SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934

NORSK HYDRO ASA

(Translation of registrant’s name into English)

Drammensveien 264, Vækerø
N-0240 OSLO
Norway
(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Form 20-F þ Form 40-F o

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Yes o No þ

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Yes o No þ

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

Yes o No þ

(If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82 — ___)

 

 

A viable society. A need. An idea.
33,000 professionals. Energy.
Cooperation. Aluminium. Determination.
Pushing boundaries. Respect. Nature.
Courage. 100 years. Thinking ahead.

Contents

Table of Contents
Introduction to Hydro IFRS reporting			3
Consolidated income statement 2006 IFRS			3
Consolidated balance sheets 1 January and 31 December 2006 IFRS			4
Consolidated statement of cash flows 2006 IFRS			5
Consolidated statement of changes in equity 2006 IFRS			6
Changes in shares outstanding 2006			7
Consolidated condensed income statements – 2006 quarterly presentation IFRS			8
Consolidated condensed balance sheets – 2006 quarterly presentation IFRS			9
Consolidated segment information – 2006 IFRS			10
Basis for presentation of Hydro IFRS financial statements			13
IFRS accounting policies and critical accounting estimates			14
Consolidated income statement 2006 US GAAP to IFRS			21
Consolidated condensed income statements – 2006 quarterly presentation US GAAP to IFRS			22
First quarter			22
Second quarter			23
Third quarter			24
Fourth quarter			25
Consolidated balance sheet 1 January 2006 US GAAP to IFRS			26
Consolidated balance sheet 31 December 2006 US GAAP to IFRS			28
Reconciliation of equity – 2006 quarterly presentation US GAAP to IFRS			30
US GAAP conversion to IFRS: Explanation of differences			31
Introduction			31
A – Presentation and classification			31
B – Pensions			32
C – Financial instruments			33
D – Property, plant & equipment			33
E – Other			34

Conversion to IFRS       3

Introduction to Hydro IFRS reporting

As of 1 January 2007 Norsk Hydro ASA (Hydro) will prepare financial statements using International Financial Reporting Standards (IFRS). This is a conversion from US GAAP as Hydro’s primary financial reporting language.

     This document presents the IFRS financial statements for the fiscal year ending 31 December 2006 and the quarters ending 31 March, 30 June, 30 September and 31 December 2006 based on the IFRS principles as adopted by Hydro. IFRS information included in this document is reconciled to the previously released US GAAP 2006 income statement (on an annual and quarterly basis) and the 1 January 2006 and 31 December 2006 balance sheets. Additionally, the IFRS transition principles adopted and the accounting principles used for Hydro’s IFRS financial statements are disclosed, as well as a discussion of the principle differences for Hydro between IFRS and US GAAP.

     The document is organized with a presentation of the IFRS financial statements, followed by Hydro’s IFRS accounting principles. The 2006 income statement and balance sheet, as previously reported under US GAAP, is then converted to present Hydro’s income statement and balance sheet using the IFRS presentation, classification and measurement principles that Hydro will continue using in 2007.

     This document provides a basis for understanding Hydro’s IFRS financial reporting going forward, and should be referred to for additional information in connection with our 2007 quarterly financial reports. Additional information related to our US GAAP reporting is available in Hydro’s Annual Report 2006. Additional information related to the 2007 demerger of Hydro’s oil and gas activities and the Hydro After Demerger carve-out financial statements is available in the Hydro Information Memorandum, and should be read in combination with this document. The documents are available at www.hydro.com.

Consolidated income statement 2006 IFRS (unaudited)

Year ended 31 December
Amounts in NOK million		2006
Revenue			201,283
Share of the profit (loss) in equity accounted investments			990
Other income, net			1,470
Total revenue and income			203,744
Raw material and energy expense			82,810
Employee benefits expense			19,546
Depreciation and amortization expense			17,215
Impairment of non-current assets			5,492
Other			23,670
Total expenses			148,733
Earnings before financial items and tax			55,010
Financial income			1,425
Financial expense			(43	)
Financial income (expense), net			1,382
Income before tax			56,392
Income tax expense			(38,459	)
Net income			17,933
Net income attributable to minority interests			273
Net income attributable to equity holders of the parent			17,660
Basic and diluted earnings per share attributable to equity holders of the parent			14.20

4

Consolidated balance sheets
1 January and 31 December 2006 IFRS (unaudited)

Amounts in NOK million		31 December				1 January
Assets
Cash and cash equivalents			6,760				10,463
Short-term investments			15,020				3,865
Accounts receivable			34,508				35,438
Inventories			16,497				14,553
Other current assets			7,980				6,955
Assets held for sale			3,691				—
Total current assets			84,457				71,275
Investments accounted for using the equity method			10,690				10,844
Property, plant and equipment			119,075				124,032
Intangible assets			11,475				10,371
Financial assets			4,914				5,452
Other non-current assets			303				96
Deferred tax assets			2,177				1,815
Total non-current assets			148,635				152,611
Total assets			233,092				223,885
Liabilities and equity
Trade and other payables			29,785				27,832
Bank loans and other interest-bearing short-term debt			3,655				5,037
Provisions			2,197				1,200
Taxes payable			18,995				13,843
Other current liabilities			7,949				9,066
Liabilities included in disposal groups			1,011				—
Total current liabilities			63,591				56,978
Long-term debt			19,619				21,387
Provisions			14,357				10,883
Pension obligation			12,605				12,921
Other financial liabilities			353				402
Other liabilities			2,702				2,750
Deferred tax liabilities			23,265				27,820
Total non-current liabilities			72,900				76,164
Total liabilities			136,491				133,142
Share capital			4,708				4,739
Additional paid-in capital			9,736				10,501
Other reserves			(1,533	)			723
Retained earnings			89,544				77,390
Treasury shares			(6,624	)			(3,589	)
Equity attributable to equity holders of the parent			95,831				89,763
Minority interest			771				980
Total equity			96,601				90,743
Total liabilities and equity			233,092				223,885

Conversion to IFRS       5

Consolidated statement of cash flows 2006 IFRS (unaudited)

Year ended 31 December,
Amounts in NOK million		2006
Operating activities:
Net income			17,933
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and impairment losses			22,707
Share of profits in equity accounted investments			(990	)
Dividends received from equity accounted investments			417
Deferred taxes			(3,733	)
Loss on sale of non-current assets			519
Gain on foreign currency transactions			(1,011	)
Net sales of trading securities			29
Capitalized interest			(1,231	)
Other			(962	)
Working capital changes that provided (used) cash:
Receivables			203
Inventories			(2,095	)
Other current assets			543
Other current liabilities			6,055
Net cash provided by operating activities			38,384
Investing activities:
Purchases of property, plant and equipment			(15,927	)
Purchases of other long-term investments			(6,197	)
Purchases of short-term investments			(22,650	)
Proceeds from sales of property, plant and equipment			358
Proceeds from sales of other long-term investments			1,658
Proceeds from sales of short-term investments			11,550
Net cash used in investing activities			(31,208	)
Financing activities:
Loan proceeds			89
Principal repayments			(1,431	)
Ordinary shares purchased			(3,949	)
Ordinary shares issued			59
Dividends paid			(5,506	)
Net cash used in financing activities			(10,738	)
Foreign currency effects on cash and bank overdraft			319
Net decrease in cash, cash equivalents and bank overdraft			(3,243	)
Cash, cash equivalents and bank overdraft reclassified to assets held for sale			(47	)
Cash, cash equivalents and bank overdraft at beginning of year			9,964
Cash, cash equivalents and bank overdraft at end of year			6,674
Specification of cash disbursements included above in operating activities regarding:
Interest 1)			853
Income taxes			37,057

6

Consolidated statement of changes in equity 2006 IFRS (unaudited)

For year ended 31 December
Amounts in NOK million		2006
Ordinary shares issued
Balance at beginning of period			4,739
Cancellation treasury shares			(17	)
Redeemed shares, the Norwegian State			(13	)
Balance at end of period			4,708
Additional paid-in capital
Balance at beginning of period			10,501
Treasury stock reissued to employees			56
Cancellation treasury shares			(363	)
Redeemed shares, the Norwegian State			(458	)
Balance at end of period			9,736
Other reserves
Balance at beginning of period			723
Currency translation differences			(1,401	)
Net unrealized gain (loss) on securities			(84	)
Cash flow hedges, net of tax			(772	)
Balance at end of period			(1,533	)
Retained earnings
Balance at beginning of period			77,390
Net income			17,660
Dividend declared and paid			(5,506	)
Balance at end of period			89,544
Treasury shares issued
Balance at beginning of period			(3,589	)
Purchase of treasury shares			(3,477	)
Treasury stock reissued to employees			61
Cancellation treasury shares			380
Balance at end of period			(6,624	)
Equity interests attributable to equity holders of the parent
Balance at beginning of period			89,763
Increase (decrease) in equity interests			6,067
Balance at end of period			95,831
Minority interest
Balance at beginning of period			980
Minority’s share of net income			273
Minority’s share of dividend declared and paid			(231	)
Equity interest purchased			(184	)
Currency translation differences			(68	)
Balance at end of period			771
Total equity			96,601

Conversion to IFRS       7

Changes in shares outstanding 2006 (unaudited)

For year ended 31 December
Number of shares in thousands		2006
Share information:
Ordinary shares issued
Balance at beginning of period			1,294,772
Cancellation treasury shares			(4,672	)
Redeemed shares, the Norwegian State			(3,645	)
Balance at end of period			1,286,455
Treasury shares issued
Balance at beginning of period			(44,080	)
Purchase of treasury shares			(21,627	)
Treasury stock reissued to employees			755
Cancellation treasury shares			4,672
Balance at end of period			(60,280	)

8

Consolidated condensed income statements
– 2006 quarterly presentation IFRS (unaudited)

		First				Second				Third				Fourth
Amounts in NOK million		quarter				quarter				quarter				quarter				2006
Revenue			53,050				49,711				50,309				48,213				201,283
Share of the profit (loss) in equity accounted investments			321				376				234				59				990
Other income, net			244				432				298				496				1,470
Revenue and income			53,615				50,519				50,841				48,768				203,744
Depreciation, amortization and impairment			4,131				4,094				6,057				8,425				22,707
Other expenses			32,613				30,593				30,622				32,198				126,026
Total expenses			36,745				34,686				36,679				40,624				148,733
Earnings before financial items and tax			16,870				15,833				14,162				8,144				55,010
Financial income (expense), net			664				792				(819	)			745				1,382
Income before tax			17,534				16,626				13,343				8,889				56,392
Income tax expense			(12,751	)			(10,693	)			(9,486	)			(5,529	)			(38,459	)
Net income			4,783				5,932				3,858				3,361				17,933
Net income attributable to minority interests			(77	)			103				238				8				273
Net income attributable to equity holders of the parent			4,859				5,829				3,619				3,353				17,660
Basic and diluted earnings per share attributable to equity holders of the parent			3.90				4.70				2.90				2.70				14.20

Conversion to IFRS       9

Consolidated condensed balance sheets
– 2006 quarterly presentation IFRS (unaudited)

Amounts in NOK million		1 January				31 March				30 June				30 September				31 December
Cash and cash equivalents			10,463				20,762				7,725				16,490				6,760
Short-term investments			3,865				3,850				12,669				12,699				15,020
Receivables and other current assets			42,393				48,294				47,021				47,587				42,488
Inventories			14,553				15,230				15,985				16,310				16,497
Assets held for sale			—				—				—				—				3,691
Total current assets			71,275				88,135				83,400				93,086				84,457
Property, plant and equipment			124,032				123,349				122,106				123,298				119,075
Other non-current assets			28,579				28,159				28,348				31,044				29,561
Total non-current assets			152,611				151,508				150,454				154,341				148,635
Total assets			223,885				239,643				233,854				247,427				233,092
Bank loans and other interest-bearing short-term debt			5,037				3,855				3,545				3,346				3,655
Other current liabilities			51,941				66,068				65,381				72,418				58,925
Liabilities included in disposal groups			—				—				—				—				1,011
Total current liabilities			56,978				69,923				68,926				75,763				63,591
Long-term debt			21,387				20,814				19,942				20,653				19,619
Other long-term liabilities			26,957				27,521				27,480				27,729				30,017
Deferred tax liabilities			27,820				27,379				26,370				27,153				23,265
Total non-current liabilities			76,164				75,714				73,792				75,536				72,900
Total liabilities			133,142				145,637				142,718				151,299				136,491
Equity attributable to equity holders of the parent			89,763				93,135				90,436				95,336				95,831
Minority interest			980				871				700				792				771
Total equity			90,743				94,006				91,136				96,129				96,601
Total liabilities and equity			223,885				239,643				233,854				247,427				233,092

10

Consolidated segment information
– 2006 IFRS (unaudited)

Amounts in NOK million		First quarter				Second quarter				Third quarter				Fourth quarter				2006
Total revenue
Exploration and Production			20,561				17,818				19,863				19,235				77,476
Energy and Oil Marketing			22,218				20,182				20,823				20,008				83,232
Eliminations			(15,077	)			(14,267	)			(14,028	)			(13,914	)			(57,286	)
Oil & Energy			27,702				23,733				26,658				25,329				103,422
Aluminium Metal			17,933				17,906				16,182				16,239				68,259
Aluminium Products			12,967				13,538				13,263				13,819				53,588
Other activities			2,935				2,719				2,582				2,818				11,054
Corporate and eliminations			(8,486	)			(8,185	)			(8,376	)			(9,992	)			(35,040	)
Total			53,050				49,711				50,309				48,213				201,283
External revenue
Exploration and Production			6,106				4,298				5,473				5,658				21,534
Energy and Oil Marketing			20,359				18,211				19,722				16,544				74,837
Eliminations			2				(2	)			—				63				63
Oil & Energy			26,467				22,507				25,195				22,266				96,434
Aluminium Metal			11,602				11,606				9,912				10,482				43,603
Aluminium Products			12,910				13,476				13,205				13,740				53,331
Other activities			2,077				2,125				1,996				1,719				7,917
Corporate and eliminations			(5	)			(4	)			1				7				(1	)
Total			53,050				49,711				50,309				48,213				201,283
Internal revenue
Exploration and Production			14,455				13,520				14,390				13,577				55,942
Energy and Oil Marketing			1,859				1,971				1,101				3,464				8,395
Eliminations			(15,079	)			(14,265	)			(14,028	)			(13,977	)			(57,350	)
Oil & Energy			1,235				1,226				1,463				3,064				6,988
Aluminium Metal			6,331				6,299				6,270				5,757				24,657
Aluminium Products			58				62				58				80				257
Other activities			858				593				586				1,099				3,137
Corporate and eliminations			(8,482	)			(8,181	)			(8,377	)			(10,000	)			(35,039	)
Total			—				—				—				—				—
Share of the profit (loss) in equity accounted investments
Exploration and Production			2				2				2				1				7
Energy and Oil Marketing			56				73				47				42				218
Eliminations			—				—				—				—				(2	)
Oil & Energy			58				75				49				42				223
Aluminium Metal			233				249				385				(12	)			854
Aluminium Products			18				30				(224	)			9				(168	)
Other activities			13				17				22				20				73
Corporate and eliminations			—				6				2				—				8
Total			321				376				234				59				990

Conversion to IFRS       11

Amounts in NOK million		First quarter				Second quarter				Third quarter				Fourth quarter				2006
Depreciation, amortization and impairment
Exploration and Production			2,886				2,757				4,813				6,543				16,999
Energy and Oil Marketing			181				174				165				311				831
Eliminations			—				—				—				—				—
Oil & Energy			3,067				2,931				4,979				6,853				17,830
Aluminium Metal			507				497				494				694				2,192
Aluminium Products			437				552				462				709				2,159
Other activities			117				115				119				167				518
Corporate and eliminations			3				(1	)			3				1				7
Total			4,131				4,094				6,057				8,425				22,707
Earnings before financial items and tax
Exploration and Production			12,927				11,675				10,860				7,246				42,707
Energy and Oil Marketing			1,157				1,178				944				1,324				4,603
Eliminations			57				344				381				539				1,321
Oil & Energy			14,140				13,196				12,186				9,109				48,632
Aluminium Metal			1,706				2,333				2,365				899				7,302
Aluminium Products			486				326				(435	)			(481	)			(104	)
Other activities			134				245				264				736				1,379
Corporate and eliminations			404				(267	)			(217	)			(2,119	)			(2,199	)
Total			16,870				15,833				14,162				8,144				55,010
Adjusted EBITDA
Exploration and Production			15,813				14,432				15,673				13,788				59,706
Energy and Oil Marketing			1,343				1,357				1,121				1,640				5,461
Eliminations			57				344				382				540				1,323
Oil & Energy			17,213				16,133				17,176				15,968				66,490
Aluminium Metal			2,223				2,841				2,868				1,603				9,536
Aluminium Products			938				892				281				242				2,353
Other activities			251				360				383				939				1,933
Corporate and eliminations			407				(274	)			(215	)			(2,118	)			(2,201	)
Total			21,033				19,952				20,493				16,635				78,112
Investments
Exploration and Production			3,463				3,540				6,598				6,789				20,390
Energy and Oil Marketing			246				533				496				757				2,032
Eliminations			—				—				—				—				—
Oil & Energy			3,709				4,073				7,093				7,546				22,421
Aluminium Metal			514				505				504				993				2,515
Aluminium Products			232				227				241				552				1,252
Other activities			107				102				232				206				647
Corporate and eliminations			12				6				12				5				35
Total			4,572				4,912				8,083				9,302				26,869

12

Consolidated segment information
– 2006 IFRS (unaudited)

		Current assets								Non-current assets								Total assets
Amounts in NOK million		31.12.2006				01.01.2006				31.12.2006				01.01.2006				31.12.2006				01.01.2006
Exploration and Production			30,502				38,572				90,538				90,598				121,040				129,170
Energy and Oil Marketing			26,312				31,362				20,003				20,174				46,315				51,536
Eliminations			(5,044	)			(7,419	)			17				(175	)			(5,027	)			(7,594	)
Oil & Energy			51,771				62,516				110,557				110,596				162,328				173,112
Aluminium Metal			69,871				44,237				25,368				25,267				95,239				69,504
Aluminium Products			27,527				28,997				13,094				16,456				40,621				45,453
Other activities			8,476				7,698				5,733				5,379				14,209				13,077
Corporate and eliminations			(76,879	)			(72,174	)			(6,117	)			(5,087	)			(82,996	)			(77,261	)
Total continued operations			80,766				71,275				148,635				152,611				229,401				223,885
Classified as held for sale			3,691				—				—				—				3,691				—
Total			84,457				71,275				148,635				152,611				233,092				223,885

		Investments accounted for
		using the equity method								Segment debt
Amounts in NOK million		31.12.2006				01.01.2006				31.12.2006				01.01.2006
Exploration and Production			54				52				12,537				10,061
Energy and Oil Marketing			2,042				2,597				7,431				10,527
Eliminations			16				18				(1	)			—
Oil & Energy			2,112				2,667				19,968				20,588
Aluminium Metal			4,926				3,851				9,800				7,588
Aluminium Products			1,913				2,460				5,863				5,638
Other activities			1,176				1,134				2,206				2,080
Corporate and eliminations			563				732				2,094				2,204
Total continued operations			10,690				10,844				39,930				38,098
Classified as held for sale			279				—				720				—
Total			10,969				10,844				40,650				38,098

Conversion to IFRS       13

Basis for presentation of Hydro IFRS financial statements

Introduction

Hydro will use IFRS as the primary GAAP for financial reporting, with a transition date of 1 January 2006. The first IFRS reporting period will be 2007 with comparable IFRS figures presented for 2006. Hydro has implemented all IFRS standards issued as of 1 May 2007, and the 31 December 2007 annual financial statements and 2006 comparable figures will be presented using all required IFRS standards for accounting periods ending 31 December 2007.

      The European Unions’s (EU) Regulation (the “regulation”) requires the use of IFRS as approved by the EU for all listed companies in the EU and European Economic Area (EEA). The regulation was incorporated into Norwegian law in December 2004, and applies to Hydro. The United States Securities and Exchange Commission (SEC) allows companies using IFRS as their primary GAAP to file their annual financial statements with the SEC using IFRS with a reconciliation to US GAAP with certain reliefs compared to companies using foreign national GAAPs. Hydro will use IFRS as approved by the IASB in the financial statements. However, the standard setting process is such that there may be a standard issued by the IASB applicable for Hydro, that has not yet been approved by the EU as of the date of Hydro’s financial statements. Therefore, it may occur that Hydro’s annual financial statements that are filed with the SEC are prepared in accordance with IFRS as approved by the EU, with a reconciliation to IFRS as approved by the IASB, that is then reconciled to US GAAP.

Transition to IFRS – IFRS 1 elected exemptions

Hydro’s transition to IFRS follows the regulation in IFRS 1 First-time Adoption of International Financial Reporting Standards (IFRS 1). IFRS 1 offers the possibility to utilize certain exemptions from retrospective implementation of IFRS as if always applied. Hydro has evaluated the options available in IFRS 1, and has elected to adopt transition implementation policies in the areas of business combinations, employee benefits, cumulative translation differences, designation of previously recognized financial instruments, share-based payment transactions and asset retirement obligations. A summary of these transition accounting policies is given below. Transition policies available in IFRS 1 that are not material for Hydro are not included in the discussion.

Business combinations

IFRS 3 Business Combinations (IFRS 3) deviates in certain respects when compared to the US GAAP standards applicable for accounting for business combinations. The implementation guidance for the current US GAAP standards gives, for certain acquisitions, a different result compared to full retrospective implementation of IFRS 3. Hydro has elected to utilize the option in IFRS 1 to not apply IFRS 3 retrospectively to past business combinations completed as of 1 January 2006. The impact of this policy decision is that all prior business combinations will continue to be accounted for as they originally were under US GAAP, including the allocation of acquisition cost. This includes the recognition of any goodwill identified in these transactions.

Employee benefits

IFRS 1 allows for all cumulative actuarial gains and losses at the date of transition to be recognized as of the date of transition as an alternative to full retrospective application of IAS 19 Employee Benefits. Hydro has chosen to adopt this transition policy, and has recognized all 1 January 2006 cumulative actuarial gains and losses at the date of transition with the effect posted directly against equity. Hydro applies the same economic and actuarial assumptions under IFRS as applied under US GAAP, and will continue to use the corridor approach when accounting for actuarial gains and losses on an ongoing basis.

Cumulative translation differences

IFRS 1 offers the first-time adopter of IFRS the option to reset the cumulative translation differences that existed at the date of adoption (i.e. the US GAAP translation differences) to zero as of the date of transition to IFRS as an alternative to establishing a cumulative translation difference as if the accounting and translation principles in IAS 21 The Effects of Changes in Foreign Exchange Rates had always been used and the measurement of assets and liabilities had been as required by currently implemented IFRS. Hydro has elected to utilize this option, and has reset the cumulative translation differences for all foreign operations to zero as of 1 January 2006. Future gains or losses on a subsequent disposal of any foreign operation will therefore exclude translation differences that arose before 1 January 2006.

Designation of previously recognized financial instruments

Marketable and non-marketable trading shares as defined under US GAAP are classified as financial assets at fair value through profit and loss under IFRS. Shares held for trading are classified as part of Short-term investments. Hydro has elected that non-marketable shares previously classified under US GAAP as not held for trading are classified as available-for-sale under IFRS with changes in fair value booked against equity. The shares are presented in the balance sheet as part of Financial Assets. Non-marketable shares in the US GAAP balance sheet were classified as Prepaid pension, investment and other non-current assets, and measured at cost.

Share-based payment transactions

Hydro adopted IFRS 2 Share-based Payment (IFRS 2) as of 1 January 2006. IFRS 1 encourages first-time adopters of IFRS to apply IFRS 2 to equity instruments granted on or before 7 November 2002. Hydro

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has applied IFRS 2 to all share-based payments, including the share appreciation rights granted prior to 7 November 2002.

Asset retirement obligations

IFRS 1 allows for a simplified treatment of historic changes when estimating the asset retirement obligations between the initial inception of the liability and the adoption of IFRS. Hydro has elected to utilize this option. The asset retirement obligations have been calculated as of Hydro’s 1 January 2006 transition date in accordance with IAS 37 Provisions using the best estimate of removal cost and timing, and the risk free interest rates for the relevant currencies and expected life of the asset as of the date of estimation. The IFRS estimate resulted in an increase in recognized asset retirement obligations of NOK 3,040 million as of 1 January 2006. The estimated amount that would have been included in the historical cost of the asset, based on historical interest rates and accumulated depreciation based on that amount, have been calculated. That estimated amount is only insignificantly different from the asset value recognized under US GAAP. Hydro has therefore not recognized any difference in historical cost or carrying value of the related fixed assets in connection with the transition to IFRS.

IFRS accounting policies and critical accounting estimates

Introduction

Norsk Hydro ASA is an offshore producer of oil and gas, as well as an integrated aluminium supplier with operations in nearly 40 countries. The 2006 consolidated income statements, balance sheets, statements of cash flows and statements of changes in equity of Norsk Hydro ASA and its subsidiaries (Hydro), presented both on an annual and quarterly basis, are prepared in accordance with International Financial Reporting Standards (IFRSs) and are included on pages 3 to 12 of this document.

     Prior to adoption of IFRS as of 1 January 2007, Hydro’s primary financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP). The 2006 consolidated income statements and balance sheets, reconciled from US GAAP to IFRS, are located on pages 21 to 25. An equity reconciliation from US GAAP to IFRS is found on page 30. The statement of cash flows is not reconciled from US GAAP to IFRS. See the section “US GAAP and IFRS financial statement differences” for an explanation of the Hydro accounting policy differences between US GAAP and IFRS, which includes a discussion of the statement of cash flows differences.

     The financial information has been prepared on a historical cost basis except for the revaluation of certain non-current assets and liabilities and financial instruments. Preparation of the financial information requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the contingency disclosures. Actual results may differ from estimates. See the discussion at the end of this section titled “Critical accounting estimates.”

     This section of the document describes the Hydro IFRS accounting policies. See the Annual Report 2006 note 1 for a comparable summary of Hydro’s US GAAP accounting policies.

Basis of consolidation

The consolidated financial statements include Norsk Hydro ASA and subsidiary companies. Hydro consolidates subsidiaries where Hydro owns, directly or indirectly, more than 50 percent of the voting power or exercises control. Hydro consolidates special purpose entities (SPEs) determined to be controlled by Hydro. Control is achieved when Hydro has the power to govern the financial and operating policies of the entity or power over more than half of the voting rights by virtue of an agreement with other investors.

     All significant intercompany transactions and balances have been eliminated.

Business combinations

Business combinations are accounted for using the purchase method in accordance with IFRS 3 Business Combinations (IFRS 3). The purchase price is the sum of the fair values, as of the date of exchange, of the assets given, liabilities incurred or assumed, and equity instruments issued by Hydro in exchange for control of the acquiree, plus any costs directly attributable to the combination. The acquiree’s identifiable assets, liabilities and contingent liabilities are recognized separately at the acquisition date at their fair value irrespective of any minority interest.

     Goodwill is recognized from the date of exchange and is initially measured as the excess of the purchase price over Hydro’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. Goodwill is not amortized, but is reviewed for impairment annually and more frequently if indicators of possible impairment are observed, in accordance with IAS 36 Impairment of Assets. Goodwill is allocated to the groups of cash generating units expected to benefit from the synergies of the combination and that are monitored for internal management purposes. For Hydro this is the sector level in Aluminium Metal and Aluminium Products, and the sub-segment level in Oil & Energy.

Conversion to IFRS       15

The interest of minority shareholders in the acquiree is initially measured as the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognized.

     See the Annual Report 2006 note 2 for a description of significant acquisitions and disposals during 2006.

Investments in associates and joint ventures

Hydro accounts for associates using the equity method. The definition of an associate is based on Hydro’s ability to exercise significant influence, which is the power to participate in the financial and operating policies of the entity. Significant influence is assumed to exist if Hydro owns between 20 to 50 percent of the voting rights. However, exercise of judgment may lead to the conclusion of significant influence at ownership levels less than 20 percent or a lack of significant influence at ownership percentages greater than 20 percent. Hydro uses the equity method for a limited number of investees where Hydro owns less than 20 percent of the voting rights, based on an evaluation of the governance structure in each investee.

     A joint venture is an entity, asset or operation that is subject to contractually established joint control. In corporate joint ventures, special voting rights in some companies give each of the partners decision rights that exceed what normally would follow from the ownership share. This may be in the form of a specified number of board representatives, in the form of a right of refusal on important decisions, or by requiring a qualified majority for all or most of the important decisions. Participation in joint ventures is accounted for using the equity method, except for jointly controlled assets or operations where the partners have a direct ownership in the assets or direct participation in operations (undivided interest). These joint ventures are accounted for by including Hydro’s share of assets, liabilities, income and expense on a line-by-line basis (the proportional method).

     The equity method involves showing the investment in the associate or joint venture at Hydro’s percentage ownership of the equity in the associate or joint ventures, including any excess values or goodwill. Hydro’s share of net income, including depreciation and amortization of excess values, is included in Share of the profit or loss of associates and joint ventures. Material unrealized profits resulting from transactions with an associate or equity accounted joint venture are eliminated. The proportional method involves consolidating the income statement and balance sheet of the joint ventures based on Hydro’s percentage ownership in the joint ventures, with full elimination of inter-company transactions.

     The financial statements of associates and joint ventures are prepared for the same reporting year as the group. Where necessary, adjustments are made to those financial statements to bring the accounting policies used into line with those of Hydro.

     Hydro reviews investments in associates and joint ventures for impairment when indicators of a possible loss in value are identified. As Hydro’s investees generally are not listed on a stock exchange or regularly traded, our impairment review for such investees can only in rare cases be based on market prices. Impairment indicators include such items as operating losses or adverse market conditions. The fair value of the investment is estimated based on valuation model techniques. If the estimated fair value of the investee is below Hydro’s carrying value and the impairment is considered to be prolonged, the investment is written down as impaired. Impairment losses are reversed if the impairment situation is deemed to no longer exist.

Assets held for sale and discontinued operations

When an asset or a group of assets are decided to be sold, they are reported separately as Assets held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, provided that the sale is highly probable, which includes the criteria that management is committed to the sale, and that the sale will be completed within one year. Assets held for sale are not depreciated, but are measured at the lower of book value and the fair value less costs to sell. Assets meeting the criteria for presentation as an Asset held for sale are not reclassified as an Asset held for sale in prior period balance sheets. Immaterial disposal groups are not classified as assets held for sale.

     A discontinued operation is a component of Hydro that can be clearly distinguished from the rest of Hydro, both operationally and for financial reporting purposes. A discontinued operation is be a separate major line of business or a geographical area of operations. Cash flows, results of operations and any gain or loss from disposal are excluded from Earnings before financial items and tax and reported separately as discontinued.

     Components disposed of through a spin-off to shareholders are presented as Discontinued operations as of the date of disposal. Prior period results of operations are reclassified to be comparable.

Provisions

Provisions are recognized when Hydro has a present obligation (legal or constructive) as a result of a past event, and it is probable that Hydro will be required to settle the obligation. Hydro recognizes provisions only when a reliable estimate can be made of the amount, taking into account the risks and uncertainties. If a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of the cash flows. See also the accounting policy discussion for asset retirement obligations and share-based payments.

Restructuring costs Hydro recognizes a provision for costs associated with an exit or disposal activity upon formal commitment to an exit plan. A provision for termination benefits related to the involuntary termination of employees is recognized as of the date of employee notification.

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Foreign currency translation

In individual companies, transactions in foreign currencies are initially recorded in the functional currency by applying the rate of exchange as of the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the rate of exchange ruling at the balance sheet date. The realized and unrealized currency gains or losses are included in financial expenses. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated into the functional currency using the rates of exchange as of the date of the initial transaction.

     In the consolidated financial statements, the assets and liabilities of non-Norwegian krone functional currency subsidiaries, joint ventures and associates, including the related goodwill, are translated into Norwegian krone using the rate of exchange as of the balance sheet date. The results and cash flows of non-Norwegian krone functional currency subsidiaries, joint ventures and associates are translated into Norwegian krone using the average exchange rate for the period reported. Exchange adjustments arising when the opening net assets and the net income for the year retained by the non-Norwegian krone operation are translated into Norwegian kroner are taken into Other reserves and reported in the statement of changes in equity. On disposal of a non-Norwegian krone functional currency subsidiary, joint venture or associate, the deferred cumulative amount recognized in equity relating to that particular non-Norwegian krone entity is recognized in the income statement.

Revenue recognition

Revenue from sales of products, including products sold in international commodity markets, is recognized when ownership passes to the customer. Generally, this is when products are delivered. Certain contracts specify price determination in a later period. In these cases, the revenue is recognized when the revenue can be measured reliably. Rebates and incentive allowances are deferred and recognized in income upon the realization or at the closing of the rebate period. In arrangements where Hydro acts as an agent, such as commission sales, only the net commission fee is recognized as revenue.

     Revenues from the production of oil and gas are recognized on the basis of the company’s net working interest, regardless of whether the production is sold (entitlement method). The difference between Hydro’s share of produced volumes and sold volumes is not material.

     Activities related to the trading of derivative commodity instruments, or related to the purchase or delivery of physical commodities on a widely recognized commodity exchange or delivery hub, as well as physical commodity swaps with a single counterparty, are presented on a net basis in the income statement, with the margin from trading recognized in revenues.

Cash and cash equivalents

Cash and cash equivalents includes cash, bank deposits and all other monetary instruments with a maturity of less than three months from the date of acquisition.

     Cash and cash equivalents, as defined for reporting purposes in the statement of cash flows, consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts connected to cash management activities.

Short-term investments

Short-term investments include bank deposits and all other monetary instruments with a maturity between three and twelve months at the date of purchase and Hydro’s current portfolio of marketable equity and debt securities. The securities in this portfolio are considered trading securities and are valued at fair value. The resulting unrealized holding gains and losses are included in financial income and expense. Investment income is recognized when earned.

Accounts receivable

Accounts receivable are presented at fair value at inception in the balance sheet and reviewed for impairment on an ongoing basis. Hydro recognizes an impairment loss on individual accounts based on an assessment of delayed payments, and other indicators of financial difficulty of the customer. Excluding the account balances that have been impaired based on the individual account evaluation process, Hydro then assesses all remaining overdue accounts receivable for impairment based on prior collection experience, the customer portfolio and business and political climate.

Inventories

Inventories are valued at the lower of cost, using the first-in, first-out method (FIFO), or net realizable value. Cost includes direct materials, direct labor and the appropriate portion of production overhead or the purchase price of the inventory. Abnormal amounts of idle facility expense, freight, handling costs, and wasted materials are recognized as expense in the current period.

Non-current assets

Non-current assets include Hydro’s portfolio of long-term marketable equity securities that are not consolidated or accounted for using the equity method. The portfolio is considered as available-for-sale securities and is measured at fair value with changes in fair value recognized through equity. Other investment income is recognized when earned. Investments are reviewed for impairment if indications of a loss in value are identified. Fair value of the investment is estimated based on valuation model techniques for non-marketable securities. When the estimated fair value of the investee is below Hydro’s carrying value the impairment is recognized in earnings.

Conversion to IFRS       17

Property, plant and equipment

Property, plant and equipment (PP&E) is recognized based upon management’s assessment of probable future economic benefit and when the acquisition cost can be measured reliably. PP&E book value is the historical cost less accumulated depreciation and any accumulated impairment losses. If a legal obligation for the retirement of a tangible long-lived asset is incurred, the carrying value of the related asset is increased by the estimated fair value of the asset retirement obligation (decommissioning costs) upon initial recognition of the liability. See section below titled “Asset Retirement Obligations”.

Periodic maintenance Expenditures for periodic maintenance and repairs applicable to production facilities are capitalized when these costs meet the criteria in accordance with IAS 16 Property, Plant and Equipment (IAS 16). Normal maintenance and repairs for all other properties are expensed as incurred. Major replacements and renewals that materially extend the life of properties are capitalized and any assets replaced are retired.

Capitalized interest Hydro capitalizes borrowing costs on qualifying assets in accordance with IAS 23 Borrowing Costs (IAS 23).

Leased assets Leases which transfer to Hydro substantially all the risks and benefits incidental to ownership of the leased item are accounted for as finance leases in accordance with IAS 17 Leases (IAS 17) and IFRIC 4 Determining whether an Arrangement contains a lease (IFRIC 4). Finance leases are capitalized at inception at the fair value of the leased property, or, if lower, at the present value of the minimum lease payments as assets under Property, plant and equipment. The liability is included in Long-term debt. The finance leases are depreciated over the shorter of the estimated useful life of the asset or the lease term. The related liability is reduced each reporting period by the amount of the lease payment less the effective interest expense. All other leases are classified as operating leases and the lease payments are recognized as an expense over the term of the lease.

Depreciation and amortization Amortization expense is determined on a straight-line basis. Depreciation is determined using the straight-line method over the estimated useful life of the asset with the following rates:

Machinery and equipment		5-25 percent
Buildings		2-5 percent
Other		10-20 percent

Hydro depreciates separately any component of an item of property, plant and equipment when that component has a useful life and cost that is significant in relation to the total PP&E cost and PP&E useful life. At each financial year-end Hydro reviews the residual value and useful life of our assets, with any estimate changes accounted for prospectively.

     Oil and gas producing properties are depreciated individually using the unit-of-production method as proved developed reserves are produced. Unit-of-production depreciation rates are reviewed and revised whenever there is an indication of the need for a change in the rates and at a minimum all producing fields are reviewed at least once a year. Any revisions in the rates are accounted for prospectively.

Asset retirement obligations

Hydro recognizes the estimated fair value of asset retirement obligations (ARO) in the period in which it is incurred. This cost includes the cost of dismantlement, removal or restoration. Obligations for oil and gas installations are recognized when the assets are constructed and ready for production. Related asset retirement costs are capitalized as part of the carrying value of the long-lived asset and the liability is accreted for the change in its present value each reporting period. Accretion expense is classified as part of Financial expense. Liabilities that are conditional on a future event (e.g. the timing or method of settlement), whether under the control of Hydro or not, are recognized if the fair value of the liability can be reasonably estimated. Asset retirement costs are depreciated over the useful life of the related long-lived asset.

Exchanges of non-monetary assets

Non-monetary transactions that have commercial substance are accounted for at fair value and any resulting gain or loss on the exchange is recognized in the income statement. A non-monetary exchange has commercial substance if Hydro’s future cash flows are expected to change significantly as a result of the exchange. Hydro accounts for certain non-monetary exchanges of oil and gas related assets at fair value and accounts for certain other non-monetary exchanges of oil and gas producing assets where Hydro has substantial continuing involvement without recognizing a gain or loss on the exchange.

Intangible assets

Intangible assets acquired individually or as a group are recorded at fair value when acquired. Intangible assets acquired in a business combination are recognized at fair value separately from goodwill when they arise from contractual or legal rights or can be separated from the acquired entity and sold or transferred. Intangible assets with finite useful lives are amortized on a straight-line basis over their benefit period. Intangible assets determined to have an indefinite

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useful life are not amortized but are subject to impairment testing on an annual basis.

Emission rights Hydro accounts for Norwegian and EU government granted and purchased CO₂ emission allowances at nominal value (cost) as an intangible asset. The emission rights are not amortized as they are either settled on an annual basis before year-end (matched specifically against actual CO₂ emissions) or rolled over to cover the next year’s emissions; impairment testing is done on an annual basis. Actual CO₂ emissions over the 95 percent level granted by the government are recognized as a liability at the point in time when emissions exceed the 95 percent level. Any sale of government granted CO₂ emission rights is recognized at the time of sale at the transaction price.

Research and development

All expenditures on research are expensed as incurred. Development costs are capitalized as an intangible asset at cost when all of the recognition criteria in IAS 38 Intangible Assets (IAS 38) are met, it is probable that Hydro will receive a future economic benefit that is attributable to the asset, and the cost can be measured reliably.

Impairment of property, plant and equipment and intangible assets

Hydro reviews property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, in accordance with IAS 36 Impairment of Assets (IAS 36). The carrying amount is not recoverable if it exceeds the asset’s or cash generating group’s fair value less costs to sell or the value in use. If the carrying amount is not recoverable, an impairment loss is recognized in the amount that the carrying value exceeds its recoverable amount. In the event of a subsequent increase in the recoverable amount, previously recognized impairment losses are reversed.

Contingencies and guarantees

Hydro recognizes a liability for the fair value of obligations it has undertaken in issuing guarantees, including Hydro’s ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. Contingencies are recognized in the financial statements when probable of occurrence and can be estimated reliably.

Financial assets

Financial assets represent a contractual right by Hydro to receive cash or another financial asset in the future. Financial assets classified as non-current include long-term financial instruments, other investments, long-term loans to employees, long-term bank accounts and restricted cash and other long-term receivables.

     Financial assets are derecognized when the rights to receive cash from the asset have expired or when Hydro has transferred its rights to receive cash flows from the asset and has either transferred substantially all of the risks and rewards of the asset or has transferred control of the asset.

Financial liabilities

Financial liabilities represent a contractual obligation by Hydro to deliver cash in the future, and are classified as either short or long-term. Financial liabilities include financial instruments used for cash-flow hedges, financial derivatives and commodity derivative contracts.

     Financial liabilities are derecognized when the obligation is discharged through payment or when Hydro is legally released from the primary responsibility for the liability.

Oil and gas royalty

Oil and gas revenue is recorded net of royalties payable in kind.

Exploration and development costs of oil and gas reserves

Hydro uses the successful efforts method of accounting for oil and gas exploration and development costs. In accordance with IFRS 6 Exploration for and Evaluation of Mineral Resources, Hydro accounts for oil and gas exploration in a similar manner as under our previous GAAP. Exploratory costs, excluding the cost of exploratory wells and acquired exploration rights, are charged to expense as incurred. Drilling costs for exploratory wells are capitalized pending the determination of the existence of proved reserves. If reserves are not found, the drilling costs are charged to operating expense. Well costs may remain capitalized beyond one year from drilling, dependent on project reviews, which take place periodically and no less frequently than every quarter.

     Cost relating to acquired exploration rights are allocated to the relevant areas and capitalized, pending the determination of the existence of proved reserves. The acquired exploration rights are charged to operating expense when a determination is made that proved reserves will not be found in the area. Each block or area is assessed separately. Capitalized exploration costs are included in Intangible assets until determination that proved reserves have been found. Upon determination that proved reserves have been found and will be developed, the exploration costs for that field is transferred to Property, plant and equipment and aggregated with costs incurred to develop the field.

     All development costs for wells, platforms, equipment and related interest are capitalized. Capitalized exploration and development costs are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. To the extent that Hydro uses future net cash flows to evaluate unproved properties for impairment, the unproved reserves are

Conversion to IFRS       19

risk adjusted before estimating future cash flows associated with those resources. Preproduction costs are expensed as incurred. See Hydro Annual Report 2006 note 26 for additional information.

Shipping costs

Shipping and handling costs are included in Other expenses. Shipping and handling costs invoiced to customers are included in Revenues.

Other income, net

Transactions resulting in income from sources other than normal production and sales operations are classified as Other income, net. Gains and losses resulting from the sale or disposal of PP&E, investments in associates or joint ventures, and subsidiaries are included in Other income, net as well as rental income and certain other incremental income and gains.

Income taxes

Deferred income tax expense is calculated using the liability method in accordance with IAS 12 Income Taxes (IAS 12). Deferred tax assets and liabilities are classified as non-current in the balance sheet and are measured based on the difference between the carrying value of assets and liabilities for financial reporting and their tax basis when such differences are considered temporary in nature. Temporary differences related to inter-company profits are deferred using the buyer’s tax rate. Deferred tax assets are reviewed for recoverability, and the amount probable of recovery is recognized. Deferred income tax expense represents the change in deferred tax asset and liability balances during the year except for the deferred tax related to items charged directly to equity and deferred taxes related to purchase and sales of subsidiaries. Changes resulting from amendments and revisions in tax laws and tax rates are recognized when the new tax laws are substantially enacted. Uncertain tax positions are recognized in the financial statements based on management’s expectations.

     Hydro recognizes the effect of uplift, a special deduction for petroleum surtax in Norway, at the investment date. Deferred taxes are not provided on undistributed earnings of most subsidiaries, when such earnings are assessed by management to be capable of being repatriated to Norway without tax effect.

Derivative instruments and fair value option instruments

Hydro applies IASB International Financial Reporting Standards No. 32 Financial Instruments: Presentation (IAS 32), and No. 39 Financial Instruments: Recognition and Measurement (IAS 39) when accounting for derivatives, as well as when determining whether contracts are derivatives. Derivative financial instruments are marked-to-market with the resulting gain or loss reflected in net financial expense, except when the instruments meet the criteria for cash flow hedge accounting. All derivatives and embedded derivatives are classified as short-term, including derivatives and embedded derivatives with a final maturity date that is more than twelve months after the balance sheet date, except for derivative hedging instruments that are classified as long-term provided that their final maturity date is more than twelve months after the balance sheet date. If Hydro has master netting agreements and the intention and ability to settle two or more derivatives net, the agreements are presented net on the face of the balance sheet. The ability to settle net is conditional on simultaneous cash-flows from the two contracts. Otherwise, derivative contracts are presented gross at their fair value.

     Physical commodity contracts are considered on a portfolio basis. If a portfolio of contracts contain contracts of a similar nature that are settled net in cash, or the assets are not intended for own use, the entire portfolio of contracts is recognized at fair value, and classified as derivatives.

     Forward currency contracts and currency options are recognized in the financial statements and measured at fair value at each balance sheet date with the resulting unrealized gain or loss recorded in financial expense.

     Interest income and expense relating to swaps are netted and recognized as income or expense over the life of the contract. Foreign currency swaps are translated into Norwegian krone at applicable exchange rates as of the balance sheet date with the resulting unrealized exchange gain or loss recorded in Financial income (expense), net.

     Derivative commodity instruments are marked-to-market with their fair value recorded in the balance sheet as either assets or liabilities. Adjustments for changes in the fair value of the instruments are reflected in the current period’s revenue and/or operating cost, unless the instrument is designated as a cash flow hedge instrument and qualifies for hedge accounting. The fair value option is currently not utilized by Hydro.

     Hedge accounting is applied when specific hedge criteria are met. The changes in fair value of the qualifying hedging instruments are offset in part or in whole by the corresponding changes in the fair value or cash flows of the underlying exposures being hedged. For cash flow hedges, gains and losses on the hedging instruments are deferred in Other reserves until the underlying transaction is recognized in earnings. When it is determined that a forecasted hedged transaction is no longer expected to occur, all the corresponding gains and losses deferred in Other reserves are immediately recognized in earnings. Any amounts resulting from hedge ineffectiveness for both fair value and cash flow hedges are recognized in the current period’s income statement. For fair value hedges, both the changes in the fair value of the designated derivative instrument and the changes in the fair value of the hedged item are recognized currently in earnings.

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Share-based compensation

Hydro accounts for share-based compensation in accordance with IFRS 2 Share-based Payment (IFRS 2). Hydro has an executive stock option plan, with a granting of share appreciation rights (SARs) to top management on an annual basis. The SARs are cash-settled upon exercise. At each reporting period, the fair value of the outstanding SARs is remeasured using a Black-Scholes option-pricing model and compensation expense is accrued, pro-rata based on the fair value, over the service period. SARs have been granted each year from 2002 to 2006, inclusive, and all grants are accounted for under IFRS 2 as of 1 January 2006. Hydro also has an employee share purchase rebate plan, where the plan payout is based on share price performance. Compensation expense in connection with this plan is measured at fair value over the service period. All share-based compensation expense includes social security taxes that will be paid by Hydro at the settlement date. All changes in fair value are recognized in profit and loss for the period. See the Annual Report 2006 note 4 for additional information.

Employee benefits and post-employment benefits

Short-term employee benefits, such as wages, salaries, social security contributions, paid annual leave, as well as short-term bonus agreements are accrued in the period in which the associated services are rendered by the employee.

     Post-employment benefits are recognized in accordance with IAS 19 Employee Benefits (IAS 19). The cost of providing pension benefits under a defined benefit plan is determined separately for each plan using the projected unit method. Past service costs are recognized in the income statement on a straight-line basis over the remaining vesting period. Net cumulative actuarial gains and losses in excess of the greater of 10 percent of the benefit obligation (before deducting plan assets) and 10% of the fair value of any plan assets are amortized in the current period’s income statement over the remaining service period of active plan participants. The funded status of a defined benefit pension plan is measured as of 31 December. Hydro recognizes the pre-paid pension asset and the accrued pension liability related to our defined benefit plans in the statement of financial position.

     Contributions to defined contribution schemes are recognized in the income statement in the period in which they accrue.

Segment information

Hydro identifies its reportable segments and disclose segment information under IFRS 8 Operating Segments. This standard requires Hydro to identify its segments according to the organization and reporting structure used by management. See the Annual Report 2006 note 5 for a description of Hydro’s segments and management model. The accounting policies used for segment reporting reflect those used for the group with the following exceptions: Certain internal commodity contracts may meet the definition of a financial instrument in IAS 39 or contain embedded derivatives that are required to be bifurcated and valued at fair value under IAS 39. However, Hydro consider these contracts as sourcing of raw materials or sale of own production even though the contracts for various reasons include clauses that meet the definition of a derivative or an embedded derivative. Such internal contracts are accounted for as executory contracts. Also certain internal contracts may contain lease arrangements that qualify as capital leases. However, the segment reporting reflects the responsibility allocated by Hydro management for those assets. Costs related to certain pension schemes covering more than one segment are allocated to the operating segments based on either premium charged or estimated service cost.

     IFRS 8 is currently not endorsed by the EU. The identified segments and reported performance measures and other information reported in accordance with IFRS 8 may in certain respects be different from what would have been reported had its predecessor standard, IAS 14 Reporting Financial Information by Segment been applied.

Critical accounting estimates

Inherent in many of Hydro’s accounting policies is the need for management to make estimates and judgments in the determination of certain revenues, expenses, assets and liabilities. The conversion to IFRS has not changed our evaluation in respect to the accounting policy areas where Hydro makes critical accounting estimates. The accounting policy areas are exploration costs of oil and gas reserves, proved oil and gas reserves, derivative instruments, asset retirement obligations, impairment of long-lived assets, contingencies and environmental liabilities, business combinations and goodwill, income taxes and employee retirement plans. These critical areas involve a higher degree of judgment and complexity which, in turn, could materially impact Hydro’s financial statements if various assumptions were changed significantly. See the Annual Report 2006 pages 100-105 for a discussion of Hydro’s critical accounting policies.

Conversion to IFRS       21

Consolidated income statement 2006 US GAAP to IFRS (unaudited)

														Pensions
						Presentation								and other								Property,
						and classi-				US GAAP				employee				Financial				plant and
		US GAAP				fication				reclassified				benefits				instruments				equipment				Other				IFRS
Year ended 31 December 2006
Amounts in NOK million
Note reference							A								B				C				D				E
Operating revenues			196,234				(196,234	)			—
Revenue							198,862				198,862				—				2,422				—				—				201,283
Share of the profit (loss) in equity accounted investments							971				971				—				—				—				19				990
Other income, net							1,496				1,496				—				—				(43	)			17				1,470
Total revenue and income							201,329				201,329				—				2,422				(43	)			36				203,744
Raw material and energy expense			98,961				(17,994	)			80,966				—				1,844				—				—				82,810
Employee benefits expense / Payroll and related costs			19,404				706				20,110				(564	)			—				—				—				19,546
Depreciation and amortization expense			16,937				(110	)			16,826				—				—				389				—				17,215
Impairment of non-current assets/ Impairment losses			5,228				—				5,228				—				—				264				—				5,492
Other			3,481				20,804				24,285				—				—				(572	)			(43	)			23,670
Total expenses / Operating costs and expenses			144,010				3,406				147,415				(564	)			1,844				81				(43	)			148,733
Operating income			52,224				(52,224	)
Earnings before financial items and tax							53,914				53,914				564				578				(124	)			79				55,010
Financial income (expense), net			1,785				(1,785	)			—
Financial income							1,425				1,425				—				—				—				—				1,425
Financial expense							(82	)			(82	)			—				(46	)			85				—				(43	)
Financial income (expense), net			1,785				(441	)			1,343				—				(46	)			85				—				1,382
Equity in net income of non-consolidated investees			962				(962	)			—
Other income (expense), net			53				(53	)			—
Income before tax / Income from continuing operations before taxes and minority interest			55,024				233				55,257				564				532				(39	)			79				56,392
Income tax expense			(37,598	)			(66	)			(37,665	)			(189	)			(645	)			(11	)			50				(38,459	)
Mintority interest			(202	)			202				—
Income from continuing operations			17,224				(17,224	)
Income from discontinued operations			167				(167	)
Net income			17,391				202				17,593				375				(113	)			(50	)			129				17,933
Net income attributable to minority interests							202				202				—				—				71				1				273
Net income attributable to equity holders of the parent							17,391				17,391				375				(113	)			(120	)			127				17,660