Statutory auditor’s report to the shareholders’ meeting of Solvay SA for the year ended 31 December 2017
In the context of the statutory audit of the consolidated financial statements of Solvay SA (“the company”) and its subsidiaries (jointly “the group”), we hereby submit our statutory audit report to you. This report includes our report on the consolidated financial statements together with our report on other legal and regulatory requirements. These reports are one and indivisible.
We were appointed in our capacity as statutory auditor by the shareholders’ meeting of 10 May 2016, in accordance with the proposal of the board of directors issued upon recommendation of the audit committee and presentation of the works council. Our mandate will expire on the date of the shareholders’ meeting approving the consolidated financial statements for the year ending 31 December 2018. We have performed the statutory audit of the consolidated financial statements of Solvay SA for 17 subsequent years.
Report on the audit of the consolidated financial statements
We have audited the consolidated financial statements of the group, which comprise the consolidated statement of financial position as at 31 December 2017, the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, as well as the summary of significant accounting policies and other explanatory notes. The consolidated statement of financial position shows total assets of 21,451 million EUR and the consolidated income statement shows a consolidated net profit for the year then ended of 1,116 million EUR.
In our opinion, the consolidated financial statements of Solvay SA give a true and fair view of the group’s net equity and financial position as of 31 December 2017 and of its consolidated results and its consolidated cash flows for the year then ended, in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and with the legal and regulatory requirements applicable in Belgium.
Basis for the unqualified opinion
We conducted our audit in accordance with International Standards on Auditing (ISA). Our responsibilities under those standards are further described in the “Responsibilities of the statutory auditor for the audit of the consolidated financial statements” section of our report. We have complied with all ethical requirements relevant to the statutory audit of consolidated financial statements in Belgium, including those regarding independence.
We have obtained from the board of directors and the company’s officials the explanations and information necessary for performing our audit. We believe that the audit evidence obtained is sufficient and appropriate to provide a basis for our opinion.
We believe that the audit evidence obtained is sufficient and appropriate to provide a basis for our opinion.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Key audit matters
How our audit addressed the key audit matters
1. Goodwill impairment test
As a consequence of the Group's transition into a specialty chemicals company, a significant value of goodwill has arisen from acquisitions. At 31 December 2017 goodwill amounts to 5,042 million EUR and represents 23,5% of the consolidated total assets.
- In accordance with IFRS requirements, the carrying value of goodwill is tested annually for impairment by comparing the carrying amount of each cash-generating unit (“CGU”) to its value in use.
- Based on the headroom that exists per CGU as well as sensitivity analyses performed on the valuation and cash flow assumptions used in the impairment test, we have focused on the key management judgements in the cash flows assumptions for the two following CGUs: Composite Materials and Technology Solutions. These 2 CGUs result mainly from the acquisition of Cytec in 2015. The goodwill balances are significant at 1,266 and 903 million EUR, respectively, representing the largest and third largest goodwill balances of the group. The difference between the CGUs carrying amounts and the values in use (“headroom”) is around 10% of the carrying amount, which is below the average of the other Group’s CGUs.
- We have also focused on the valuation assumptions (discount rate and long-term growth rate) in the context of the aforementioned CGUs important sensitivity to said assumptions, and the fact that management applied the same discount rate for all the CGUs.
- As consequence, we consider goodwill impairment test for the two aforementioned CGUs to be a key audit matter.
- Management’s disclosure on impairment of goodwill is included in Note F28 of the consolidated financial statements
- We obtained an understanding and performed walkthroughs of the goodwill impairment and the budgeting/forecasting processes through which we identified relevant controls;
- We evaluated and challenged management’s determination of cash-generating units for the purpose of goodwill impairment testing;
- We tested the carrying amounts of the CGUs used in the impairment test for reconciliation with the financial reporting system;
- We evaluated whether the valuation methodology is appropriate in the circumstances and whether the methodology used for determining the value in use is applied consistently with the preceding periods;
- We assessed and challenged the reasonableness of the valuation assumptions (discount rate and long-term growth rate);
- We assessed and challenged the reasonableness of the cash flow assumptions, both in the projection period as in the terminal period;
- We performed benchmarking and sensitivity analyses with peers and analyst reports, on valuation and cash flow assumptions;
- We tested the mathematical accuracy of the overall model;
- We reviewed and tested the management’s reconciliation of the valuations, used for impairment testing purposes, to the entity’s market capitalization;
- We evaluated whether the fair value measurements and disclosures in the financial statements are in conformity with the applicable accounting framework;
- We involved our valuation specialists to assist us in performing certain of the above procedures.
Key audit matters
How our audit addressed the key audit matters
2. Tax reform in the US
- On 22 December 2017, the US President signed into law the tax legislation commonly known as the Tax Cuts and Jobs Act. Accordingly, recognition of the tax effects of the Act is required for the year ending 31 December 2017.
- The main consequences on the consolidated figures as of December 2017 are:
- Decrease of the corporate income tax rate (from 35% to 21%) resulting in the reduction of deferred tax liabilities for 193 million EUR through P&L (including an adjustment on temporary differences on intangible assets for an amount of 175 million EUR);
- Recognition of a long term tax payable of 40 million EUR through P&L which represents its best estimate of the transition tax as of 31 December 2017. Because the amount of the transition tax is inherently subject to judgements, measurement of the ultimate amount to be paid is potentially subject to future adjustments. The group mentions this point as a key judgement in its annual report as part of the section “Critical accounting judgments and key sources of estimation uncertainties”.
- Following this US tax reform, statutory reorganizations result in a net derecognition of deferred tax assets for 92 million EUR and the recognition of a DTL on dividends for 10 million EUR.
- We consider the accounting treatment in the financial statements of this event as a key audit matter because of the timing of tax reform (December 2017), the complexity of the new legislation and the judgement required to assess the impact of the tax reform.
- Management’s disclosure on the main impacts of the US tax reform is the Note F7 of the consolidated financial statements.
- The audit procedures undertaken to address aforementioned audit risks has been primarily substantive;
- Furthermore, given the significant judgement associated with the transition tax, we challenged management on (i) the process and methodology used by Solvay to calculate the tax liability and (ii) the accuracy and completeness of the information used in the inputs to the calculation – namely earnings and profits, tax pools, and cash balances of the related subsidiaries;
- Substantive review of impact of the tax reform was performed by our US tax specialists and mainly covered the following items:
- Change in tax rate:
- Accuracy of the impact of the change in corporate tax rate, including the split between income statement and Other Comprehensive Income;
- Transition tax:
- Conformity of the transition tax calculation with the newly enacted tax law;
- Accuracy of the information used to calculate the earnings and profits and foreign tax pools of the related subsidiaries;
- Completeness of the information used to calculate the transition tax;
- Accuracy of the cash and cash equivalents balances of the related subsidiaries.
- Change in tax rate:
Key audit matters
How our audit addressed the key audit matters
3. Divestment of Acetow business
- On 1 June 2017, Solvay completed the divestment of its cellulose acetate tow business (“Acetow”) to private equity funds managed by Blackstone (“Buyer”).
- We considered the accounting treatment in the financial statements of this event as a key audit matter because of the size and complexity of the transaction. The business generated sales of 531 million EUR and operating profit (“EBIT”) of 116 million EUR for the year ending 31 December 2016.
- The disclosure of the divested operations is contained in the consolidated income statement, the consolidated statement of comprehensive income, the consolidated cash flows from discontinued operations and Note F8 Discontinued operations of the financial statements.
- We tested the disposal gain by reconciling the consideration to the Share Sale Agreement and bank accounts and by verifying the net assets disposed to underlying accounting records. In addition, we verified whether the disposal gain was calculated in accordance with the relevant clauses of the Agreement;
- We also evaluated the adequacy of the disclosure (Note F8) of this disposal in the financial statements.
4. Planned divestment of Polyamide – Application of IFRS 5
- On 18 September 2017 Solvay entered into a binding agreement with BASF for the sale of its Polyamide business. The Share Sale Agreement was signed on 22 December 2017. The business generated revenue of 1,414 million EUR for the year ending 31 December 2016. The transaction is expected to close in the second half of 2018. Based on these considerations, Management determined the criteria of IFRS 5 were met and the activities should be presented as Held-for-sale and Discontinued operations at 31 December 2017. We considered accounting treatment in the financial statements of this event as a key audit matter because:
- The size and complexity of the transaction;
- The appropriate application of IFRS 5, specifically whether the classification is made in accordance with the requirements of IFRS, whether the assets and liabilities are measured at the lower of fair value less costs to sell or their carrying amounts;
- The potential impact of the transaction on impairment assessments of assets of other businesses within the group.
- The disclosure of the discontinued operations is contained in the consolidated income statement, the consolidated statement of comprehensive income, the consolidated cash flows from discontinued operations, the consolidated statement of financial position, Note F8 Discontinued operations and Note F25 Assets Held for Sale of the financial statements.
- We read and reviewed the executed agreements to evaluate and determine appropriate treatment of the transaction in accordance with the requirements of IFRS 5;
- We held meetings and performed inquiries with the entity’s M&A department to obtain an understanding of the disposal process as well as of the particularities and contingencies of the executed agreements;
- We performed procedures to verify completeness and accuracy of the assets and liabilities reflected as held-for-sale and the results presented as discontinued operations, including measurement in accordance with IFRS. Our procedures include but are not restricted to:
- Reconciling the reclassified assets and liabilities and results to the business unit reporting available in the entity’s financial reporting system;
- Reviewing and challenging management’s preliminary estimate of the disposal gain; we note that up to closing of the transaction, the calculation of some amounts is based on judgment.
Key audit matters
How our audit addressed the key audit matters
5. Defined benefit obligations
- The defined benefit net liability, amounting to 2,616 million EUR, consists of defined benefit obligations (5,349 million EUR) offset partially by plan assets (2,733 million EUR). The largest post-employment plans in 2017 are in the United Kingdom, France, the United States, Germany and Belgium. These five countries represent 94% of the total defined benefit obligations.
- Defined benefit obligations is a key audit matter mainly as the amounts are significant, the assessment process is complex and it requires key management estimates to determine the actuarial assumptions and fair value of assets. The actuarial assumptions used in the measurement of the group's pension commitments involve judgements in relation to mortality, price inflation, discount rates, and rates of pension and salary increases, around which there are inherent uncertainties.
- Management’s disclosure on defined benefit obligations is included in Note F31A of the consolidated financial statements
- We assessed and challenged management’s assumptions (actuarial and other assumptions), the numerical data, the actuarial parameters, the calculation of the provisions as well as the presentation in the consolidated statement of financial position and the notes to the consolidated financial statements based on the actuarial reports;
- Our audit of the fair value of the plan assets was carried out on the basis of respective bank and fund confirmations as well as expert valuation reports which were available to us and which we have reviewed;
- We assessed and reviewed the completeness and accuracy of the disclosures in the notes in accordance with IAS 19;
- We involve in this review our actuaries. We also reviewed the internal controls, mainly around database maintenance and update of assumptions.
Responsibilities of the board of directors for the consolidated financial statements
The board of directors is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and with the legal and regulatory requirements applicable in Belgium, and for such internal control as the board of directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements the board of directors is responsible for assessing the group’s ability to continue as a going concern, disclosing, as applicable, matters to be considered for going concern and using the going concern basis of accounting unless the board of directors either intends to liquidate the group or to cease operations, or has no other realistic alternative but to do so.
Responsibilities of the statutory auditor for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISA will always detect a material misstatement when it exists. 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.
As part of an audit in accordance with ISA, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
- identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain 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 for one resulting from an error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;
- obtain 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 group’s internal control;
- evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management;
- conclude on the appropriateness of management’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 the group’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 consolidated 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 the group to cease to continue as a going concern;
- evaluate the overall presentation, structure and content of the consolidated financial statements, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
- obtain sufficient appropriate audit evidence regarding the financial information of the entities and business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with the audit committee regarding, amongst other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide the audit committee with a statement that we have complied with relevant ethical requirements regarding independence, and we communicate with them about all relationships and other matters that may reasonably be thought to bear our independence, and where applicable, related safeguards.
From the matters communicated to the audit committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes any public disclosure about the matter.
Report on other legal and regulatory requirements
Responsibilities of the board of directors
The board of directors is responsible for the preparation and the content of the directors’ report on the consolidated financial statements, the statement of non-financial information attached to the directors’ report on the consolidated financial statements and other matters disclosed in the annual report.
Responsibilities of the statutory auditor
As part of our mandate and in accordance with the Belgian standard complementary (Revised in 2018) to the International Standards on Auditing (ISA), our responsibility is to verify, in all material respects, the director’s report on the consolidated financial statements, the statement of non-financial information attached to the directors’ report on the consolidated financial statements and other matters disclosed in the annual report, as well as to report on these matters.
Aspects regarding the directors’ report on the consolidated financial statements and other matters disclosed in this report
In our opinion, after performing the specific procedures on the directors’ report on the consolidated financial statements, this report is consistent with the consolidated financial statements for the period ended 31 December 2017 and it has been established in accordance with the requirements of article 119 of the Companies Code.
In the context of our statutory audit of the consolidated financial statements we are also responsible to consider, in particular based on information that we became aware of during the audit, if the directors’ report on the consolidated financial statements is free of material misstatement, either by information that is incorrectly stated or otherwise misleading. In the context of the procedures performed, we are not aware of such material misstatement. We do not express and will not express any kind of assurance on the directors’ report on the consolidated financial statements, nor on the statement of non-financial information nor on other matters disclosed in the annual report, except for certain non-financial performance indicators referred to in the next paragraph.
The non-financial information as required by article 119, § 2 of the Companies Code, has been disclosed in the directors’ report on the consolidated financial statements. This non-financial information has been established by the company in accordance with the Global Reporting Initiative (GRI) framework. As requested by Solvay management, we have issued a separate limited and reasonable assurance report on a selection of social, environmental and other sustainable development information in accordance with the International Standard of Assurance Engagements ISAE 3000. We do however not express any opinion on the question whether this non-financial information has been established, in all material respects, in accordance with this GRI framework. For information not included in our specific assurance report on non-financial information, we do not express any assurance on individual elements that have been disclosed in this non-financial information.
Statements regarding independence
- No prohibited non-audit services, as referred to by the law, have been performed and our audit firm and, if applicable, our network of audit firms, remained independent from the company during the performance of our mandate.
- The fees for the additional non-audit services compatible with the statutory audit of the consolidated financial statements, as defined in article 134 of the Companies Code, have been properly disclosed and disaggregated in the notes to the consolidated financial statements.
- This report is consistent with our additional report to the audit committee referred to in article 11 of Regulation (EU) No 537/2014.
Zaventem, 29 March 2018
The statutory auditor
DELOITTE Bedrijfsrevisoren / Réviseurs d’Entreprises
BV o.v.v.e. CVBA / SC s.f.d. SCRL
Represented by Michel Denayer