Form 20-F 2005

The following paragraphs list the critical accounting estimates that we deem to be important for properly understanding our financial
condition, results of operations and cash flows. An estimate is considered critical if it has the following characteristics:
we have to assess effects of events that are highly uncertain when the estimate is made; and
different estimates that may reasonably be made and the possible changes to these estimates that may reasonably happen
from one fiscal year to the next may have a material impact on our financial position, our results of operations and cash
flows.
We have reviewed these critical accounting estimates with the Audit Committee of the Board of Directors.
Impairment of Long-lived assets and Goodwill
We test our goodwill and other intangible assets with indefinite useful lives, as well as property, plant and equipment and intangible
assets with finite useful lives for impairment annually, and more frequently if there are indications of a loss in value. To test impairment,
we group assets into cash-generating units (CGUs), in accordance with IAS 36 Impairment of assets. A cash-generating unit is the
smallest identifiable group of assets that generates cash inflows that are largely independent of cash inflows from other assets or
groups of assets. For these tests, we compare the net carrying amount with the recoverable amount of the assets. The recoverable
amount is the higher of fair value less costs to sell or its value in use. Value in use is the present value of the future cash flows
we expect to derive from a cash-generating unit or group of CGUs after taking into account, where necessary, all other relevant
information. The discount rate is calculated using the average cost of capital reflecting current market assessments of the time
value of money and the risks specific to the assets tested. Our method of accounting for goodwill is described in Note 3.3 to the
Consolidated Financial Statements and our method of accounting for other long-lived assets is described in Note 3.5.
The calculation of impairment losses is by its very nature highly sensitive to any changes in the underlying assumptions. The
assumptions we make with regard to the future cash flows from these assets are subject to change. This could lead to adjustments
to the net book value of these assets in future years.
Deferred Tax Assets
In the course of preparing our Consolidated Financial Statements, we calculate our deferred tax by applying the liability method
to each tax entity in the Group. This process involves calculating the temporary differences arising from the differences between
the book values and tax bases of assets and liabilities, including tax losses that may be carried forward. Deferred tax assets are
recognized when it is probable (i.e. more likely than not) that they will be realized. No deferred tax assets were recognized with
respect to the French, U.K. and U.S. tax groups at December 31, 2005.
Our management must make judgments when determining the realizability of deferred tax assets. The chief uncertainty is that we
must estimate if, and to what extent, the tax group to which this deferred tax asset belongs will generate taxable income in the
future. We make this assessment on the basis of the jurisdiction in question, the period during which the deferred tax asset may
be recovered and the tax group’s earnings history. Where actual taxable income differs from these estimates or if these estimates
change in future years, the deferred tax assets may need to be adjusted, which would have an impact on our Consolidated Financial
Statements and on our results of operations.
Pension, Retirement and Other Post-employment Obligations
We have a large number of pension and retirement plans, including defined benefit pension plans. The specific features of the plans
(benefit formulas, funding policies and types of assets held) vary depending on regulations and laws in the country in which the
employees are located. Our principal commitments for pension and retirement plans principally relate to employees in the United
40 Form 20 - F 2005 - Rhodia