Independent auditor's report

To: the Annual General Meeting of Shareholders and the Supervisory Board of Koninklijke DSM N.V.

Report on the accompanying financial statements 2016

Our opinion

In our opinion:

  • the accompanying consolidated financial statements give a true and fair view of the financial position of Koninklijke DSM N.V. (hereafter: Royal DSM) as at 31 December 2016, and of its result and its cash flows for 2016 in accordance with International Financial Reporting Standards as adopted by the European Union (EU-IFRS) and with Part 9 of Book 2 of the Netherlands Civil Code;
  • the accompanying parent company financial statements give a true and fair view of the financial position of Royal DSM as at 31 December 2016, and of its result for 2016 in accordance with Part 9 of Book 2 of the Netherlands Civil Code.

What we have audited

We have audited the financial statements 2016 of Royal DSM, based in Heerlen, the Netherlands. The financial statements include the consolidated financial statements and the parent company financial statements.

The consolidated financial statements comprise:

  • the consolidated balance sheet as at 31 December 2016;
  • the following consolidated statements for 2016: the income statement, the statement of comprehensive income, the statement of changes in equity and cash flow statement; and
  • the notes comprising a summary of the significant accounting policies and other explanatory information.

The parent company financial statements comprise:

  • the parent company balance sheet as at 31 December 2016;
  • the parent company income statement for 2016; and
  • the notes comprising a summary of the accounting policies and other explanatory information.

Basis for our opinion

We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. Our responsibilities under those standards are further described in the ‘Our responsibilities for the audit of the financial statements’ section of our report.

We are independent of Royal DSM in accordance with the Verordening inzake de onafhankelijkheid van accountants bij assurance-opdrachten (ViO, Code of Ethics for Professional Accountants, a regulation with respect to independence) and other relevant independence regulations in the Netherlands. Furthermore, we have complied with the Verordening gedrags- en beroepsregels accountants (VGBA, Dutch Code of Ethics).

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Audit approach

Summary

KPMG Auditors Report

Materiality

Based on our professional judgment we determined the materiality for the financial statements as a whole at €30 million (2015: €25 million). The materiality is determined with reference to Adjusted profit before tax from continuing operations (Note 2: €609 million; 2015: €427 million) of which it represents 4.9% (2015: 5.9%). In addition, the appropriateness of the materiality was assessed by comparing the amount to consolidated net sales from continuing operations of which it represents 0.4% (2015: 0.3%). We have also taken into account misstatements and/or possible misstatements that in our opinion are material for qualitative reasons for the users of the financial statements.

We agreed with the Supervisory Board that misstatements in excess of €1 million (2015: €1 million), which are identified during the audit, are reported to them, as well as smaller misstatements that in our view must be reported on qualitative grounds.

Scope of the group audit

Royal DSM is head of a group of reporting entities (hereafter: entities). The financial information of this group is included in the consolidated financial statements of Royal DSM.

Because we are ultimately responsible for the auditor’s report, we are also responsible for directing, supervising and performing the group audit. In this respect we have determined the nature and extent of the audit procedures to be carried out for entities reporting for group audit purposes. Decisive were the size and/or the risk profile of the entities or operations. On this basis, we selected 27 entities (2015: 29 entities) to perform audits for group reporting purposes on a complete set of financial information as well as 14 entities (2015: 16 entities) to perform specified audit procedures for group reporting purposes on specific items of financial information.

This resulted in a coverage of 74% (2015: 74%) of total net sales from continuing operations and 81% (2015: 75%) of total assets. The remaining 26% of total net sales from continuing operations (2015: 26%) and 19% of total assets (2015: 25%) is represented by a significant number of entities (‘Remaining entities’) none of which individually represents more than 2% of total net sales from continuing operations and 1% of total assets.

For these remaining entities, we performed amongst others analytical procedures at (business) group level to validate our assessment that there are no significant risks of material misstatement within these entities.

KPMG Total net salesKPMG Total assets

We have:

  • performed audit procedures ourselves at (business) group level in respect of areas such as the annual goodwill impairment tests, other (in)tangible asset impairments, accounting for associates and joint ventures, valuation of deferred tax assets, acquisitions, restructurings, treasury and shared service centers;
  • used the work of local KPMG auditors when auditing or performing specified audit procedures at business group and local entity level and Royal DSM’s investment in POET-DSM Advanced Biofuels LLC;
  • used the work of local non-KPMG auditors when auditing Royal DSM’s investments such as Patheon, DSM Sinochem Pharmaceuticals, Ltd and ChemicaInvest Holding B.V.

The group audit team has set materiality levels for the entities, which ranged from €5 million to €12.5 million (2015: €5 million to €12.5 million), based on the mix of size and risk profile of the entities within the group.

The group audit team provided detailed instructions to all business group and local entity auditors part of the group audit, covering the significant audit areas, including the relevant risks of material misstatement, and the information required to be reported back to the group audit team. The group audit team visited entity locations in the United States of America, Switzerland and the shared service center in India (2015: United States of America, Switzerland, China, Brazil and the shared service center in India). Also Royal DSM’s investments in Patheon, POET-DSM Advanced Biofuels LLC and ChemicaInvest Holding B.V. (2015: Patheon, POET-DSM Advanced Biofuels LLC) were visited by the group audit team. Telephone conferences were held with all entity auditors part of the group audit. During these visits and telephone conferences, we discussed the audit approach and the audit findings and observations reported to the group audit team. For a number of these entities we also performed file reviews.

By performing the procedures mentioned above at reporting entities, together with additional procedures at (business) group level, we have been able to obtain sufficient and appropriate audit evidence about the group’s financial information to provide an opinion about the financial statements.

Our key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements. We have communicated the key audit matters to the Supervisory Board. The key audit matters are not a comprehensive reflection of all matters discussed.

These matters were addressed in the context of our audit of the financial statements as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Compared to last year we have added as a key audit matter the valuation of joint venture POET-DSM Advanced Biofuels LLC. Last year’s key audit matters about the Transition as auditor and the Assessment of the loss on disposal of the Polymer Intermediates and Composite Resins business are not included anymore in 2016, given the one-off nature of these matters in 2015.

Valuation of goodwill

Description

Royal DSM carries a significant amount of goodwill on the balance sheet. Under EU-IFRSs, the Company is required to test the amount of goodwill for impairment at least annually. In case of impairment triggers, goodwill requires impairment testing as well. The impairment tests were significant to our audit due to the complexity of the assessment process and judgments and assumptions involved, which are affected by expected future market and economic developments.

Our response

We challenged the cash flow projections included in the annual goodwill impairment tests. Our audit procedures included, amongst others, the involvement of a valuation specialist to assist us in evaluating the assumptions, in particular the terminal growth and pre-tax discount rates, and the valuation methodology used by Royal DSM. We furthermore assessed the appropriateness of other data used by comparing them to external and historical data, such as external market growth expectations and by analyzing sensitivities in Royal DSM’s valuation model. We specifically focused on the sensitivity in the available headroom for the cash generating units, evaluating whether a reasonably possible change in assumptions could cause the carrying amount to exceed its recoverable amount and assessed the historical accuracy of management’s estimates. We assessed the adequacy of the disclosures (Note 8) to the financial statements.

Our observations

We consider management’s key assumptions and estimates to be within the acceptable range and we assessed the disclosure (Note 8) to the financial statements being proportionate. We note that Royal DSM concluded from its impairment test that the headroom for the cash generating unit DSM Biomedical is limited and sensitive to changes in the assumptions.

Valuation of deferred tax assets

Description

The group has a significant amount of deferred tax assets, mainly resulting from net operating losses. The valuation of deferred tax assets is significant to our audit because the assessment process is complex and is based on estimates of future taxable income. The risk exists that future (fiscal) profits will not be sufficient to recover all or part of these deferred tax assets. Management has supported the recoverability of the deferred tax assets mainly with taxable income projections which contain estimates of and tax strategies for future taxable income. Changes in for example the industrial footprint, the business and its markets and changes in regulations may impact these projections.

Our response

In this area, our audit procedures included, amongst others, using our own tax specialists to assist us in assessing the appropriateness of the level of deferred taxes recognised in the balance sheet. We paid attention to the long-term forecasts and critically assessed the assumptions and judgments underlying these forecasts by considering the historical accuracy of forecasts and the sensitivities of the profit forecasts. We assessed the adequacy of the income tax disclosures (Note 7) to the financial statements, setting out the basis of the deferred tax balance and the level of estimation involved.

Our observations

We found that the assumptions and estimates were within the acceptable range and that the disclosures (Note 7) were proportionate.

Valuation of joint venture POET-DSM Advanced Biofuels LLC

Description

Royal DSM has a 50% investment in POET-DSM Advanced Biofuels amounting to €117 million as at 31 December 2016. This investment is classified as joint venture in accordance with IFRS 11 and accounted for using the equity method. The POET-DSM Advanced Biofuels joint venture is a start-up entity which experiences delays in the start-up of the factory. As in 2015, management concluded that delays in the start-up of the factory triggered an impairment test. This impairment test required significant management judgment in determining the expected cash flows to calculate the recoverable amount. Changes in, for example, projected volumes, related variable costs and the anticipated market price for bio-ethanol may impact the future cash flow projections.

Our response

In our audit we assessed and tested the assumptions, methodologies, the weighted average cost of capital and other data used, for example by comparing them to external data. Key assumptions tested by us are expectations of revenue growth, margin improvements as a result of anticipated improvements in the factory, developments of the market price for bio-ethanol and anticipated continuation of the US renewable fuel standard subsidy program after 2022. We furthermore analyzed sensitivities in Royal DSM’s valuation model. We included in our team valuation specialists to assist us with these procedures. We specifically focused on the sensitivities by evaluating whether a reasonably possible change in assumptions could cause the carrying amount to exceed its recoverable amount. We assessed the adequacy of the disclosure in Note 10 to the financial statements.

Our observations

We consider management’s key assumptions and estimates to be within the acceptable range and we assessed the disclosures (Note 10) to the financial statements as being proportionate. We note that Royal DSM concluded from its impairment test that the headroom for joint venture POET-DSM Advanced Biofuels LLC is limited and sensitive to changes in the assumptions.

Alternative performance measures

Description

As in prior years, DSM makes use of Alternative performance measures which are not defined by EU-IFRS. Compared with last year, Royal DSM has changed its presentation of exceptional items in the income statement, which does not include alternative performance measures anymore. These Alternative performance measures are now disclosed in Note 2 to the financial statements. The presentation of Alternative performance measures was significant to our audit, given the size and nature of the amounts involved and the prominence given to the Alternative performance measures by management.

Our response

We assessed the appropriateness of the basis for the adjustments between the EU-IFRS income statement and the Alternative performance measures and the consistent application thereof as defined in Note 2 to the financial statements. We tested these adjustments, through examination of the audit evidence obtained relating to the underlying transactions and discussions with management.

Our observations

We consider that there is adequate disclosure of the nature and amounts of adjustments in accordance with the definition as described in Note 2, and determined that the definition of these adjustments is consistently applied.

Report on the other information included in the Integrated Annual Report

In addition to the financial statements and our auditor’s report thereon, the Integrated Annual Report contains other information that consists of:

  • Report by the Managing Board;
  • Corporate governance and risk management report;
  • Report by the Supervisory Board;
  • Other information pursuant to Part 9 of Book 2 of the Netherlands Civil Code;
  • Five-year summary of key figures.

Based on the below procedures performed, we conclude that the other information:

  • is consistent with the financial statements and does not contain material misstatements;
  • contains the information as required by Part 9 of Book 2 of the Netherlands Civil Code.

We have read the other information. Based on our knowledge and understanding obtained through our audit of the financial statements or otherwise, we have considered whether the other information contains material misstatements.

By performing these procedures, we comply with the requirements of Part 9 of Book 2 of the Netherlands Civil Code and the Dutch Standard on Auditing 720. The scope of the procedures performed is substantially less than the scope of those performed in our audit of the financial statements.

The Managing Board is responsible for the preparation of the other information, including the Report by the Managing Board in accordance with Part 9 of Book 2 of the Netherlands Civil Code and other Information pursuant to Part 9 of Book 2 of the Netherlands Civil Code.

Report on other legal and regulatory requirements

Engagement

We were appointed by the Annual General Meeting of Shareholders as auditor of Royal DSM on 7 May 2014, as of the audit for year 2015 and have operated as statutory auditor since then.

Description of the responsibilities for the financial statements

Responsibilities of the Managing Board and the Supervisory Board for the financial statements

The Managing Board is responsible for the preparation and fair presentation of the financial statements in accordance with EU-IFRS and with Part 9 of Book 2 of the Netherlands Civil Code. Furthermore, the Managing Board is responsible for such internal control as the Managing Board determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to errors or fraud.

As part of the preparation of the financial statements, the Managing Board is responsible for assessing the company’s ability to continue as a going concern. Based on the financial reporting framework mentioned, the Managing Board should prepare the financial statements using the going concern basis of accounting unless the Managing Board either intends to liquidate the company or to cease operations, or has no realistic alternative but to do so. The Managing Board should disclose events and circumstances that may cast significant doubt on the company’s ability to continue as a going concern in the financial statements.

The Supervisory Board is responsible for overseeing the company’s financial reporting process, amongst other things.

Our responsibilities for the audit of financial statements

Our objective is to plan and perform the audit to obtain sufficient and appropriate audit evidence for our opinion. Our audit has been performed with a high, but not absolute, level of assurance, which means we may not have detected all material errors and fraud during the audit.

Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. The materiality affects the nature, timing and extent of our audit procedures and the evaluation of the effect of identified misstatements on our opinion.

For a further description of our responsibilities in respect of an audit of financial statements, we refer to the website of the professional body for accountants in the Netherlands (NBA). https://www.nba.nl/Documents/Tools%20Vaktechniek/Standaardpassages/Standaardpassage_nieuwe_controletekst_oob_variant_%20Engels.docx.

Amstelveen, 2 March 2017

KPMG Accountants N.V.

E.H.W. Weusten RA