357 Life Is On | Schneider Electric www.se.com Financial Statements 5. Chapter 5 – Consolidated financial statements at December 31, 2021 1.11 – Impairment of assets In accordance with IAS 36 – Impairment of Assets , the Group assesses the recoverable amount of its long-lived assets as follows: • for all property, plant and equipment subject to depreciation and intangible assets subject to amortization, the Group carries out a review at each balance sheet date to assess whether there is any indication that they may be impaired. Indications of impairment are identified based on external or internal information. If such an indication exists, the Group tests the asset for impairment by comparing its carrying amount to the higher of fair value minus costs to sell and value in use; • non-amortizable intangible assets and goodwill are tested for impairment at least annually and whenever there is an indication that the assets may be impaired. Value in use is determined by discounting future cash flows that will be generated by the tested assets. These future cash flows are based on Group management’s economic assumptions and operating forecasts presented in business plans over a period generally not exceeding five years, and then extrapolated based on a perpetuity growth rate. The discount rate corresponds to the Group’s Weighted Average Cost of Capital (WACC) at the measurement date. The WACC stood at 6.8% at December 31, 2021 (6.8% at December 31, 2020). This rate is based on (i) a long-term interest rate of 0.0%, corresponding to the average interest rate for 10-year OAT treasury bonds over the past year, (ii) the average premium applied to financing obtained by the Group in 2021, and is completed by, for CGUs WACC only, (iii) the weighted country risk premium for the Group’s businesses in the countries in question. The perpetuity growth rate is 2.0%, unchanged from the previous financial year. Impairment tests are performed at the level of the Cash-Generating Unit (CGU) to which the asset belongs. A cash-generating unit is the smallest group of assets that generates cash inflows that are largely independent of the cash flows from other assets or groups of assets. The cash-generating units are Low Voltage , Medium Voltage , Industrial Automation and Secure Power . CGUs net assets were allocated to the CGUs at the lowest possible level on the basis of the CGU activities to which they belong; the assets belonging to several activities were allocated to each CGU ( Low Voltage , Medium Voltage and Industrial Automation mainly). The WACC used to determine the value in use of each CGU was 7.5% for Low Voltage , 7.8% for Medium Voltage , 7.6% for Secure Power , and 7.6% for Industrial Automation . Goodwill is allocated when initially recognized. The CGU allocation is done on the same basis as used by Group management to monitor operations and assess synergies deriving from acquisitions. Where the recoverable amount of an asset or CGU is lower than its book value, an impairment loss is recognized for the excess of the book value over the recoverable value. The recoverable value is defined as the highest value between the value in use and the fair value less costs to sell. Where the tested CGU comprises goodwill, any impairment losses are firstly deducted from goodwill. 1.12 – Non-current financial assets Investments in non-consolidated companies are initially recorded at their cost of acquisition and subsequently measured at fair value. The fair value of investments listed in an active market may be determined reliably and corresponds to the listed price at balance sheet date (Level 1 from the fair value hierarchy as per IFRS 7). IFRS 9 standard allows two accounting treatments for equity instruments: • change in fair value is recognized through “Other Comprehensive Income” in the comprehensive income statement, and in equity under “Other reserves” in the balance sheet, with no subsequent recycling in the income statement even upon sale. • change in fair value, as well as gain or loss in case of sale, are recognized in the income statement. The election between those two methods is to be made from inception for each equity investment and is irrevocable. Venture capital (FCPR)/Mutual funds (SICAV) are recognized at fair value through income statement, in accordance with IFRS 9. Loans, recorded under “Non-current financial assets”, are carried at amortized cost. In accordance with IFRS 9, a depreciation is booked from inception to reflect the expected credit risk losses within 12 months. In case of significant degradation of the credit quality, the initial level of depreciation is modified to cover the entire expected losses over the remaining maturity of the loan. 1.13 – Inventories and work in progress Inventories and work in progress are measured at the lower of their initial recognition cost (acquisition cost or production cost generally determined by the weighted average price method) or of their estimated net realizable value. Net realizable value corresponds to the estimated selling price net of remaining expenses to complete and/or sell the products. Inventory impairment losses are recognized in “Cost of sales”. The cost of work in progress, semi-finished and finished products, includes the cost of materials and direct labor, subcontracting costs, all production overheads based on normal manufacturing capacity and the portion of research and development costs that are directly related to the manufacturing process (corresponding to the amortization of capitalized projects in production and product and range of products maintenance costs).