(Translation from the Finnish Original)
To the Annual General Meeting of Kesko Oyj
In our opinion,
We have audited the financial statements of Kesko Oyj (Business ID: 0109862-8) for the year ended 31 December, 2016. The financial statements comprise:
We conducted our audit in accordance with good auditing practice in Finland. Our responsibilities under good auditing practice are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
We are independent of the parent company and of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in Finland, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
Group audit scope
Key audit matters
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain.
The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether 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 group materiality for the consolidated financial statements. 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 on the financial statements as a whole.
We determined that overall group materiality € 13 million. We chose comparable 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 by users, and is a generally accepted benchmark. We chose 5% which is within the range of acceptable quantitative materiality thresholds in auditing standards.
Kesko operates in grocery trade, building and technical trade and car trade. Operations are based in nine countries. We tailored the scope of our audit, taking into account the structure of the Kesko Group, the industry and the accounting processes and controls.
We performed an audit in Kesko Group companies that are most significant based on the financial position and result. We have performed audit procedures in all nine of Kesko’s operating countries: in Finland, Sweden, Norway, Estonia, Latvia, Lithuania, Poland, Russia and Belarus.
By performing those procedures, we have obtained sufficient and appropriate evidence regarding the financial information of Kesko Group’s legal companies and operations which provides a basis for our opinion on the consolidated financial statements.
Key audit matters are those matters that, in our professional judgment, 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.
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.
Key audit matter in the audit of the Group
How our audit addressed the Key audit matter
|Business combination of Suomen Lähikauppa, Onninen and AutoCarrera|
|Refer to note 1 (Accounting policies for the consolidated financial statements), note 12 (Intangible assets) and note 3 (Business acquisitions and disposals)
During the financial year, Kesko has acquired the whole share capital of Suomen Lähikauppa Oy, Onninen Oy and Oy AutoCarrera Ab. These acquisitions have been treated as business combinations based on IFRS 3 in Kesko consolidated financial statements.
Regarding these acquisitions we focused on meeting the criteria of business combination based on IFRS 3, intangible assets identification and determination of the fair value of net assets. These matters involve management judgment and the result is dependent on valuation methods, assumptions and inputs used in the model.
In our audit we reviewed management’s assessment about, whether acquisitions of Suomen Lähikauppa, Onninen and AutoCarrera meet the definition of business combination as set out in IFRS 3.
We assessed the appropriateness of the identifiable assets acquired and the liabilities assumed at the acquisition date by comparing these to the clauses laid out in the Asset Purchase Agreements. We reviewed management’s procedure for determining the fair value of the net identifiable assets acquired.
We tested appropriateness of valuation models and mathematical accuracy by sample as well as by comparing input data used to clauses laid out in the Asset Purchase Agreements.We tested the amount of goodwill arising from the acquisition by reviewing purchase price allocation accounting principles and formulas of calculations. We assessed whether goodwill arising from the acquisitions is allocated to cash generating units based on applied accounting standards.
|Goodwill and trademarks – management impairment testing|
Refer to note 1 (Accounting policies for the consolidated financial statements) and note 12 (Intangible assets)
We reviewed financial plans prepared by the management and compared to the financial plans approved by the Board of Directors.
|Refer to note 1 (Accounting policies for the consolidated financial statements) and note 18 (Inventories)
Kesko Group balance sheet includes inventory amount of € 978.9 million.
Inventories are measured at the lower of cost and net realisable value.
The Group regularly reviews inventories for obsolescence and turnover, and for possible reduction of net realisable value below cost, and records an impair-ment as necessary. Such reviews require assessments of future demand for products.
The cost of finished goods comprises all costs of purchase including freight. Inventory cost is adjusted by vendor allowances. The Group uses judgment to what extent allowances clauses laid out in purchase agreements are fulfilled at the financial statements period end date.
In our audit we focused on the assessment of net realisable value and underlying assumptions. In addition, we focused on assessment of fulfilment of vendor agreement clauses at the financial statements period end date.
|In our evaluation of the Group reviews on inventory net realisable value, we walked through monitoring processes over inventory obsolescence and turnover and processes of net realisation calculation. We identified key controls and tested efficiency of those.
We reviewed on a sample basis inventory write-off calculations and reconciled source data to inventory accounting. We tested by sample basis formulas of valuation reports to ensure that formulas lead to the correct result.
In our evaluation over the vendor allowances we walked through the Group monitoring processes, identified key controls and tested efficiency of those. We tested on a sample basis vendor allowances calculations and reconciled input information to clauses laid out in purchase agreements and financial year purchases information. In addition, we reconciled comparable reporting date vendor allowance accruals to materialized allowances to evaluate the quality of the process and accuracy of the accruals.
|We have no key audit matters to report with respect to our audit of the parent company financial statements.|
The Board of Directors and the Managing Director are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, as well as for the preparation of financial statements that give a true and fair view in accordance with the laws and regulations governing the preparation of the financial statements in Finland and comply with statutory requirements. The Board of Directors and the Managing Director are also responsible for such internal control as they determine 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 and the Managing Director are 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 they either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.
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 good auditing practice 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 good auditing practice, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:
We communicate with those charged with governance 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 also provide those charged with governance 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 those charged with governance, 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, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
The Board of Directors and the Managing Director are responsible for the other information. The other information comprises information included in the report of the Board of Directors and in the annual report, but does not include the financial statements and our auditor’s report thereon. We obtained the report of the Board of Directors prior to the date of this auditor’s report and the Annual report is expected to be made available to us after the date of this auditor's report.
Our opinion on the financial statements does not cover the other information.
In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. With respect to the report of the Board of Directors our responsibility also includes considering whether the report of Board of Directors has been prepared in accordance with the applicable legal requirements.
In our opinion,
If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, 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.
We support that the financial statements and the consolidated financial statements should be adopted. The proposal by the Board of Directors regarding the use of the profit shown in the balance sheet is in compliance with the Limited Liability Companies Act. We support that the Members of the Board of Directors and the Managing Director of the parent company should be discharged from liability for the financial period audited by us.
Helsinki 1 February 2017
Authorised Public Accountants