4 – Consolidation principles Subsidiaries, over which the Group exercises exclusive control, either directly or indirectly, are fully consolidated. Group investments in entities controlled jointly with a limited number of partners, such as joint ventures and companies over which the Group has significant influence (“associates”) are accounted for by the equity method. Significant influence is presumed to exist when more than 20% of voting rights are held by the Group. Companies acquired or sold during the year are included in or removed from the consolidated financial statements as of the date when effective control is acquired or relinquished. Intra-group balances and transactions are eliminated. The list of consolidated main subsidiaries, joint ventures and associates can be found in Note 29. The reporting date for all companies included in the scope of consolidation is December 31, with the exception of certain immaterial associates accounted for by the equity method. For the latter however, financial statements up to September 30 of the financial year have been used (maximum difference of three months in line with the standards). 1.5 – Business combinations Business combinations are accounted for using the acquisition method, in accordance with IFRS 3 – Business Combinations . Acquisition costs are presented under “Other operating income and expenses” in the statement of income. All acquired assets, liabilities and contingent liabilities are recognized at their fair value at the acquisition date, the fair value can be adjusted during a measurement period that can last for up to 12 months from the date of acquisition. The excess of the cost of acquisition over the Group’s share in the fair value of assets and liabilities at the date of acquisition is recognized in goodwill. When the cost of acquisition is lower than the fair value of the identified assets and liabilities acquired, the badwill is immediately recognized in the statement of income. Goodwill is not amortized, but tested for impairment at least annually and whenever there is an indication that it may be impaired (see Note 1.11 below). Any impairment losses are recognized under “Amortization expenses and impairment losses of purchase accounting intangible assets”.