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rates. As allowed under French law, translation dif-
ferences are recorded in the income statement
a) Consolidation principles
under interest income and expense.
Exchange gains as well as carrybacks and carry-
All signi¬cant companies that are controlled
forwards related to forward purchases and sales of
directly or indirectly by Schneider SA have been fully
foreign currency used to hedge the Group™s trading
commitments are deferred and recognized at the
Companies over which Schneider SA exercises
same time as the gain or loss on the underlying
signi¬cant in¬‚uence have been accounted for by the
equity method.
Gains and losses on unhedged forward currency
As an exception to the above principles, Banque
transactions are credited or charged to income. The
Morhange, in which the Group holds a majority
gain or loss corresponds to the difference between
interest but whose operations are not material in
the forward exchange rate provided for in the con-
relation to the Group as a whole, has also been
tract and the exchange rate prevailing at year end
consolidated by the equity method.
for purchases and sales made in the same currency
In accordance with French generally accepted
and according to the same term.
accounting principles, joint ventures in which the
In cases where a speculative currency position is
Group is the managing partner are fully consoli-
considered to exist due to the future interest on ¬xed
dated by Schneider SA, after deducting the other
to variable currency swaps, the interest is discounted
partners™ share in the income or loss of the joint
on the basis of the ¬xed rate and stated at the
venture. In cases where the Group is not the manag-
exchange rate prevailing at year end for cash trans-
ing shareholder, only Schneider SA™s share of the
actions. The translation difference is credited or
income or loss is accounted for, except for two con-
charged to income.
tracts which are consolidated by the proportional
Goodwill is amortized out of income over a maxi-
d) Financial instruments based on
mum of forty years based on estimated useful life.
exchange and interest rates
b) Translation of the financial statements
The Group uses ¬nancial instruments based on
of foreign subsidiaries
exchange and interest rates. The methods used to
The ¬nancial statements of foreign subsidiaries account for these instruments are described above.
Prospective Analysis: Valuation Theory and Concepts

11-51 Part 2 Business Analysis and Valuation Tools

e) Long-term contracts (FASB) Statement of Financial Accounting Standards
No. 87.
Income from long-term contracts is recognized by Part of the Group™s liability for retirement
the percentage-of-completion method, based on the bonuses is provided for and part is funded by an
¬nancial status of the contract. Probable losses upon insured plan. The provisions are calculated for all
completion of a given contract are provided for in eligible employees and the same discount and
full as soon as they become known. The cost of work indexation rates are used for all Group companies
in process includes costs relating directly to the con- that have adopted this method. For the insured plan,
tracts and a percentage of overheads.
Schneider and Square D

the current value of the plan assets has been calcu-
The estimated cost of the remaining work on con- lated and provision has been made for any
tracts expected to generate a loss does not take unfunded liability.
account of any income from claims, except where
such claims have been accepted by the customer
i) Marketable securities
and the latter has no major ¬nancing problems.
Contracts in progress are therefore stated at the
Almost all marketable securities represent conven-
lower of cost or realizable value.
tional short-term instruments (commercial paper,
In accordance with the logic underlying the per-
mutual funds and related securities). They are stated
centage-of-completion method, work in process is
at cost. In the case of bonds and other debt instru-
matched with customer prepayments received upon
ments, cost includes accrued interest.
presentation of a schedule of work performed to
date. However, prepayments in connection with the
j) Inventories and work in process
work in process include:
“ Prepayments to ¬nance production;
Inventories and work in process are stated at
“ Prepayments for work in process on contracts
weighted average cost. Any difference between cost
which are still in the early stages and for which it is
and realizable value is provided for.
not possible to make any estimate of probable
The cost of work in process, semi-¬nished and ¬n-
income or losses; and
ished products includes direct materials and labor
“ Contracts scheduled to last less than twelve
costs, sub-contracting costs incurred up to the bal-
ance sheet date and a percentage of production
f) Research and development
k) Property, plant and equipment
Internally-¬nanced research and development
expenditures are charged to income for the period. Land, buildings and equipment are stated at cost.
Assets held at the time of a legal revaluation are
g) Deferred taxes stated at revalued cost. An equivalent amount is
recorded in shareholders™ equity, under retained
Deferred taxes corresponding to timing differ- earnings or revaluation reserve, and is written back
ences between the recognition of income and to income in an amount matching the correspond-
expenses in the consolidated ¬nancial statements ing depreciation and disposals, so that the revalua-
and for tax purposes are accounted for by the liabil- tion has no impact on income.
ity method.
In the case of subsidiaries operating in high-in¬‚a-
tion countries, the impact of legal revaluations is
h) Provisions for retirement bonuses eliminated on consolidation and the resulting trans-
lation differences are recorded in retained earnings.
The Group™s liability for retirement bonuses is cal-
culated taking into account projected future com- Property, plant and equipment is depreciated on a
pensation levels. The method used is in accordance straight-line basis over the estimated useful lives of
with the Financial Accounting Standards Board the assets.
456 Prospective Analysis: Valuation Theory and Concepts

Prospective Analysis: Valuation Theory and Concepts

Property, plant and equipment acquired under a Customer prepayments
capital lease is capitalized on the basis of the cost of
In the consolidated ¬nancial statements, customer
the asset concerned and depreciated in accordance
prepayments are recorded as a separate compo-
with the above principles. An obligation in the same
nent of current liabilities. Under U.S. GAAP, work in
amount is recorded on the liabilities side of the bal-
process in an amount equal to the cost of the work
ance sheet.
performed for which no income or loss has been
l) Non-consolidated equity investments

Schneider and Square D
and other investments Deferred taxes

In December 1987, the FASB issued a new stan-
Non-consolidated equity investments and other
dard concerning the accounting treatment of
investments are stated at cost, except for investments
deferred taxes. The application of this standard is
held at the time of the 1977 legal revaluation. Each
not compulsory in 1990. The Company has not yet
year, the carrying value is compared to fair value
decided the date at which it will start applying this
and any difference is provided for. Fair value is
standard and, in view of the complexity of the new
determined by reference to the Group™s share in the
rules, has not determined the impact that its appli-
underlying net assets, the expected future pro¬tabil-
cation would have had on the 1990 ¬nancial state-
ity and business prospects of the investee company,
ments as presented.
and “ in the case of listed securities “ the market
value of the stock.
Non-recurring income and expense

Non-recurring income and expense includes
m) Differences between Schneider SA
items that the Company considers to be non-recur-
accounting principles and U.S. GAAP ring but that would be treated as operating income
and expense under U.S. GAAP. In addition, under
The main differences between the accounting U.S. GAAP, the amortization of goodwill would have
principles described above and U.S. GAAP are as been accounted for under income from continuing
follows: operations.

These reclassi¬cations would have the following
impact on income from continuing operations:
As mentioned in Note l.k. above, the Company
has performed certain write-ups which are contrary (in FF million) 1990 1989
to U.S. GAAP. The write-ups have no impact on
income but do affect shareholders™ equity. Income from continuing
operations, before tax 2,509 2,196
Consolidation Non-recurring income
other than extraordi-
As indicated in Note a, Banque Morhange, whose
nary items (237) 85
operations are not material in relation to the Group
Amortization of goodwill (236) (235)
as a whole, has been accounted for by the equity
method. Income from continuing
operations, before tax,
Provisions for contingencies according to U.S. GAAP 2,036 2,046
In U.S. GAAP, the part of these provisions related
to operating cycles would be considered as accrued
Prospective Analysis: Valuation Theory and Concepts

11-53 Part 2 Business Analysis and Valuation Tools

Square D Common Stock Purchase Plan

The ¬rm™s Articles of Incorporation were modi¬ed in August 1988 as follows:
The Company adopted a new Share Purchase Rights Plan and declared a divi-
dend distribution of one new common purchase right on each outstanding share
of Square D common stock. The rights are exercisable only if someone acquires
Schneider and Square D

20 percent or more of the company™s common stock or announces a tender
offer. At any time a person or group acquires 20 percent or more of the com-
pany™s outstanding common stock and prior to that person acquiring 50 percent
or more of the company™s common stock, the company may exchange the rights
(other than rights owned by such 20 percent or greater shareholder) in whole or
in part for one share of common stock per right. If a person or group acquires
20 percent or more of the common stock, or certain events occur, each right not
owned by the 20 percent or greater shareholder becomes exercisable for the
number of shares of the company having a market value of twice the exercise
price of the right. If the company is acquired in a merger or other business com-
bination transaction or 50 percent or more of its assets or earning power are
sold at any time after the rights become exercisable, the rights entitle a holder to
buy a number of shares of common stock of the acquiring company having a
market value of twice the exercise price of each right.

Selected Square D Stock Data for the Fourth Quarter 1990a
Selected Square D Stock Data for the Fourth Quarter 1990

Price Volume
($US) (000 shares)


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