Independent auditor’s report
To: the Annual General Meeting of shareholders and the Supervisory Board of Akzo Nobel N.V.
Report on the Financial statements 2016
In our opinion:
- the accompanying Consolidated financial statements give a true and fair view of the financial position of Akzo Nobel N.V. as at December 31, 2016 and of its result and cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union (EU-IFRS) and with Title 9 of Book 2 of the Dutch Civil Code
- the accompanying Company financial statements give a true and fair view of the financial position of Akzo Nobel N.V. as at December 31, 2016 and of its result for the year then ended in accordance with Title 9 of Book 2 of the Dutch Civil Code
What we have audited
We have audited the accompanying financial statements 2016 of Akzo Nobel N.V., Amsterdam (‘the company’). The financial statements include the Consolidated financial statements of Akzo Nobel N.V. and its subsidiaries (together: ‘the group’) and the Company financial statements.
The Consolidated financial statements comprise:
- the consolidated balance sheet as at December 31, 2016
- the following statements for 2016: the consolidated statement of income and the consolidated statements of comprehensive income, changes in equity and cash flows; and
- the notes, comprising a summary of significant accounting policies and other explanatory information
The Company financial statements comprise:
- the company balance sheet as at December 31, 2016
- the company statement of income for the year then ended
- the notes, comprising a summary of the accounting policies and other explanatory information.
The financial reporting framework that has been applied in the preparation of the financial statements is EU-IFRS and the relevant provisions of Title 9 of Book 2 of the Dutch Civil Code for the Consolidated financial statements and Title 9 of Book 2 of the Dutch Civil Code for the Company financial statements.
The 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 section ‘Our responsibilities for the audit of the financial statements’ of our report.
We are independent of Akzo Nobel N.V. in accordance with the ‘Verordening inzake de onafhankelijkheid van accountants bij assuranceopdrachten’ (ViO) and other relevant independence requirements 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.
Our audit approach
Overview and context
Akzo Nobel N.V. is a global paints and performance coatings company and a major producer of specialty chemicals headquartered in the Netherlands. The group comprises of multiple components and therefore we considered our group audit scope and approach as set out in the scope of our group audit section below. We paid specific attention to the areas of focus driven by the operations of the company, as set out below.
We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the Board of Management made subjective judgments, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. In Note 1 of the Consolidated financial statements the company describes the areas of judgment in applying accounting policies and the key sources of estimation uncertainty. Given the significant estimation uncertainty in the impairment testing of goodwill and other intangibles with indefinite useful lives, calculation of the post-retirement benefit provisions and accounting for income tax positions, we considered these to be key audit matters as set out in the key audit matter section of this report. Furthermore, as this is our first year as auditor of Akzo Nobel N.V., we identified the transition as auditors including the audit of the opening balances as key audit matter because initial audit engagements involve a number of considerations not associated with recurring audits to establish an appropriate audit plan and strategy.
Besides the key audit matters, other areas of focus were provisions, the acquisition of BASF’s Industrial Coatings business and information technology general controls (ITGC). The ITGC are the policies and procedures used by the company to ensure information technology (IT) operates as intended and provides reliable data for financial reporting purposes. As in all of our audits, we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the Board of Management that may represent a risk of material misstatement due to fraud.
The outlines of our audit approach were as follows:
- Overall materiality: €65 million which represents approximately 5 percent of profit before tax
- We conducted audit work at 61 components in 17 countries
- Site visits by the group team were conducted to seven countries – US, China, Sweden, UK, Brazil, Germany and the Netherlands
- Audit coverage: 77 percent of consolidated revenue, 77 percent of consolidated total assets and 81 percent of profit before tax
Key audit matters
- Impairment testing of goodwill and other intangibles with indefinite useful lives
- Post-retirement benefit provisions
- Valuation of deferred tax assets and uncertain tax positions
- Transition as auditors including audit of the opening balances
The scope of our audit is influenced by the application of materiality which is further explained in the section ‘Our responsibilities for the audit of the financial statements’.
We set certain quantitative thresholds for materiality. These, together with qualitative considerations including our first year as auditor, key audit matters and other areas of focus, helped us to determine the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and to evaluate the effect of identified misstatements on our opinion.
Based on our professional judgment, we determined materiality for the financial statements as a whole as follows:
Overall group materiality
How we determined it
Approximately 5 percent of profit before tax
Rationale for benchmark applied
We have applied this benchmark, a generally accepted auditing practice, based on our analysis of the common information needs of users of the financial statements. On this basis we believe that profit before tax is an important metric for the financial performance of the company
To each component in our audit scope, we, based on our judgment, allocate materiality that is less than our overall group materiality. The range of materiality allocated across components was between €6 and €40 million
We also take misstatements and/or possible misstatements into account that, in our judgment, are material for qualitative reasons.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above €3 million as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
The scope of our group audit
Akzo Nobel N.V. is the parent company of a global group of entities managed by the Board of Management and Executive Committee, with an Executive Committee member responsible for each Business Area. The financial information of this group is included in the Consolidated financial statements of Akzo Nobel N.V.
Considering our ultimate responsibility for the opinion we are responsible for the direction, supervision and performance of the group audit. In this context, we tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole. We took into account the size and the risk profile of the group entities or operations and how Akzo Nobel N.V. is organized and monitors the business through the Business Areas and related business units and functions. We selected group entities or operations of each Business Area or function for which an audit or specified audit procedures had to be carried out on either the complete set of financial information or specific financial statement line items. We also ensured that the audit teams both at group and at component levels included the appropriate skills and competencies which are needed for the audit of Akzo Nobel N.V. This included specialists such as actuaries, tax, valuation, treasury specialists and IT auditors.
We include components of Akzo Nobel N.V. in scope for the group audit where they are significant in size, impose significant risks to the group or are considered significant for any other reasons. As this scoping does not provide adequate coverage over the financial statements as a whole, we used our judgment to scope-in additional components. This resulted in 61 components in scope in 17 countries across all Business Areas, with components being operating companies and operating business units in our group audit. We further performed central audit procedures at group level on the areas that to a large extend are controlled and monitored centrally by Akzo Nobel N.V. such as goodwill and other assets impairment testing, post-retirement benefit provisions, tax positions, legal and environmental provisions, treasury, IT, the group consolidation and financial statement disclosures. For all components in scope we performed hard close audit procedures on the interim October positions and results and year-end audit procedures on the December positions and results. For the remaining components not in our group scope we performed, among others, analytical procedures to corroborate our assessment that there were no risks of material misstatements within those components. This also included central procedures over the controls performed by the Business Areas and other central functions, where relevant for our audit.
In total, in performing these procedures, we achieved the following coverage on the financial line items:
Profit before tax
Where the work was performed by component auditors, we determined the level of involvement we needed to have in their audit work to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the Consolidated financial statements as a whole. The group engagement team visited the component teams and local management in the local operations in the US, China, Sweden, UK, Brazil, Germany and the Netherlands and conference/video calls were held with the all the component auditors on various moments during the year. During these visits and calls, the audit approach, findings and observations reported to the group audit team were discussed in more detail. Furthermore, we performed detailed reviews of the component team audit files and any further work considered necessary by the group audit team.
By performing the procedures above at components, combined with additional procedures at group level, we have obtained sufficient and appropriate audit evidence regarding the financial information of the group as a whole to provide a basis for our opinion on the Consolidated financial statements.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements. We have communicated the key audit matters to the Supervisory Board, but they are not a comprehensive reflection of all matters that were identified by our audit and that we discussed. We described the key audit matters and included a summary of the audit procedures we performed on those matters.
The key audit matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon. We do not provide a separate opinion on these matters or on specific elements of the financial statements. Any comments we make on the results of our procedures should be read in this context.
Report on the other information included in the annual report
In addition to the financial statements and our auditor’s report thereon, the annual report contains other information that consists of:
- The report of the Board of Management, as defined in Note 1 of the Consolidated financial statements
- The other information pursuant to Title 9 of Book 2 of the Dutch Civil Code
- Other parts of the annual report: How AkzoNobel performed in 2016, How AkzoNobel created value in 2016, CEO statement, Our purpose, Strategic performance, Business Performance, Leadership, Governance and compliance, Sustainability statements, Index, Financial calendar and Glossary
Based on the procedures performed as set out below, we conclude that the other information:
- Is consistent with the financial statements and does not contain material misstatements
- Contains all information that is required by Title 9 of Book 2 of the Dutch Civil Code
We have read the other information. Based on our knowledge and understanding obtained in our audit of the financial statements or otherwise, we have considered whether the other information contains material misstatements.
By performing our procedures, we comply with the requirements of Title 9 Book 2 of the Dutch Civil Code and the Dutch Standard of Auditing 720. The scope of such procedures was substantially less than the scope of those performed in our audit of the financial statements.
The Board of Management is responsible for the preparation of the other information, including the directors’ report and the other information pursuant to Title 9 Book 2 of the Dutch Civil Code.
Report on other legal and regulatory requirements
We were appointed for the first year as auditors of Akzo Nobel N.V. by the Supervisory Board following the passing of a resolution by the shareholders at the Annual General Meeting held on April 29, 2014 for the audit of the financial statements as of 2016.
Responsibilities for the financial statements and the audit
Responsibilities of the Board of Management and the Supervisory Board for the financial statements
The Board of Management is responsible for:
- The preparation and fair presentation of the financial statements in accordance with EU-IFRS and with Title 9 of Book 2 of the Dutch Civil Code; and for
- Such internal control as the Board of 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 Board of Management is responsible for assessing the company’s ability to continue as a going concern. Based on the financial reporting frameworks mentioned, the Board of Management should prepare the financial statements using the going-concern basis of accounting unless the Board of Management either intends to liquidate the company or to cease operations, or has no realistic alternative but to do so. The Board of Management 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.
Our responsibilities for the audit of the financial statements
Our responsibility is to plan and perform an audit engagement in a manner that allows us to obtain sufficient and appropriate audit evidence to provide a basis for our opinion. Our audit opinion aims to provide reasonable assurance about whether the financial statements are free from material misstatement. Reasonable assurance is a high but not absolute level of assurance which makes it possible that we may not detect all misstatements. Misstatements may arise due to fraud or error. They are considered to be material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the 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.
A more detailed description of our responsibilities is set out in the appendix to our report.
Amsterdam, February 14, 2017
PricewaterhouseCoopers Accountants N.V.
R. Dekkers RA
Appendix to our auditor’s report on the financial statements 2016 of Akzo Nobel N.V.
In addition to what is included in our auditor’s report we have further set out in this appendix our responsibilities for the audit of the financial statements and explained what an audit involves.
The auditor’s responsibilities for the audit of the financial statements
We have exercised professional judgment and have maintained professional scepticism throughout the audit in accordance with Dutch Standards on Auditing, ethical requirements and independence requirements. 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. Our audit consisted, among other things, of the following:
- 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 for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the intentional 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 company’s internal control
- Evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Board of Management
- Concluding on the appropriateness of the Board of Management’s use of the going concern basis of accounting, and based on the audit evidence obtained, concluding whether a material uncertainty exists related to events and/or conditions that may cast significant doubt on the company’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 and are made in the context of our opinion on the financial statements as a whole. However, future events or conditions may cause the 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
Considering our ultimate responsibility for the opinion on the company’s Consolidated financial statements we are responsible for the direction, supervision and performance of the group audit. In this context, we have determined the nature and extent of the audit procedures for components of the group to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole. Determining factors are the geographic structure of the group, the significance and/or risk profile of group entities or activities, the accounting processes and controls, and the industry in which the group operates. On this basis, we selected group entities for which an audit or review of financial information or specific balances was considered necessary.
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 deficiencies in internal control that we identify during our audit.
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 those matters that were of most significance in the audit of the 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 public disclosure about the matter or when, in extremely rare circumstances, not communicating the matter is in the public interest.
The change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with shareholders in their capacity as shareholders.