PC15. Auditor’s report


To the general meeting of the shareholders of Svenska Cellulosa Aktiebolaget SCA (publ), corporate identity number 556012-6293.

REPORT ON THE ANNUAL ACCOUNTS AND CONSOLIDATED ACCOUNTS

Opinions

We have audited the annual accounts and consolidated accounts of Svenska Cellulosa Aktiebolaget SCA (publ) for the year 2016. The annual accounts and consolidated accounts of the company are included on pages 40–135 in this document.

In our opinion, the annual accounts have been prepared in accordance with the Annual Accounts Act and present fairly, in all material respects, the financial position of the parent company as of 31 December 2016 and its financial performance and cash flow for the year then ended in accordance with the Annual Accounts Act. The consolidated accounts have been prepared in accordance with the Annual Accounts Act and present fairly, in all material respects, the financial position of the group as of 31 December 2016 and their financial performance and cash flow for the year then ended in accordance with International Financial Reporting Standards (IFRS), as adopted by the EU, and the Annual Accounts Act. The statutory administration report is consistent with the other parts of the annual accounts and consolidated accounts.

We therefore recommend that the general meeting of shareholders adopts the income statement and balance sheet for the parent company and the group.

Basis for Opinions

We conducted our audit in accordance with International Standards on Auditing (ISA) and generally accepted auditing standards in Sweden. Our responsibilities under those standards are further described in the Auditor’s Responsibilities section. We are independent of the parent company and the group in accordance with professional ethics for accountants in Sweden and have otherwise fulfilled our 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 opinions.

Key Audit Matters

Key audit matters of the audit are those matters that, in our professional judgment, were of most significance in our audit of the annual accounts and consolidated accounts of the current period. These matters were addressed in the context of our audit of, and in forming our opinion thereon, the annual accounts and consolidated accounts as a whole, but we do not provide a separate opinion on these matters.

Valuation of goodwill and other intangible assets (trademarks)

The value of goodwill and other intangible assets (trademarks) with an indefinite useful life as of 31 December 2016 amounted to 25.3 billion SEK. An impairment test is a complex process and contains a high degree of judgement regarding future cash flows and other assumptions. We have therefore assessed valuation of goodwill and other intangible assets with an indefinite useful life to be a key audit matter. The company performs annual impairment tests as well as when impairment indicators have been identified. The recoverable amount for each cash-generating unit is determined as the value in use, which is calculated based on the discontinued present value of future cash flows. Key assumptions in these calculations are future growth rate, gross profit and applied discount rate. The process is by nature based on assumptions and judgment, not least because it is based on estimates of how the company’s business will be effected by future market developments and by other economic events, and the underlying calculations are in themselves complex.

In our audit we have evaluated and reviewed key assumptions, application of recognized valuation practice, discount rate (called WAAC –”Weighted Average Cost of Capital”) and other source data that the company has used. This has been done by i.e. comparing to external data sources, such as forecasts of inflation or assessment of future market growth and by evaluating the sensitivity in the company’s valuation model. We have as appropriate included valuation experts in the team performing our review. We have specifically focused on the sensitivity in the calculations and have made an independent evaluation of whether there is a risk that reasonably probable events would give rise to a situation where the value in use would be lower than the carrying amount. In this assessment we have also evaluated the company’s historical capability to forecast. Finally we have evaluated if disclosures provided in note D1 (“Intangible assets”) in the company’s notes are appropriate, specifically with regards to disclosure of which of the stated assumptions that are most sensitive in calculating the value in use.

Forest valuation

The group’s forest assets are accounted for as biological assets valued at fair value in accordance with IAS 41 Agriculture and by application of IFRS 13 Fair Value Measurement. As of 31 December 2016 the forest is accounted for at 30.8 billion SEK. The fair value of the group’s forest assets is calculated as the present value of future cash flows before tax and is classified as Level 3 valuation as defined in IFRS 13. The valuation process is complex since a quoted price in an active market does not exist for these assets. As a result biological assets are valued based on the present value of future cash flows. Key assumptions are future forest prices, felling costs, volume assumptions and discount rate which all include a high degree of assumptions from the company.

In our audit we have evaluated and reviewed key assumptions, application of common valuation practice, discount rate (“WAAC”) and other source data that the company has used by i.e. comparing to external data sources, such as forecasted inflation, forest prices and felling costs or assumptions of future felling volumes and by evaluating the sensitivity in the company’s valuation model. We have as appropriate included valuation specialists in the team performing our review. We have specifically focused on the sensitivity in the calculations. Furthermore we have evaluated the company’s historical capability to forecast. Finally we have evaluated if disclosures provided in note D3 (“Biological Assets”) in the company’s notes are appropriate, specifically with regards to disclosure of which of the stated assumptions that are most sensitive in calculating the fair value.

Provisions for tax risks and legal disputes

Provisions for tax risks and legal disputes amounted to 1.5 billion SEK in the statement of financial position for the group as of 31 December 2016. As follows from note D7 the provisions mainly relate to tax matters in Sweden as well as antitrust cases in Chile, Poland, Spain and Hungary. The provisions are made based on the company’s best estimate of the outcome of these tax matters and legal disputes which is based on current regulation and praxis in the respective area.

Calculation of future expenditure for tax risks and legal disputes includes a number of assumptions made by the company and changes in these assumptions can have a considerable effect on the reported provision. Based on this we have made the assessment that provisions for tax risks and legal disputes is a key audit matter.

In our audit we have evaluated the company’s process of assessing the outcome of the legal disputes and the size of the provisions. We have evaluated the company’s process of identifying and assessing tax risks and size of provisions. Our audit has included to take part of correspondence with authorities, comparisons with current legislation and outcome of similar cases. We have considered opinions from the company’s internal as well as external legal counsel. We have also included tax specialists in our audit. We furthermore evaluated whether disclosures provided are appropriate.

Revenue recognition and related sales incentives

Revenue recognition and related sales incentives are areas with a great element of estimates and assessments. We have noted that rebates and adjustments to sales prices in some cases can be material. Normal incentives related to sales are reported as reduction of the company’s revenue. The company applies different incentive programs to increase sales. Incentives can for example be structured as percentage reductions on sales, discounts per item, fixed amounts with or without thresholds or in other ways. The company calculates an estimate of final incentives based on the information available at the end of the period. In our audit we have reviewed the company’s revenue recognition with a focus on such bonuses and rebates. We have evaluated the company’s revenue process and tested the company’s controls within the process. We have also reviewed the accrued costs related to bonuses and rebates to customers as of 31 December 2016 which amounted to 4.1 billion SEK to underlying customer agreements and performed a retrospective analysis of the accruals per 31 December 2015. Our audit has also included review of credit invoices and other adjustments to trade receivables that have taken place after 31 December 2016. We have also reviewed non-standard customer agreements. In our audit we have tested larger payouts to the company’s customers that have taken place during 2016 in order to confirm that that they are in accordance with customer agreements and reported in the correct accounting period. Finally we have audited manual journal entries related to bonus and rebates in order to confirm that sufficient documentation and suitable attestations exist for these entries.

Initial audit engagement

We have been appointed as auditors during the year. The company conducts business in several business areas in closer to 100 markets. A first-time audit engagement of a company with such extensive and geographically spread operations includes a number of considerations that are not present in a recurring audit engagement. Additional planning activities and considerations become necessary in order to establish a suitable audit strategy and audit plan including:

  • Obtaining sufficient knowledge of the company and its business including their control environment and information systems in order to make a risk assessment and develop an audit strategy and audit plan;
  • Obtaining audit evidence regarding the opening balances including application of accounting principles; and
  • Communication with the predecessor auditors.

Before we were appointed as auditors in April 2016 we developed a comprehensive plan for the audit transition. During the spring of 2016 we started to retrieve material in order to create an understanding of risks for material misstatements in the financial reporting and the company’s internal control framework. Our work included a close interaction with the predecessor auditors and a review of their reporting from the prior year, including all formal audit procedures that are a part of generally accepted auditing standards. Furthermore we performed walkthroughs with the company’s internal audit department in order to take part of their view of the operations, risks and material observations from their review and an assessment of key areas within accounting and auditing from prior years. We conducted a review of the company’s internal control system in order to understand the company’s business processes and processes for financial reporting. On the basis of this work our audit plan was presented to the audit committee in May 2016 and we have reported status and material observations from our audit throughout the year.

Other Information than the annual accounts and consolidated accounts

This document also contains other information than the annual accounts and consolidated accounts and is found on pages 1-35 and 139-147. The Board of Directors and the Managing Director are responsible for this other information.

Our opinion on the annual accounts and consolidated accounts does not cover this other information and we do not express any form of assurance conclusion regarding this other information.

In connection with our audit of the annual accounts and consolidated accounts, our responsibility is to read the information identified above and consider whether the information is materially inconsistent with the annual accounts and consolidated accounts. In this procedure we also take into account our knowledge otherwise obtained in the audit and assess whether the information otherwise appears to be materially misstated.

If we, based on the work performed concerning this information, 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 and the Managing Director

The Board of Directors and the Managing Director are responsible for the preparation of the annual accounts and consolidated accounts and that they give a fair presentation in accordance with the Annual Accounts Act and, concerning the consolidated accounts, in accordance with IFRS as adopted by the EU. 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 annual accounts and consolidated accounts that are free from material misstatement, whether due to fraud or error.

In preparing the annual accounts and consolidated accounts, The Board of Directors and the Managing Director are responsible for the assessment of the company’s and the group’s ability to continue as a going concern. They disclose, as applicable, matters related to going concern and using the going concern basis of accounting. The going concern basis of accounting is however not applied if the Board of Directors and the Managing Director intends to liquidate the company, to cease operations, or has no realistic alternative but to do so.

The Audit Committee shall, without prejudice to the Board of Director’s responsibilities and tasks in general, among other things oversee the company’s financial reporting process.

Auditor’s responsibility

Our objectives are to obtain reasonable assurance about whether the annual accounts and consolidated accounts as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinions. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs and generally accepted auditing standards in Sweden 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 annual accounts and consolidated accounts.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

  • Identify and assess the risks of material misstatement of the annual accounts and consolidated accounts, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinions. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
  • Obtain an understanding of the company’s internal control relevant to our audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control.
  • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Board of Directors and the Managing Director.
  • Conclude on the appropriateness of the Board of Directors’ and the Managing Director’s use of the going concern basis of accounting in preparing the annual accounts and consolidated accounts. We also draw a conclusion, based on the audit evidence obtained, as to whether any material uncertainty exists related to events or conditions that may cast significant doubt on the company’s and the group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the annual accounts and consolidated accounts or, if such disclosures are inadequate, to modify our opinion about the annual accounts and consolidated accounts. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause a company and a group to cease to continue as a going concern.
  • Evaluate the overall presentation, structure and content of the annual accounts and consolidated accounts, including the disclosures, and whether the annual accounts and consolidated accounts represent the underlying transactions and events in a manner that achieves fair presentation.
  • Obtain sufficient and appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated accounts. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our opinions.

We must inform the Board of Directors of, among other matters, the planned scope and timing of the audit. We must also inform of significant audit findings during our audit, including any significant deficiencies in internal control that we identified.

We must also provide the Board of Directors 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 the Board of Directors, we determine those matters that were of most significance in the audit of the annual accounts and consolidated accounts, including the most important assessed risks for material misstatement, and are therefore the key audit matters. We describe these matters in the auditor’s report unless law or regulation precludes disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in the auditor’s report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Report on other legal and regulatory requirements

Opinions

In addition to our audit of the annual accounts and consolidated accounts, we have also audited the administration of the Board of Directors and the Managing Director of Svenska Cellulosa Aktiebolaget SCA (publ) for the year 2016 and the proposed appropriations of the company’s profit or loss.

We recommend to the general meeting of shareholders that the profit be appropriated in accordance with the proposal in the statutory administration report and that the members of the Board of Directors and the Managing Director be discharged from liability for the financial year.

Basis for Opinions

We conducted the audit in accordance with generally accepted auditing standards in Sweden. Our responsibilities under those standards are further described in the Auditor’s Responsibilities section. We are independent of the parent company and the group in accordance with professional ethics for accountants in Sweden and have otherwise fulfilled our 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 opinions.

Other Disclosures

The audit of the annual report for the years 2015 and 2014 has been performed by a different auditor who has issued an auditor’s report dated 21 March 2016 and 10 March 2015 with unqualified opinions in the “Report on the annual accounts”.

Responsibilities of the Board of Directors and the Managing Director

The Board of Directors is responsible for the proposal for appropriations of the company’s profit or loss. At the proposal of a dividend, this includes an assessment of whether the dividend is justifiable considering the requirements which the company’s and the group’s type of operations, size and risks place on the size of the parent company’s and the group’s equity, consolidation requirements, liquidity and position in general.

The Board of Directors is responsible for the company’s organization and the administration of the company’s affairs. This includes among other things continuous assessment of the company’s and the group’s financial situation and ensuring that the company’s organization is designed so that the accounting, management of assets and the company’s financial affairs otherwise are controlled in a reassuring manner. The Managing Director shall manage the ongoing administration according to the Board of Directors’ guidelines and instructions and among other matters take measures that are necessary to fulfill the company’s accounting in accordance with law and handle the management of assets in a reassuring manner.

Auditor’s responsibility

Our objective concerning the audit of the administration, and thereby our opinion about discharge from liability, is to obtain audit evidence to assess with a reasonable degree of assurance whether any member of the Board of Directors or the Managing Director in any material respect:

  • has undertaken any action or been guilty of any omission which can give rise to liability to the company, or
  • in any other way has acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association.

Our objective concerning the audit of the proposed appropriations of the company’s profit or loss, and thereby our opinion about this, is to assess with reasonable degree of assurance whether the proposal is in accordance with the Companies Act.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with generally accepted auditing standards in Sweden will always detect actions or omissions that can give rise to liability to the company, or that the proposed appropriations of the company’s profit or loss are not in accordance with the Companies Act.

As part of an audit in accordance with generally accepted auditing standards in Sweden, we exercise professional judgment and maintain professional scepticism throughout the audit. The examination of the administration and the proposed appropriations of the company’s profit or loss is based primarily on the audit of the accounts. Additional audit procedures performed are based on our professional judgment with starting point in risk and materiality. This means that we focus the examination on such actions, areas and relationships that are material for the operations and where deviations and violations would have particular importance for the company’s situation. We examine and test decisions undertaken, support for decisions, actions taken and other circumstances that are relevant to our opinion concerning discharge from liability.

As a basis for our opinion on the Board of Directors’ proposed appropriations of the company’s profit or loss we examined the Board of Directors’ reasoned statement and a selection of supporting evidence in order to be able to assess whether the proposal is in accordance with the Companies Act.

Stockholm 23 February 2017

Ernst & Young AB

Hamish Mabon
Authorized Public Accountant

INDEPENDENT ASSURANCE REPORT RELATING TO SUSTAINABILITY REPORT

Pages 18–19, 22, 28 and 30–31 of this document contains an extract of the Sustainability Report. A complete Sustainability Report has been prepared by the company, which contains our full assurance report. Based on our review, nothing has come to our attention that causes us to believe that the sustainability report has not, in all material respects, been prepared in accordance with the criteria stipulated in our full version of the assurance report.

Stockholm, 23 February 2017

Ernst & Young AB

Hamish Mabon
Authorized Public Accountant
Auditor in charge

Outi Alestalo
Expert member of the Swedish Institute of
Authorized Public Accountants (FAR)