Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies

W. R. Grace & Co., through its subsidiaries, is engaged in specialty chemicals and specialty materials businesses on a global basis through three operating segments: Grace Catalysts Technologies, which includes catalysts and related products and technologies used in refining, petrochemical and other chemical manufacturing applications; Grace Materials Technologies, which includes packaging technologies and engineered materials used in consumer, industrial, coatings, and pharmaceutical applications; and Grace Construction Products, which includes specialty construction chemicals and specialty building materials used in commercial, infrastructure and residential construction.

W. R. Grace & Co. conducts all of its business through a single wholly owned subsidiary, W. R. Grace & Co.-Conn. ("Grace-Conn."). Grace-Conn. owns all of the assets, properties and rights of W. R. Grace & Co. on a consolidated basis, either directly or through subsidiaries.

As used in these notes, the term "Company" refers to W. R. Grace & Co. The term "Grace" refers to the Company and/or one or more of its subsidiaries and, in certain cases, their respective predecessors.

Chapter 11 Proceedings During 2000 and the first quarter of 2001, Grace experienced several adverse developments in its asbestos-related litigation, including: a significant increase in personal injury claims, higher than expected costs to resolve personal injury and certain property damage claims, and class action lawsuits alleging damages from Zonolite^® Attic Insulation ("ZAI"), a former Grace attic insulation product.

After a thorough review of these developments, Grace's Board of Directors concluded that a federal court-supervised bankruptcy process provided the best forum available to achieve fairness in resolving these claims and on April 2, 2001 (the "Filing Date"), Grace and 61 of its United States subsidiaries and affiliates filed voluntary petitions for reorganization (the "Filing") under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").

Under Chapter 11, Grace operated its businesses under court supervision while using the Chapter 11 process to develop and implement a plan for addressing the asbestos-related claims. In September 2008, Grace and other parties filed a joint plan of reorganization with the Bankruptcy Court to address all pending and future asbestos-related claims and all other pre-petition claims as outlined therein (as subsequently amended, the "Joint Plan"). Following the confirmation of the Joint Plan in 2011 by the Bankruptcy Court and in 2012 by a U.S. District Court, and the resolution of all appeals, Grace emerged from bankruptcy on February 3, 2014. (See Note 2 for Chapter 11 information.)

Basis of Presentation The interim Consolidated Financial Statements presented herein are unaudited and should be read in conjunction with the Consolidated Financial Statements presented in the Company's 2013 Annual Report on Form 10-K. Such interim Consolidated Financial Statements reflect all adjustments that, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented; all such adjustments are of a normal recurring nature except for the impacts of adopting new accounting standards as discussed below. All significant intercompany accounts and transactions have been eliminated.

The results of operations for the six-month interim period ended June 30, 2014, are not necessarily indicative of the results of operations for the year ending December 31, 2014.

Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses for the periods presented. Actual amounts could differ from those estimates, and the differences could be material. Changes in estimates are recorded in the period identified. Grace's accounting measurements that are most affected by management's estimates of future events are:


•	Contingent liabilities, which depend on an assessment of the probability of loss and an estimate of ultimate resolution cost, such as asbestos-related matters and litigation (see Note 2), income taxes (see Note 6), and environmental remediation (see Note 9);


•	Pension and postretirement liabilities that depend on assumptions regarding participant life spans, future inflation, discount rates and total returns on invested funds (see Note 7); and


•	Realization values of net deferred tax assets, which depend on projections of future taxable income (see Note 6).

Currency Translation On February 8, 2013, the Venezuelan government announced that, effective February 13, 2013, the official exchange rate of the bolivar to U.S. dollar would devalue from 4.3 to 6.3. As a result of this currency devaluation, Grace incurred a charge to net income of $8.5 million in the 2013 first quarter. Of this amount, $1.6 million was included in segment operating income.

Licensing Revenue Recognition Grace typically bundles the license, the basic process design package, training, and software into one fixed price contract. The fixed price contract revenue is recognized on a straight-line basis over the period of performance of the contract, except for contingent revenue associated with a final performance guarantee. Revenue associated with the performance guarantee is considered contingent and therefore revenue is recognized when customer acceptance is obtained. Other services that are sold in connection with license arrangements generally qualify for separate accounting, with revenue recognized as earned.

Reclassifications and Revisions Certain amounts in prior years' Consolidated Financial Statements have been reclassified to conform to the current year presentation. Such reclassifications have not materially affected previously reported amounts in the Consolidated Financial Statements.

Certain pension costs previously reported as a separate line item in the Consolidated Statements of Operations are now reported in "cost of goods sold" and in "selling, general and administrative expenses" based upon the functions of the employees to which the pension costs relate. Grace has revised its accounting such that a portion of the defined benefit pension expense has been and will continue to be capitalized into inventories prior to being reported in "cost of goods sold." Grace believes that the change in classification of defined benefit pension costs and the change to inventory capitalization are not material to all prior periods.

Certain prior period amounts related to borrowings and repayments under credit arrangements reported as financing activities on the Consolidated Statements of Cash Flows have been revised. These amounts were originally presented on a net basis and are now being presented on a gross basis. Grace concluded that these revisions were not material to the prior-year Consolidated Financial Statements.

Change in Accounting Principle Regarding Pension Benefits During 2013, Grace changed its method of accounting for actuarial gains and losses relating to its global defined benefit pension plans to a more preferable method under U.S. GAAP. Grace's new method of accounting is referred to as "mark-to-market accounting" and includes immediate recognition of actuarial gains and losses in the period in which they occur. Under Grace's previous accounting method, such amounts were deferred and amortized. In addition, Grace will no longer update the balance sheet funded status of its pension plans each quarter for changes in discount rates and actual returns on assets, but rather will perform such update annually as of the end of each year. Should a significant event occur, Grace's pension obligation and plan assets would be remeasured at an interim period, and the gains or losses on remeasurement would be recognized in that period. This new accounting method was adopted in the 2013 fourth quarter, and retrospectively applied to Grace's financial results for all periods presented.

Under mark-to-market accounting, Grace's pension costs consist of two elements: 1) ongoing costs recognized quarterly, which include service and interest costs, expected returns on plan assets, and amortization of prior service costs/credits; and 2) mark-to-market gains and losses recognized annually in the fourth quarter resulting from changes in actuarial assumptions, such as discount rates and the difference between actual and expected returns on plan assets.

In order to better reflect the nature of pension costs in Grace's operating results, Grace also retrospectively revised the classification of defined benefit pension expense. See "Reclassifications and Revisions" above for further discussion related to these revisions.

These changes have been reported through retrospective application of the new policies to all periods presented. The impacts of all adjustments made to the financial statements are summarized below:

Consolidated Statements of Operations



	Three months ended June 30, 2013
(In millions, except per share amounts)	Previously Reported			Revised			Effect of Change
Cost of goods sold	$	499.5		$	501.9		$	2.4
Gross profit	303.3			300.9			(2.4		)
Selling, general and administrative expenses	137.6			142.1			4.5
Defined benefit pension expense	18.1			—			(18.1		)
Total costs and expenses	181.2			167.6			(13.6		)
Income before income taxes	122.1			133.3			11.2
Provision for income taxes	(38.8		)	(42.5		)	(3.7		)
Net income	83.3			90.8			7.5
Net income attributable to W. R. Grace & Co. shareholders	82.8			90.3			7.5
Basic earnings per share
Net income attributable to W. R. Grace & Co. shareholders	1.09			1.18			0.09
Diluted earnings per share
Net income attributable to W. R. Grace & Co. shareholders	1.07			1.16			0.09



	Six months ended June 30, 2013
(In millions, except per share amounts)	Previously Reported			Revised			Effect of Change
Cost of goods sold	$	945.6		$	952.8		$	7.2
Gross profit	567.1			559.9			(7.2		)
Selling, general and administrative expenses	266.5			275.4			8.9
Defined benefit pension expense	36.7			—			(36.7		)
Total costs and expenses	363.7			335.9			(27.8		)
Income before income taxes	203.4			224.0			20.6
Provision for income taxes	(66.9		)	(73.8		)	(6.9		)
Net income	136.5			150.2			13.7
Net income attributable to W. R. Grace & Co. shareholders	135.7			149.4			13.7
Basic earnings per share
Net income attributable to W. R. Grace & Co. shareholders	1.79			1.97			0.18
Diluted earnings per share
Net income attributable to W. R. Grace & Co. shareholders	1.75			1.93			0.18

Consolidated Statements of Cash Flows



	Six months ended June 30, 2013
(In millions)	Previously Reported			Revised			Effect of Change
Cash flows from operating activities:
Net income	$	136.5		$	150.2		$	13.7
Provision for income taxes	66.9			73.8			6.9
Defined benefit pension expense	36.7			16.1			(20.6		)
Inventories	(39.5		)	(37.0		)	2.5
All other items, net(1)	(47.7		)	(50.2		)	(2.5		)

_______________________________________________________________________________


(1)	Includes only those items which relate to the change in accounting method to mark-to-market accounting.

Consolidated Statements of Equity



	June 30, 2013
(In millions)	Previously Reported			Revised			Effect of Change
Retained earnings (Accumulated Deficit)
Beginning balance	$	395.2		$	(240.3	)	$	(635.5	)
Net income	135.7			149.4			13.7
Ending balance	530.9			(90.9		)	(621.8		)

Accumulated other comprehensive income (loss)
Beginning balance	$	(607.3	)	$	29.7		$	637.0
Other comprehensive income (loss)	45.8			(20.5		)	(66.3		)
Ending balance	(561.5		)	9.2			570.7

Total equity	$	534.1		$	483.0		$	(51.1	)

Consolidated Statements of Comprehensive Income



	Three months ended June 30, 2013
	Previously Reported			Revised			Effect of Change
Net income	$	83.3		$	90.8		$	7.5
Defined benefit pension and other postretirement plans, net of income taxes	33.3			3.1			(30.2		)
Currency translation adjustments	(16.8		)	(16.9		)	(0.1		)
Total other comprehensive income (loss)	15.3			(15.0		)	(30.3		)
Comprehensive income	98.6			75.8			(22.8		)
Comprehensive income attributable to W. R. Grace & Co. shareholders	98.5			75.7			(22.8		)



	Six months ended June 30, 2013
	Previously Reported			Revised			Effect of Change
Net income	$	136.5		$	150.2		$	13.7
Defined benefit pension and other postretirement plans, net of income taxes	69.5			3.2			(66.3		)
Currency translation adjustments	(23.3		)	(23.3		)	—
Total other comprehensive income (loss)	45.6			(20.7		)	(66.3		)
Comprehensive income	182.1			129.5			(52.6		)
Comprehensive income attributable to W. R. Grace & Co. shareholders	181.5			128.9			(52.6		)

Effect of New Accounting Standards In July 2013, the FASB issued ASU 2013-11 "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." This update is intended to improve the consistency surrounding the presentation of an unrecognized tax benefit when a net operating loss carryforward exists, requiring the unrecognized tax benefit to be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The new requirements are effective for fiscal years beginning after December 15, 2013, and for interim periods within those fiscal years, with early adoption permitted. Grace adopted this standard for the 2014 first quarter, and it did not have a material effect on the Consolidated Financial Statements.

In May 2014, the FASB issued ASU 2014-09 "Revenue from Contracts with Customers." This update is intended to remove inconsistencies and weaknesses in revenue requirements; provide a more robust framework for addressing revenue issues; improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets; provide more useful information to users of financial statements through improved disclosure requirements; and simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. The new requirements are effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years, with early adoption not permitted. Grace will adopt this standard when it becomes applicable and is currently evaluating its effect on the Consolidated Financial Statements.