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 financial statements 2020 included in the Integrated Annual Report

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 2020 and of its result and its cash flows for the year then ended, 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.
• the accompanying parent company financial statements give a true and fair view of the financial position of Royal DSM as at 31 December 2020 and of its result for the year then ended in accordance with Part 9 of Book 2 of the Dutch Civil Code.

What we have audited

We have audited the financial statements 2020 of Royal DSM based in Heerlen. The financial statements include the consolidated financial statements and the parent company financial statements.

The consolidated financial statements comprise:

1. the consolidated balance sheet as at 31 December 2020;
2. the following consolidated statements for 2020: the income statement, the statements of comprehensive income, changes in equity and cash flows; and
3. the notes comprising a summary of the significant accounting policies and other explanatory information. 

The parent company financial statements comprise:

1. the parent company balance sheet as at 31 December 2020;
2. the parent company income statement for 2020; and
3. 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 the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Audit Approach

Summary

Materiality

Based on our professional judgement we determined the materiality for the financial statements as a whole at EUR 45 million (2019: EUR 45 million). The materiality is determined with reference to profit before income tax expense, normalized for acquisition/divestment related expenses and current year’s impairments of the cash generating units DSM Advanced Solar and DSM Bio-based Products & Services to arrive at a normalized level, resulting in a percentage of 5.9% (2019: 5.5%). We consider this normalized profit before income tax expense as the most appropriate benchmark following our analysis of the common information needs of users of the financial statements. For 2020 and 2019, this benchmark has been influenced by the announced divestment of the Resins and Functional Materials and associated businesses. Although included in net profit for the year, the results of these businesses and related activities have been presented separate from continuing operations, and are no longer part of (normalized) profit before income tax expense. In addition, the appropriateness of the materiality was assessed by comparing the amount to consolidated net sales of which it represents 0.6% (2019: 0.6%). We have also taken into account misstatements and/or possible misstatements that in our opinion are material for the users of the financial statements for qualitative reasons.

We agreed with the Supervisory Board that misstatements in excess of EUR 2 million (2019: EUR 2 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 at the head of a group of components. The financial information of this group is included in the 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 components reporting for group audit purposes. Decisive were the size and/or the risk profile of the components or operations. Based on our risk assessment, we selected 26 components (2019: 22 components) to perform audits for group reporting purposes on a complete set of financial information. In addition, we selected 16 components (2019: 14 components) to perform specified audit procedures for group reporting purposes on specific items of financial information.

This resulted in a coverage of 73% (2019: 73%) of total net sales and 79% (2019: 76%) of total assets. The remaining 27% of total net sales (2019: 27%) and 21% of total assets (2019: 24%) is represented by a significant number of components (‘Remaining components’), none of which individually represent more than 3% of total net sales and 2% of total assets.

For these remaining components, we performed among others analytical procedures to validate our assessment that there are no risks of material misstatement within these components.

Our procedures as described above can be summarized as follows:

We have:

• performed audit procedures at group level in respect of areas such as the annual goodwill impairment tests, other asset impairment assessments, accounting for associates and joint ventures, income tax for the Dutch fiscal unities, acquisitions of subsidiaries, accounting for divestments, restructuring provisions, treasury and shared service centers; and
• used the work of local KPMG and non-KPMG auditors (both ‘component auditors’) when auditing financial information or performing specified audit procedures at business group and component level.

The group audit team has set materiality levels for the components, which ranged from EUR 2 million to EUR 12.5 million (2019: EUR 5 million to EUR 12.5 million), based on the mix of size and risk profile of the respective components.

The group audit team provided detailed instructions to all business group and component 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.

As part of our original audit plan to evaluate the component auditors’ communications and the adequacy of their work, we intended to visit the component auditors and component locations in the United States of America, Switzerland, China, Denmark, Spain and the shared service center in India to review selected component auditor documentation. In view of restrictions on the movement of people across borders, and also within significantly affected countries, due to the Covid-19 pandemic, the group audit team considered how to make appropriate changes to the audit plan. Due to the aforementioned restrictions, travelling generally was not practicable, and we only visited in person the component auditors and Royal DSM’s locations in Denmark. As a result, we have requested other component auditors to provide us with remote access to audit workpapers to perform these evaluations. In addition, due to the inability to arrange in-person meetings with such component auditors and local management, we have increased the use of alternative methods of communication with them, including issuing additional written instructions, exchange of emails and virtual meetings.

Virtual meetings were held with all component auditors that participated in the group audit. During these (virtual) meetings, we discussed the audit approach and the audit findings and observations reported to the group audit team. 

By performing the procedures mentioned above at components, 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 focus on the risk of fraud and non-compliance with laws and regulations

Our objectives

The objectives of our audit with respect to fraud and non-compliance with laws and regulations are as follows.

With respect to fraud:

• to identify and assess the risks of material misstatement of the financial statements due to fraud;
• to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate audit responses; 
• to obtain a high (but not absolute) level of assurance that the financial statements, taken as a whole, are free from material misstatement, due to fraud; and
• to respond appropriately to fraud or suspected fraud identified during the audit.

With respect to non-compliance with laws and regulations:

• to identify and assess the risk of material misstatement of the financial statements due to non-compliance with laws and regulations; and
• to obtain a high (but not absolute) level of assurance that the financial statements, taken as a whole, are free from material misstatement, due to such non-compliance when considering the applicable legal and regulatory framework.

The primary responsibility for the prevention and detection of fraud and non-compliance with laws and regulations lies with the Managing Board, with oversight by the Supervisory Board. 

Our risk assessment

As part of our process of identifying fraud risks, we evaluated fraud risk factors with respect to fraudulent financial reporting and misappropriation of assets. We, together with our forensics specialists, evaluated the fraud risk factors to consider whether those factors indicated a risk of material misstatement due to fraud. 

In addition, we performed procedures to obtain an understanding of the legal and regulatory frameworks that are applicable to Royal DSM and we inquired the Managing Board and the Supervisory Board as to whether Royal DSM is in compliance with such laws and regulations and inspected correspondence, if any, with relevant licensing and regulatory authorities.

The potential effect of the identified laws and regulations on the financial statements varies considerably. 

Firstly, Royal DSM is subject to laws and regulations that directly affect the financial statements, including taxation and financial reporting. We assessed the extent of compliance with these laws and regulations as part of our audit procedures on the related financial statement items. 

Secondly, Royal DSM is subject to many other laws and regulations for which the consequences of non-compliance could have an indirect material effect on amounts recognized or disclosures provided in the financial statements, or both, for instance through the imposition of fines or litigation. We identified the following areas as those most likely to have such an indirect effect: 

• Competition legislation (reflecting Royal DSM’s operations across the world and potential investigations by national competition authorities);
• Health and safety regulation (reflecting the nature of Royal DSM’s production and distribution processes); 
• Employment legislation (reflecting Royal DSM’s significant and geographically diverse work force); 
• Consumer product law relating to product safety (reflecting the nature of Royal DSM’s diverse product base);
• Environmental regulation (reflecting the environmental clean-up responsibilities related to mainly Royal DSM’s former production and distribution processes).

In accordance with the auditing standards we evaluated the following fraud risks that are relevant to our audit, including the relevant presumed risks:

• fraud risk in relation to revenue recognition (presumed risk), specifically being the risk of manual override with respect to the cut-off of revenue; and 
• fraud risk in relation to management override of controls to meet targets and/or expectations (presumed risk).

We communicated the identified risks of fraud throughout our team and remained alert to any indications of fraud and/or non-compliance throughout the audit. This included communication from the group to component teams of relevant risks of fraud identified at group level.

In all of our audits, we address the risk of management override of controls, including evaluating whether there was evidence of bias by management that may represent a risk of material misstatement due to fraud. We refer to the key audit matter ‘Accounting for the acquisitions of Glycom and the Erber Group’, which is an example of our approach related to areas of higher risk due to accounting estimates where management makes significant judgements.

We communicated our risk assessment and audit response to the Managing Board and the Supervisory Board. Our audit procedures differ from a specific forensic fraud investigation, which often has a more in-depth character.

Our response to the risks identified

We performed the following audit procedures (not limited) to respond to the assessed risks:

• We evaluated the design and implementation of internal controls that mitigate fraud risks. 
• We performed data analysis on high-risk journal entries and evaluated key estimates and judgements for bias by management, such as estimates relating to goodwill impairment testing and accounting for acquisitions of subsidiaries, including retrospective reviews of prior year's estimates. Where we identified instances of unexpected journal entries or other risks through our data analytics, we performed additional audit procedures to address each identified risk. These procedures also included testing of transactions back to source information.
• We assessed matters included on the Royal DSM alert cases (whistleblower procedures) and fraud incidents, and the results of management's investigation of such matters.
• With respect to the risk of fraud of revenue recognition, we carried out inspection and testing of documentation such as agreements with customers and shipping documents.
• We incorporated elements of unpredictability in our audit.
• We considered the outcome of our other audit procedures and evaluated whether any findings or misstatements were indicative of fraud or non-compliance.
• We obtained audit evidence regarding compliance with the provisions of those laws and regulations generally recognized to have a direct effect on the determination of material amounts and disclosures in the financial statements.

We do note that our audit is based on the procedures described in line with applicable auditing standards. In addition to the requirements of the auditing standards we have performed the following procedures as part of our risk assessment:

• An assessment of DSM’s activities with respect to cyber security threats; and
• Data-analyses on revenue and purchase related areas, for a selection of components rotating year over year.

Our procedures to address identified risks of fraud did not result in a key audit matter. 

We do note that our audit is not primarily designed to detect fraud and non-compliance with laws and regulations and that the Managing Board is responsible for such internal control as management determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to errors or fraud, including compliance with laws and regulations. 

The more distant non-compliance with indirect laws and regulations (irregularities) is from the events and transactions reflected in the financial statements, the less likely it is that the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls.

Our key audit matters

Key audit matters are those matters that, in our professional judgement, 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 the key audit matter with respect to the (announced) divestment of DSM Resins and Functional Materials and associated businesses has been added, because the announcement occurred in 2020.

Impairment of cash generating units DAS and BP&S

Description

As mentioned in Note 8 to the financial statements, the cash generating unit (‘CGU’) DSM Advanced Solar (‘DAS’),  is expecting insufficient future cashflows for the solar assets that remain following the announced sale of the solar coating activities to Covestro. Furthermore, the CGU DSM Bio-based Products & Services (‘BP&S’) is facing an expected subdued market outlook for biofuels, as also evidenced by the ceased activities of POET-DSM as mentioned in Note 10 to the financial statements.

These events are considered indications that the respective assets may be impaired and consequently Royal DSM performed impairment testing in respect of the abovementioned CGUs. As reflected in Note 8 to the financial statements, Royal DSM recognized an impairment of EUR 110 million with respect to its CGUs DAS and BP&S, which mainly relates to intangible assets. Given the financial impact of these events and the determination of the recoverable amounts, the accounting for these impairments is significant for our audit of the financial statements.

Our response

We evaluated the design and implementation of controls with respect to Royal DSM’s impairment testing process. We assessed the appropriate identification of DAS and BP&S as separate CGUs. Since the impairment testing is related to CGUs for which insufficient future cash flows are expected, our audit procedures of evaluating the recoverable amount focused on assessing the fair value less costs to sell (‘FVLCS’), which was assessed by Royal DSM as immaterial. Our audit procedures included, among others, inspecting board minutes of the decision-making and thus obtaining an understanding of the business rationale of the decisions made. We furthermore assessed the reasonableness of the residual value assumptions, by inspection of management’s written plans, inquiry of management involved in the impairment testing process and by inspection of available external information. Finally, we assessed the adequacy of the disclosure (Note 8) to the financial statements. 

Our observation

We consider that the impairments are appropriately reflected in the financial statements and we assessed the disclosure (Note 8) to the financial statements as being adequate.

Accounting for acquisitions of Glycom and Erber

Description

As disclosed in Note 3 to the financial statements, during 2020, Royal DSM completed the acquisitions of Glycom A/S and Erber Group. The acquisitions involved a total consideration of EUR 1,579 million and had an aggregated impact on Goodwill and Intangible assets of EUR 862 million and EUR 824 million respectively.

The acquisitions were significant to our audit due to the financial impact and complexity of purchase price accounting including related judgements and assumptions used in the determination of the fair values of assets acquired and liabilities assumed.

Our response

We inspected the agreements and other documents underlying the acquisitions to gain an understanding of the contractual terms and conditions to assess the consideration and the acquired identifiable assets and liabilities. We obtained the reports from the external valuation experts engaged by Royal DSM to assist management with the purchase price accounting and the identification of identifiable assets and liabilities in the respective business combinations. We involved valuation specialists to evaluate management’s valuation models, and assumptions used such as growth rates and discount rates to arrive at the fair value of assets and liabilities recognized in the purchase price allocation. Our assessment of key assumptions used by management included a comparison with available external information such as market indices and financial metrics of peer companies.
We also evaluated the adequacy of the disclosure (Note 3) of the acquisitions in the financial statements.

Our observation

We consider that the outcome of the purchase price accounting is reasonable. The acquisitions are adequately disclosed in Note 3 to the financial statements.

Announced divestment of Resins and Functional Materials and associated businesses

Description

As disclosed in Note 3 to the financial statements, on 30 September 2020, Royal DSM announced their agreement to sell the Resins and Functional Materials and associated businesses (‘RFM business’) to Covestro, subject to certain conditions and approvals. Management concluded that the RFM business classifies as held for sale and should be presented as discontinued operations.

This event is significant to our audit because the assessment of the classification as asset held for sale and discontinued operations is complex, the transaction and its accounting is non-routine and involves a certain level of management judgement. These include, amongst others, determining the date of classification of the RFM business as held for sale and the presentation of its results separately as discontinued operations. This involves determining whether charges from other DSM group companies to the RFM business should be presented as part of continuing or discontinued operations. Furthermore, upon classification of the RFM business as discontinued operation, management had to measure this business at the lower of the carrying amount and its fair value less cost to sell.

Our response

We inspected the contractual agreements and other relevant documents underlying the announced divestment in order to understand key terms and conditions and to assess the accounting impact. Our audit procedures included, among others, an assessment of the appropriateness of the classification of the RFM business as held for sale and the presentation of its results as discontinued operations.
This included evaluating management’s judgements over the identification of the disposal group, assessing the date as of which the RFM business is classified as held for sale, assessing the valuation of the assets of the RFM business at the lower of the carrying amount and fair value less cost of disposal, and testing the presentation of the RFM business in the financial statements. We evaluated the recognition and presentation of the results of the RFM business as discontinued operations in the financial statements by testing the allocation to continuing or discontinued operations, and by evaluating management’s assumptions in allocating charges from other group companies to the RFM business.

Finally, we assessed the adequacy of both the presentation as assets held for sale and discontinued operations and the disclosure (Note 3) of the announced divestment in the financial statements

Our observation

We consider that the measurement of the RFM business, as well as the presentation of its assets and liabilities as held for sale and its results as those from discontinued operations, is adequately reflected and disclosed in Note 3 to the financial statements.

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.

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

• is consistent with the financial statements and does not contain material misstatements; and
• contains the information as required by Part 9 of Book 2 of the Dutch 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 Dutch Civil Code and the Dutch Standard 720. The scope of the procedures performed is 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 information as required by Part 9 of Book 2 of the Dutch Civil Code.

Report on other legal and regulatory requirements

Engagement

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

No prohibited non-audit services

We have not provided prohibited non-audit services as referred to in Article 5(1) of the EU Regulation on specific requirements regarding statutory audits of public-interest entities.

Description of responsibilities regarding 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 Part 9 of Book 2 of the Dutch Civil Code. Furthermore, the Managing Board is responsible for such internal control as management determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error.

As part of the preparation of the financial statements, the Managing Board is responsible for assessing the Royal DSM’s ability to continue as a going concern.

Based on the financial reporting frameworks 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 Royal DSM’s ability to continue as a going concern in the financial statements.

The Supervisory Board is responsible for overseeing Royal DSM’s financial reporting process.

Our responsibilities for the audit of the financial statements

Our objective is to plan and perform the audit engagement in a manner that allows us 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 detect all material errors and fraud during our audit.

Misstatements can arise from fraud or error and are considered material if, individually or in the 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. 

A further description of our responsibilities for the audit of the financial statements is included in appendix of this auditor's report. This description forms part of our auditor’s report.

Amstelveen, 1 March 2021

KPMG Accountants N.V.

P.J. Groenland – van der Linden RA

Appendix: 
Description of our responsibilities for the audit of the financial statements

Appendix

Description of our responsibilities for the audit of the financial statements

We have exercised professional judgement and have maintained professional scepticism throughout the audit, in accordance with Dutch Standards on Auditing, ethical requirements and independence requirements. Our audit included among others:

• identifying and assessing the risks of material misstatement of the financial statements, whether due to fraud or error, designing and performing audit procedures responsive to those risks, and obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than the risk resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;
• obtaining an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Royal DSM’s internal control;
• evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Managing Board;
• concluding on the appropriateness of the Managing Board’s use of the going concern basis of accounting, and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on Royal DSM’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause a company to cease to continue as a going concern;
• evaluating the overall presentation, structure and content of the financial statements, including the disclosures; and
• evaluating whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We are solely responsible for the opinion and therefore responsible to obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the financial statements. In this respect we are also responsible for directing, supervising and performing the group audit. 

We communicate with the Supervisory Board regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant findings in internal control that we identify during our audit. In this respect we also submit an additional report to the Supervisory Board in accordance with Article 11 of the EU Regulation on specific requirements regarding statutory audits of public-interest entities. The information included in this additional report is consistent with our audit opinion in this auditor’s report.

We provide the Supervisory Board with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the Supervisory Board, we determine the key audit matters: those matters that were of most significance in the audit of the financial statements. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, not communicating the matter is in the public interest.