Report of the statutory auditor on the financial statements

To the General Meeting of Chocoladefabriken Lindt & Sprüngli AG, Kilchberg

Report on the audit of the financial statements

Opinion

We have audited the financial statements of Chocoladefabriken Lindt & Sprüngli AG, which comprise the balance sheet as at 31 December 2016, income statement and notes for the year then ended, including a summary of significant accounting policies.

In our opinion, the financial statements as at 31 December 2016 comply with Swiss law and the company’s articles of incorporation.

Basis for opinion

We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Our responsibilities under those provisions and standards are further described in the “Auditor’s responsibilities for the audit of the financial statements” section of our report.

We are independent of the entity in accordance with the provisions of Swiss law and the requirements of the Swiss audit profession 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.

Our audit approach

Overview

Overall materiality: CHF 24,000,000

We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the financial statements as a whole, taking into account the structure of the entity, the accounting processes and controls, and the industry in which the entity operates.

As key audit matters the following areas of focus have been identified:

Intangible Assets: impairment assessment of intangible assets with indefinite-lives

Investments: Investments and loans to group companies valuation

Audit scope

We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we considered where subjective judgements were made; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.

Materiality

The scope of our audit was influenced by our application of materiality. Our audit opinion aims to provide reasonable assurance that the 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 financial statements.

Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall materiality for the 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 financial statements as a whole.

Overall materiality	CHF 24,000,000
How we determined it	7.5% of profit before tax
Rationale for the materiality benchmark applied	We chose profit before tax as the benchmark because, in our view, it is the benchmark against which the performance of the company is most commonly measured and because it is a generally accepted benchmark. We chose 7.5% due to the strong equity level, a low level of external debt and past performance of the entity.

We agreed with the Board of Directors that we would report to them misstatements above CHF 1,200,000 identified during our audit as well as any misstatements below that amount which, in our view, warranted reporting for qualitative reasons.

Report on key audit matters based on the circular 1/2015 of the Federal Audit Oversight Authority

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. 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.

Intangible Assets – impairment assessment of intangible assets with indefinite-lives

Key audit matter

How our audit addressed the key audit matter

Refer to the balance sheet item intangible assets totalling CHF 501 million which relates to acquired brand names “Russell Stover” (CHF 460 million), “Ghirardelli” (CHF 35 million) and “Caffarel” (CHF 6 million).

We focused on this area due to the size of the balance and because management’s assessment of the valuation of the Russell Stover intangible involves important judgements about future results of this entity.

Management performs a value in use valuation of the Russell Stover business in order to justify the relevant brand’s valuation. Value in use is calculated by estimating the future cash flows that the business is expected to generate. To the extent that value in use is lower than the carrying value of indefinite-lived intangible assets, an impairment charge is recognised.

The most significant elements were the assessment of the discounted cash flow model used and the underlying assumptions. The most judgmental assumptions underlying the cash flow forecasts were the long-term sales growth rates, EBIT margin growth rates and the discount rate.

Refer to note 8 of the consolidated financial statements and for details of management’s Russell Stover value in use valuation.

We evaluated and challenged the composition of management’s future cash flow forecasts and the process by which they were established for Russell Stover.

Lindt Group prepares 3-year budgets which are approved by the Board of Directors and which are the basis for management’s cash flow forecasts used in the impairment assessment.

We compared the 2016 actual results with the cash flow forecasts used in the 2015 impairment test to consider whether any forecasts included assumptions that, with hindsight, had been optimistic.

2016 performance of Russell Stover was found to be lower than the level forecasted and management has appropriately reflected this in this year’s valuation model.

Additionally, we evaluated the following assumptions used by management:

terminal growth rate, by comparing it to economic and industry forecasts;

EBIT margin growth rates, by comparing them to other mature Lindt production entities; and

the discount rate, by assessing the costs of capital for the company and comparable organizations, as well as considering territory specific factors.

We performed thorough sensitivity analyses around the key assumptions to ascertain the extent of change in those assumptions that either individually or collectively would be required for the indefinite-lived intangibles to be impaired. We discussed the headroom of the sensitivity analyses with management. For the brand names of Ghirardelli and Caffarel we compared the licence fee income to the carrying value of the brand name.
We concluded the assumptions to be consistent and in line with our expectations and concur with the view that an impairment is not necessary.

Investments – Valuation of Investments and Loans to Grpoup Companies

Key audit matter

How our audit addressed the key audit matter

Refer to the balance sheet items investments totaling CHF 858 million and loans to group companies totaling CHF 430 million. We focused our audit on these assets because of the large value of the account balances, the judgment involved in the assessment of recoverability of these assets and in light of the financial performance of certain subsidiaries.

In order to assess any potential impairments in the value of the investments and the loans granted to subsidiaries, management has performed an assessment.

The value of the investments is determined using generally accepted valuation methods in Switzerland that are based on current financial information and past performance. An impairment loss is recognized if the carrying amount of the investment exceeds the value determined by the valuation model.

The valuation of the loans is determined by assessing the financial strength (equity) of the debtor.

In the financial year 2016, no impairments were considered necessary by management.

Refer to the company’s accounting policy summarized in note 2.

We have tested management’s assessment of the recoverability of loans and investments as follows:

– We assessed the mathematical and technical accuracy of management’s valuations;
– We audited the consistency of the applied valuation method;
– We reconciled the input parameters used for the valuations to publicly available data;

– We tested the financial information used in the valuations for accuracy.

Based on our audit work we concur with management’s conclusions.

Responsibilities of the Board of Directors for the financial statements

The Board of Directors is responsible for the preparation of the financial statements in accordance with the provisions of Swiss law and the company’s articles of incorporation, and for such internal control as the Board of Directors determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Board of Directors is responsible for assessing the entity’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 entity or to cease operations, or has no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the 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 Swiss law 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 financial statements.

A further description of our responsibilities for the audit of the 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 financial statements according to the instructions of the Board of Directors.

We further confirm that the proposed appropriation of available earnings complies with Swiss law and the company’s articles of incorporation. We recommend that the financial statements submitted to you be approved.

PricewaterhouseCoopers AG

Bruno Häfliger
Audit expert
Auditor in charge

Richard Müller
Audit expert

Zurich, 6 March 2017