Report of the Statutory Auditor to the General Meeting of Clariant Ltd, Muttenz
Report on the audit of the consolidated financial statements
Opinion
We have audited the consolidated financial statements of Clariant Ltd and its subsidiaries (the Group), which comprise the consolidated balance sheet as at 31 December 2018 and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
In our opinion, the consolidated financial statements (marked with the label “Audited information”) give a true and fair view of the consolidated financial position of the Group as at 31 December 2018 and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with the International Financial Reporting Standards (IFRS) and comply with Swiss law.
Basis for opinion
We conducted our audit in accordance with Swiss law, International Standards on Auditing (ISAs) and Swiss Auditing Standards. Our responsibilities under those provisions and standards are further described in the “Auditor’s responsibilities for the audit of the consolidated financial statements” section of our report.
We are independent of the Group in accordance with the provisions of Swiss law and the requirements of the Swiss audit profession, as well as the IESBA Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Overview |
Overall Group materiality: CHF 30 million |
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We concluded full scope audit work at 18 reporting units in nine countries. Our audit scope addressed over 67% of the Group’s revenue. In addition, specified procedures were performed on a further two reporting units in two countries representing a further 1% of the Group’s revenue. We performed analytical procedures on the remaining components. As key audit matters the following areas of focus have been identified:
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Materiality
The scope of our audit was influenced by our application of materiality. Our audit opinion aims to provide reasonable assurance that the consolidated financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They 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 the consolidated financial statements.
Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall Group materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate, on the consolidated financial statements as a whole.
Overall Group materiality |
CHF 30 million |
How we determined it |
2.5% of the Group’s EBITDA weighted at 75%, and 1% of the Group’s total assets weighted at 25% |
Rationale for the materiality benchmark applied |
We chose EBITDA as the benchmark because management assesses its profitability mainly based on this measure of profit and we took the Group’s assets into consideration since the chemical industry is highly capital intensive, operating at a lower net profit margin compared with other industries. |
We agreed with the Audit Committee that we would report to them misstatements above CHF 1.5 million identified during our audit as well as any misstatements below that amount which, in our view, warranted reporting for qualitative reasons.
Audit scope
We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates.
From 142 reporting units, we identified 18 reporting units (components) to be the largest contributors to the Group’s financial statements (amounting to 67% of the Group’s revenue, addressing all geographical areas of the Group’s business). These reporting units were subject to a full scope audit by local PwC network firms. In addition to in-person meetings, we held regular calls during all audit phases to discuss material audit topics with the component auditors of the most significant reporting units. Further audit procedures were performed by the central Group audit team on certain Group functions (including taxation, treasury, ongoing investigations and litigation, and information technology) and the Group consolidation. Of the Group’s revenue, 1% was addressed through specified audit procedures. In addition, two PwC network firms performed specific audit procedures related to sales and procurement and to the financial closing cycle at the Group’s shared service centres on behalf of PwC Switzerland, and assisted other PwC network firms.
Key audit matters
Key audit matters are those matters that, in our professional judgement, 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 matter |
How our audit addressed the key audit matter |
We consider the valuation of goodwill to be a key audit matter because of the significant scope for judgement with respect to assumptions concerning the future results of the businesses and the discount rates applied to future cash flow forecasts. Specifically, we focused on goodwill relating to the Catalysts business unit, which amounts to CHF 694 million, as the risk of impairment is higher for this unit compared with other business units. Please refer to page 19 (Critical accounting estimates and judgments, 4.1 Estimated impairment of goodwill, intangibles, and property, plant and equipment), and page 24 (Goodwill allocation) in the notes. |
We evaluated and challenged management’s assumptions as described on page 19 (Critical accounting estimates and judgments, 4.1 Estimated impairment of goodwill and property, plant and equipment) in the notes to the consolidated financial statements. Management followed a clearly documented process for forecasting future cash flows, which was subject to timely oversight and challenges by the Board of Directors and which was consistent with the business plans as approved by the Board of Directors. We compared the actual results of the year under review with the figures used to make the forecasts in the prior year in order to assess with hindsight whether any of the assumptions underlying the forecasts might have been too optimistic. In some cases, actual performance was found to be lower than forecast. Management analysed the underlying drivers and considered actual revenue growth rates and operating margins against those in the business plans prepared in the year under review and included them in the new business plans. We discussed with the business unit leaders management’s assumptions regarding revenue, long- term growth rates and profit margins. We involved PwC’s own valuation specialists to assess the model and the weighted average cost of capital (WACC) used. The WACC was assessed using comparable industry peers and data available from external sources. In addition, we assessed for reasonableness the expectations of movements in working capital and of investments in property, plant and equipment. We found the assumptions to be balanced and reasonable. We re-performed thorough sensitivity analyses on the key assumptions to ascertain the extent of change in those assumptions that either individually or collectively would be required for the goodwill to be impaired. We discussed the results of our audit work as well as the headroom of the sensitivity analyses with management, the Audit Committee and the Board of Directors. On the basis of the procedures performed and the evidence obtained, we identified no significant issues with respect to the assumptions used in the impairment test for goodwill. |
Key audit matter |
How our audit addressed the key audit matter |
There is a risk that revenue is not recognised in accordance with the requirements of IFRS, mainly with regard to the timing of revenue recognition, which depends on the transfer of control of the goods. Invoices are usually raised by the systems when the goods are shipped, which may not be in line with the detailed contractual terms for the transfer of control. Management has a standardised process in place to identify sales transactions where control is transferred after the balance sheet date. This process allowed management to recognise revenue in the appropriate period. We consider this to be a key audit matter due to the number of large transactions that occur close to year-end and the potential impact of the cut-off date of these transactions on the consolidated financial statements. |
We tested management’s approach for recognising revenue in the appropriate period. We tested revenue transactions and the timing of these transactions by examining third party documents and the contractual delivery terms. We tested the system and the related inputs that support management’s approach to ensuring that revenue transactions are recorded in the appropriate period. On the basis of the procedures performed and the evidence obtained, we identified no significant issues with respect to revenue cut-off. |
Key audit matter |
How our audit addressed the key audit matter |
Since July 2017, Clariant has been part of an ongoing investigation by the European Commission into alleged infringements of competition law in the ethylene purchasing market. Clariant is cooperating fully with the authorities. The eventual outcome of the investigation is uncertain both in terms of the further course of the proceedings and the magnitude of fines, if any, which might be imposed. The investigation is ongoing and it has not been possible for the Group to make a reliable estimate of the amount of any liability that could arise from these proceedings; therefore, no provision has been recorded by management. Accordingly, unexpected adverse outcomes could significantly impact the Group’s reported profit, cash flow and balance sheet position. Please refer to page 19 (Critical accounting estimates and judgments, 4.5 Contingencies), and pages 60 to 61 (Commitments and contingencies) in the notes. |
We discussed the status of the ongoing investigation with in-house and external legal counsel and evaluated the relevant correspondence and minutes of the Board of Directors’ and management meetings. We obtained independent letters and procedural documents from external legal counsel to confirm our understanding of the status and their assessment of the investigation. We also used internal PwC legal specialists to assist us in evaluating the status of the investigation and the appropriateness of the assumptions taken and in assessing the position taken by management and the Board of Directors. We discussed this assessment with management, the Audit Committee and the Board of Directors and we obtained written representations from the company in relation to the case. As set out in the notes to the consolidated financial statements, the outcome of the pending investigation is dependent on the outcome of future developments and therefore the exposure of Clariant Ltd, as assessed by management and the Board of Directors, is subject to inherent uncertainty. On the basis of the procedures performed and the information obtained, we are satisfied that the approach taken by management and the Board of Directors was appropriate. |
Other information in the integrated report
The Board of Directors is responsible for the other information in the integrated report. The other information comprises all information included in the integrated report, but does not include the consolidated financial statements, the stand-alone financial statements and the remuneration report of Clariant Ltd and our auditor’s reports thereon.
Our opinion on the consolidated financial statements does not cover the other information in the integrated report and we do not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information in the integrated report and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
Responsibilities of the Board of Directors for the consolidated financial statements
The Board of Directors is responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with IFRS and the provisions of Swiss law, 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 related to 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 realistic alternative but to do so.
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated 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 Swiss law, ISAs and Swiss Auditing Standards 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 consolidated financial statements.
A further description of our responsibilities for the audit of the consolidated financial statements is located at the website of EXPERTsuisse: http://expertsuisse.ch/en/audit-report-for-public-companies. This description forms part of our auditor’s report.
Report on other legal and regulatory requirements
In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists which has been designed for the preparation of consolidated financial statements according to the instructions of the Board of Directors.
We recommend that the consolidated financial statements submitted to you be approved.
PricewaterhouseCoopers AG
Rolf Johner
Audit expert
Auditor in charge
Michael Scheibli
Audit expert
Basel, 11 February 2019
PricewaterhouseCoopers AG St. Jakobs-Strasse 25, Postfach, CH-4002 Basel, Switzerland
Telephone: +41 58 792 51 00, Facsimile: +41 58 792 51 10, www.pwc.ch
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The International Financial Reporting Standards (IFRS) are international accounting standards. View entire glossary