Form 20-F 2005

For quoted securities, fair value represents a market price. For unquoted securities, fair value represents a reference to recent
arm’s length market transactions between knowledgeable, willing parties, or a valuation technique commonly used by market
participants demonstrated to provide reliable estimates, or discounted cash flow analysis. However, if the fair value of a security
cannot be reasonably estimated, the security is maintained at historical cost.
This category mainly comprises non-consolidated investments.
Impairment of financial assets
A financial asset or a group of financial assets is impaired and impairment losses are incurred if there is objective evidence
of impairment as a result of one of more events that occurred after the initial recognition of the asset and that loss event has an
impact on the estimated future cash flows of the financial asset or group of financial assets.
3.7. Inventories
Inventories are measured at the lower of cost and net realizable value. The cost of inventories is determined by using the
weighted average cost or first-in, first-out (FIFO) method.
Finished goods and work-in-progress are measured at the cost of production which takes into account, in addition to the
cost of raw materials and supplies, the costs incurred in bringing the inventories to their present location and condition and an
allocation of overheads excluding administrative overheads. Net realizable value is the estimated selling price in the ordinary course
of business less the estimated costs of completion and the estimated costs necessary to make the sale.
3.8. Trade and other receivables
Trade and other receivables are initially recognized at fair value, which in most cases corresponds to their nominal amount.
The carrying amount is subsequently measured at amortized cost using the effective interest rate method, less any impairment
provisions. Short-term receivables with no stated interest rate are recognized at their nominal amount unless the effect of market
rate discounting is material.
If there is objective evidence of impairment or if there is a risk that Rhodia may not recover the contractual amounts (principal
plus interest) at the contractual maturity dates, an impairment loss is recognized in the income statement. This provision is equal
to the difference between the carrying amount and the estimated future recoverable cash flows, discounted at the initial effective
interest rate.
Asset securitization program
As part of its normal business, Rhodia may, especially under the trade receivable securitization program, use special purpose
entities, such as dedicated conduits. In accordance with interpretation SIC 12 Consolidation–special purpose entities, Rhodia
includes in its Consolidated Financial Statements the entities over which in substance the Group exercises control. The receivables
sold directly to a factor or under a securitization program without the use of special purpose entities are not derecognized if Rhodia
retains substantially all of the risks and rewards associated with the transferred receivables or the control of these receivables.
3.9. Other current financial assets
Other current financial assets comprise short-term investments held for trading or, where necessary, available for sale, which
do not satisfy the definition of cash equivalents.
3.10 Cash and cash equivalents
Cash and cash equivalents comprise cash funds, demand deposits, money market funds (within the meaning of the French
market regulator) and short-term, highly liquid investments that are readily convertible to known amounts of cash and which are
F-18 Form 20 - F 2005 - Rhodia