www.se.com 354 Schneider Electric Universal Registration Document 2021 Chapter 5 – Consolidated financial statements at December 31, 2021 1.6 – Translation of the financial statements of foreign subsidiaries The consolidated financial statements are prepared in euros. The financial statements of subsidiaries that use another functional currency are translated into euros as follows: • assets and liabilities are translated at the official closing rates; • income statement, backlog and cash flow items are translated at average annual exchange rates. Gains or losses on translation are recorded in consolidated equity under “Cumulative translation reserve”. The Group applies IAS 29 – Financial Reporting in Hyperinflationary Economies to the Group’s subsidiaries in hyperinflation countries (Venezuela and Argentina). The impacts are not significant for the Group in 2021. 1.7 – Foreign currency transactions Foreign currency transactions are recorded using the exchange rate in effect at the transaction date or at the hedging rate. At the balance sheet date, monetary items in foreign currency (eg. payables, receivables, etc.) are translated into the functional currency of the entity at the closing rate or at the hedging rate. Gains or losses on translation of foreign currency transactions are recorded under “Net financial income/ (loss)”. Foreign currency hedging is described below, in Note 1.23. However, certain long-term receivables and loans to subsidiaries are considered to be part of a net investment in a foreign operation, as defined by IAS 21 – The effects of changes in foreign exchange rates . As such, the impact of exchange rate fluctuations is recorded in equity and recognized in the statement of income when the investment is sold or when the long-term receivable or loan is reimbursed. 1.8 – Intangible assets Intangible assets acquired separately or as part of a business combination Intangible assets acquired separately are initially recognized in the balance sheet at historical cost. They are subsequently measured using the cost model, in accordance with IAS 38 – Intangible Assets . Intangible assets (mainly trademarks, technologies and customer lists) acquired as part of business combinations are recognized in the balance sheet at fair value at the combination date, appraised externally for the most significant assets and internally for the rest, and that represents its historical cost in consolidation. The valuations are performed using generally accepted methods, based on future inflows. Intangible assets are generally amortized on a straight-line basis over their useful life or, alternatively, over the period of legal protection. Amortized intangible assets are tested for impairment when there is any indication that their recoverable amount may be less than their carrying amount. Amortization expenses and impairment losses on intangible assets acquired in a business combination are presented on a separate statement of income line item, “Amortization expenses and impairment losses of purchase accounting intangible assets”. Trademarks The trademarks fair value is determined using the royalty method at the date of acquisition. Trademarks acquired as part of a business combination are not amortized when they are considered to have an indefinite life. The criteria used to determine whether or not such trademarks have indefinite lives and, as the case may be, their lifespan, are as follows: • brand awareness; • outlook for the brand in light of the Group’s strategy for integrating the trademark into its existing portfolio. Non-amortized trademarks are tested for impairment at least annually and whenever there is an indication they may be impaired. When necessary, an impairment loss is recorded. Internally-generated intangible assets Research and development costs Research costs are expensed in the statement of income when incurred. Development costs for new projects are capitalized if, and only if: • the project is clearly identified and the related costs are separately identified and reliably monitored; • the project’s technical feasibility has been demonstrated and the Group has the intention and financial resources to complete the project and to use or sell the resulting products; • the Group has allocated the necessary technical, financial and other resources to complete the development; • it is probable that the future economic benefits attributable to the project will flow to the Group. 5.5 Notes to the consolidated financial statements