ESMA Guidelines on APMs paras 41, 26, change in definition of APM, reconciliation to IFRS

Roche Holding Ltd – Annual report – 31 December 2016

Industry: pharmaceuticals

Alternative Performance Measures (extract)

Free cash flow (extract)

Free cash flow is used to assess the Group’s ability to generate the cash required to conduct and maintain its operations. It also indicates the Group’s ability to generate cash to finance dividend payments, repay debt and to undertake merger and acquisition activities. The free cash flow concept is used in the internal management of the business.

Operating free cash flow is calculated based on the IFRS operating profit and adjusted for certain cash items, movements in net working capital and capital expenditures (investments in property, plant and equipment and intangible assets). Operating free cash flow is different from cash flows from operating activities as defined by IAS 7 in that it includes capital expenditures (which is within the responsibility of divisional management) and excludes income taxes paid (which is not within the responsibility of divisional management). Cash outflows from defined benefit plans are allocated to the operating free cash flow based on the current service cost with the residual allocated to treasury activities.

Free cash flow is calculated as the operating free cash flow adjusted for treasury activities and taxes paid. Free cash flow is different from total cash flows as defined by IAS 7 in that it excludes dividend payments, cash inflows/outflow from financing activities such as issuance/repayment of debt, purchase/sale of marketable securities and cash inflows/outflows from mergers, acquisitions and divestments.

The Group refined the calculation of free cash flow in 2016 to exclude dividends, in line with its peer group. The free cash flow for 2015 has been restated accordingly, resulting in an increase of CHF 6,954 million to the free cash flow for that period. There was no impact on the operating free cash flow from this change.

Operating free cash flow and free cash flow are calculated as shown in the tables below. Additional commentary to the adjustment items is given in the Financial Review.

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