Report of the statutory auditor on the consolidated financial statements

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

Report on the audit of the consolidated financial statements

Opinion

We have audited the consolidated financial statements of Chocoladefabriken Lindt & Sprüngli AG and its subsidiaries (the Group), which comprise the consolidated statement of financial position as at 31 December 2016 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 give a true and fair view of the consolidated financial position of the Group as at 31 December 2016 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.

Our audit approach

Overview

Overall Group materiality: CHF 41,000,000

We concluded full scope audit work at 26 reporting units in 18 countries.

Our audit scope addressed 99% of the Group’s revenues and assets.

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

  • Intangible Assets: goodwill impairment assessment
  • Financial Assets: prepaid pension funds valuation

    • Audit scope

    We designed our audit by determining materiality and assessing the risks of material misstatement in the consolidated 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.

    In identifying these areas of focus, we tailored the scope of our audit to ensure that we performed sufficient work to be able to give an opinion on the Group financial statements as a whole, taking into account the geographic structure of the Group, the accounting processes and controls and the industry in which the Group operates.

    The Group financial statements are a consolidation of 29 reporting units, each of which is considered to be a component. Together with management, we identified 26 reporting units, where an audit of the complete financial information is performed. The 3 reporting units that are not in our scope, are immaterial to the group and contribute less than 1% to the Group’s assets and revenues.

    Where the work was performed by component auditors, we determined the appropriate level of our involvement as Group auditors at those reporting units. Our procedures included a thorough review of the audit approach applied by the component auditors and regular calls with selected component audit teams.

    Further specific audit procedures over the Group consolidation and areas of significant judgement (including taxation, goodwill, intangible assets, treasury, post-retirement benefits, litigations and the elimination of unrealised intercompany profit in inventory) were directly led by the Group audit team.

    Taken together, the territories and functions where we performed our audit work accounted for 99% of consolidated revenue and 99% of total assets.

    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 41,000,000

    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 Group is most commonly measured, and 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 group.

    We agreed with the Board of Directors that we would report to them misstatements above CHF 2,050,000 identified during our audit as well as any misstatements below that amount which, in our view, warranted reporting for qualitative reasons.

    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.

    Intangible Assets – goodwill impairment assessment

    Key audit matter

    How our audit addressed the key audit matter

    Refer to the balance sheet item intangible assets totaling CHF 1,424.4 million of which CHF 803.6 million relates to goodwill recognised when acquiring Russell Stover LLC – a US based chocolate producer – in 2014.

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

    Management compares the carrying value of goodwill to the value in use of the underlying business. 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 goodwill, an impairment charge is recognised.

    The most significant elements of the value in use calculation were the assess-ment of the discounted cash flow model used and the underlying assumptions. The most judgmental assumptions underlying the cash flow forecasts were the longterm sales growth rates, EBIT margin growth rates and the discount rate.

    Refer to note 8 for details of management’s impairment test and assumptions.

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

    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 model.

    Additionally, we evaluated the following assumptions used by management:

    – terminal growth rates , by comparing them 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 goodwill to be impaired. We discussed the headroom of the sensitivity analyses with management.
    We concluded the assumptions to be consistent and in line with our expectations and concur with the view that an impairment is not necessary.

    Key audit matter

    How our audit addressed the key audit matter

    Refer to the balance sheet item financial assets totaling of CHF 1,302.2 million of which CHF 1,300.9 million relates to prepaid pension funds.

    We focused on this area due to the size of the prepaid pension funds balance and because management’s assessment of the valuation of this balance involves judgements about future developments of the group’s employees and pension funds.

    Management engages an external actuary to perform the calculation of the net defined pension position. The most judgemental assumptions underlying this calculation were the salary growth rates, the pension increase rates, the mortality rate and the inflation rate.

    Refer to notes 9 and 18 for further details.

    We evaluated the census data that was used for the actuarial calculation. No differences were identified.

    We assessed the engagement and the professional competency and independence of the actuary engaged by management. We concluded that we could place reliance on the calculation performed by the actuary.

    Additionally, we evaluated the following assumptions used by management:

    – the salary growth rates and the pension increase rates by comparing them to economic and industry forecasts;
    – the pension increase rates, by comparing them to industry benchmarks;
    – the mortality rate, by ensuring that the appropriate generation table was used; and

    – the inflation rate, by comparing it to relevant market data.


    Based on the evidence obtained, we found that the assumptions used by management in the valuation of the net defined pension position were within a range considered to be reasonable using an internally developed range of acceptable assumptions, based on our view of various economic indicators.

    Other information in the annual report

    The Board of Directors is responsible for the other information in the annual report. The other information comprises all information included in the annual report, but does not include the consolidated financial statements, the standalone financial statements and the remuneration report of Chocoladefabriken Lindt & Sprüngli AG and our auditor’s reports thereon.

    Our opinion on the consolidated financial statements does not cover the other information in the annual 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 annual 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

    Bruno Häfliger
    Audit expert
    Auditor in charge

    Richard Müller
    Audit expert

    Zurich, 6 March 2017