Carrefour - 2017 Registration Document

CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2017 Statutory Auditors' report on the Consolidated Financial Statements 2017 REGISTRATION DOCUMENT | CARREFOUR 5. 294 Key Audit Matters Responses as part of our audit Tax provisions of Brazilian subsidiaries: estimation of provisions and contingent liabilities (See notes 1.3, 9.1, 9.2.1 and 9.3 of the consolidated financial statements) In Brazil, the Group is involved in tax risks, in particular, to the tax on the distribution of goods and services (ICMS) and to the corresponding tax credits recorded, to the federal contributions related to the social integration programme and to the financing of the social security system (Pis-Cofins) and to the tax amortization of goodwill recognised in 2007 in the context of the acquisition of Atacadão. The assessment of the risk related to each tax litigation is reviewed regularly by the Group’s tax department and the subsidiary’s Management, with the support of its external counsels for the most significant tax litigations in order to determine the need of recording a provision or not, and in the case where a provision should be recorded, to estimate the amount of the provision. We considered the tax risk of the brazilian subsidiaries, for both the estimation of the provisions and the information disclosed in the financial statement as a key audit matter due to the amount and the number of tax risks, to the complexity of the tax legislation especially for retail companies in Brazil and the level of management judgment in the assessment of the outcome of the ongoing litigations and the amount of the provision to be booked. We have obtained an understanding of the internal controls implemented by the Group to identify tax risks in the brazilian subsidiaries. In order to appreciate if the provisions for tax risks in for brazilian subsidiaries have been correctly estimated, we performed the following procedures, with the assistance of our tax experts: Conducted interviews with the tax department in order to ● assess the current state of the risks identified, the investigations and reassessments made by the tax authorities and monitor the development of ongoing tax disputes; Analysed the opinion of the external counsels of the entities of ● the Group on the ongoing tax disputes and the information on ongoing procedures and their potential financial impacts that have been provided by the external counsels in response to our written confirmation requests; Performed a review of the estimates and positions adopted by ● the management to measure the provisions booked; Assessed the information disclosed in notes 9.2.1 and 9.3 of ● the consolidated financial statements. Valuation of the recoverable amount of the Goodwill allocated to Italy and Poland (notes 1.3, 2.5, 6.1.1 and 6.3 of the consolidated financial statements) The amount of Goodwill recorded following external growth operations is tested for impairment at the country level in which the Group operates. As mentioned in note 6.3, the recoverable amount of Goodwill is tested whenever events or changes in the market environment indicate a risk of an impairment loss and at least once a year. An impairment loss is recognised when the carrying value of Goodwill exceeds its recoverable amount. The recoverable value is defined as the higher amount of the fair value and the value in use. The estimation of the value in use is performed through the discounted future cash flows expected in accordance with the methodology defined in note 6.3. The determination of the value in use involves significant judgments made by management, especially regarding the projected future cash flows, the discount rate and the perpetual growth rate used. The fair value is defined as the price that would be received to sell the country’s activities within the ordinary course of business between market participants. It is estimated based on external data when available or analysis prepared by internal or external experts. As of December 31, 2017, the carrying value of Goodwill allocated to Italy amounted to 253 million euros, after consideration of a 700 million-euro-impairment loss based on the calculation of a fair value with reference to a multi-criteria approach. Poland, for which the recoverable amount of Goodwill amounted to 252 million euros, was found to be close to the carrying amount as of December 31, 2017. Sensitivity analysis on the recoverable amount of Goodwill allocated to Poland in relation to assumptions retained were performed by the management and presented in note 6.3.1.2. In this context, we have considered the valuation of the recoverable amount of Goodwill allocated to Poland and Italy as a key audit matter given the significant part of judgment involved to assess the recoverable amounts, the impairment amount recorded on Italy, and the low headroom between the recoverable and the carrying value of Poland. In order to review procedures performed by the management to determine the recoverable amount of Goodwill allocated to Italy and Poland, we mainly : assessed the appropriateness of the methodology used to ● determine the recoverable amount; analysed for the calculation of the value in use: ● lthe consistency of the projected cash flows used with our ● understanding of the Group’s perspectives and strategic orientations in Italy and Poland and with the latest estimations presented to the Board of Directors ; the reasonableness of the financial assumptions used (discount rates and perpetual growth rates) with the assistance of our specialists in financial valuation; reviewed for Italy, the datas used to determine the fair value ● based on a multi-criteria approach valuation which took account multiples observed for comparable companies in the retail sector in Europe as well as the market value of real estate assets based on external valuations; assessed for Poland, the relevance of sensitivity analysis ● performed by the Group and reviewed the appropriateness of the information disclosed in note 6.3.1.2.