Independent auditor's report
To: the Annual General Meeting of Shareholders and the Supervisory Board of Koninklijke DSM N.V.
Report on the audit of the annual financial statements 2015
In our opinion:
- the 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 2015, and of its result and its cash flows for 2015 in accordance with International Financial Reporting Standards as adopted by the European Union (EU-IFRS) and with Part 9 of Book 2 of the Dutch Civil Code; and
- the parent company financial statements give a true and fair view of the financial position of Royal DSM as at 31 December 2015, and of its result for 2015 in accordance with Part 9 of Book 2 of the Dutch Civil Code.
What we have audited
We have audited the financial statements 2015 of Royal DSM, based in Heerlen (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 2015;
- the following consolidated statements for 2015: 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 2015;
- the parent company income statement for 2015; and
- the notes comprising a summary of the significant 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)” and other relevant independence regulations in the Netherlands. Furthermore, we have complied with the “Verordening gedrags- en beroepsregels accountants (VGBA)”.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
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. Materiality affects the nature, timing and extent of our audit procedures and the evaluation of the effect of identified misstatements on our opinion.
Based on our professional judgment we determined the materiality for the financial statements as a whole at €25 million (2014 EY: €44 million). The materiality is determined with reference to profit before tax from continuing operations, before exceptional items, of which it represents 5.2%. In addition, the appropriateness of the materiality was assessed by comparing the amount to consolidated net sales from continuing operations of which it represents 0.3% (2014 EY: 0.5%). 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, which are identified during the audit, would be 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 financial statements of Royal DSM.
Because we are ultimately responsible for the opinion, 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 group entities. Decisive were the size and/or the risk profile of the group entities or operations. On this basis, we selected group entities for which an audit or specified audit procedures had to be carried out on the complete set of financial information or specific items.
This resulted in a coverage of 74% of total net sales from continuing operations and 75% of total assets. For the remaining entities, we performed amongst others analytical procedures to validate our assessment that there are no significant risks of material misstatement within these.
- performed audit procedures ourselves at group and business group level in respect of areas such as the annual goodwill impairment tests, other (in)tangible asset impairments, valuation of deferred tax assets, acquisitions and disposals 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; and
- used the work of 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 entity materiality levels, which ranged from €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 who were part of the group audit, covering the significant audit areas, including the relevant risks of material misstatement, and set out 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, China, Brazil and the Shared Service Center in India. The group audit team also visited Royal DSM’s investments in Patheon and POET-DSM Advanced Biofuels LLC. Telephone conferences were also held with all entity auditors who were part of the group audit. During these visits and telephone conferences, the audit approach, the findings and observations reported to the group audit team were discussed in more detail. Also file reviews were performed for certain entities.
By performing the procedures mentioned above, 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.
Transition as auditor
Initial audit engagements involve considerations in addition to recurring audits. During initial audit engagements we have to gain sufficient knowledge about the company, its business, control environment and application of accounting principles in order to perform our initial audit risk assessment and planning of audit activities.
A detailed transition plan, including independence clearance, was prepared prior to the start of the audit. We gained an understanding of Royal DSM and its business including its control environment and accounting policies as we were involved early in the year at group, business group and local entity level. We have been in close contact with the predecessor auditor EY and have performed reviews on their audit files at all levels throughout the group. During the year we had regular meetings with management, performed quarterly procedures and assessed key accounting matters at an early stage.
Assessment of the loss on disposal of Polymer Intermediates and Composite Resins
On 31 July 2015, Royal DSM completed the sale of its Polymer Intermediates (caprolactam and acrylonitrile) and Composite Resins activities. We considered the accounting treatment in the financial statements of this event as a key audit matter because of its size, complexity and the judgment required in calculating some of the amounts included in the loss on disposal.
We tested the loss on disposal by reconciling the consideration to the Share Purchase Agreement (SPA) and bank accounts and by verifying the net assets disposed to underlying accounting records. In addition we verified whether the loss on disposal was calculated in accordance with the relevant clauses of the SPA. When verifying the loss on disposal we particularly challenged the net present value of the earn-out receivable which is linked to future performance of the divested business. We also evaluated the adequacy of the disclosure (Note 2) of this disposal in the financial statements.
Valuation of goodwill and other (in)tangible fixed assets
Royal DSM carries a significant amount of goodwill and other (in)tangible fixed assets on the balance sheet. Under EU-IFRS, the Company is required to test the amount of goodwill for impairment at least annually. In case of impairment triggers, goodwill and other (in)tangibles require 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.
We challenged the cash flow projections included in the annual goodwill impairment tests. For our audit we furthermore critically assessed and tested the assumptions, methodologies, the weighted average cost of capital and other data used, for example 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 included valuation specialists in our team to assist us with these procedures. 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. In case of recorded impairment losses, we tested the impairment calculations. Based on our procedures performed we consider management’s key assumptions to be within a reasonable range. We also assessed the adequacy of the disclosures (Note 8 and Note 9) in the financial statements.
Valuation of deferred tax assets
The group has a significant amount of deferred tax assets, mainly resulting from net operating losses. The risk exists that future (fiscal) profits will not be sufficient to fully recover the deferred tax assets. Management supports the recoverability of the deferred tax assets mainly with 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.
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. In this area, our audit procedures included, among others, using our own tax specialists to assist us in assessing the appropriateness of the level of deferred tax asset balance recognized in the balance sheet. We mainly focused on the long-term forecasts and critically assessed the assumptions and judgments included in these forecasts by considering the historical accuracy of forecasts and the sensitivities of the profit forecasts. Based on our procedures performed we consider management’s key assumptions to be within a reasonable range. We also assessed the adequacy of the tax disclosures (Note 7) in the financial statements setting out the basis of the deferred tax balance and the level of estimation involved.
Appropriateness of presentation of exceptional items
Royal DSM records exceptional items on the face of the consolidated income statement and discloses both the definition of exceptional items and the amount and nature of the recorded exceptional items. The presentation of exceptional items was significant to our audit given the size and nature of the amounts included.
We considered the items accounted for within ‘Exceptional items’ as deﬁned in note 6 to the ﬁnancial statements. We determined, through examination of the audit evidence obtained relating to the underlying transactions and discussion with management, whether such classification is consistent with Royal DSM’s stated policy as disclosed in the summary of significant accounting policies and past practice for recognition of such items, and whether, taken as a whole, the income statement is fair and balanced in its presentation.
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 Dutch Civil Code and for the preparation of the Report by the Managing Board in accordance with Part 9 of Book 2 of the Dutch 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 to obtain a high, but not absolute, level of assurance, which means we may not have detected all errors and fraud. 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) www.nba.nl/standardtexts-auditorsreport.
Report on other legal and regulatory requirements
Report on the Report by the Managing Board and the other information
Pursuant to legal requirements of Part 9 of Book 2 of the Dutch Civil Code (concerning our obligation to report about the Report by the Managing Board and other information):
- We have no deficiencies to report as a result of our examination whether the Report by the Managing Board, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of the Dutch Civil Code, and whether the information as required by Part 9 of Book 2 of the Dutch Civil Code has been annexed.
- We report that the Report by the Managing Board, to the extent we can assess, is consistent with the financial statements.
We were appointed as auditor of Royal DSM by the Annual General Meeting of Shareholders on 7 May 2014. The audit 2015 was our first year’s audit.
Amstelveen, 29 February 2016
KPMG Accountants N.V.
E.H.W. Weusten RA