Measurement of the recoverable amount of goodwill
(Note 6.4 to the consolidated financial statements)
Description of risk
At August 31, 2021, the goodwill balance amounted to € 5,811 million, representing the largest item on the consolidated balance sheet. An impairment loss is recognized if the recoverable amount of goodwill as determined during the annual impairment test, or during a specific test carried out where there is an indication of impairment, is lower than its carrying amount.
Recoverable amount is typically determined based on the present value of future cash flows and requires significant judgment from management, in particular as regards the preparation of business forecasts, as well as the discount and long-term growth rates used.
We deemed the measurement of the recoverable amount of goodwill to be a key audit matter, due to the size of the goodwill balance and the inherent uncertainty of certain inputs, in particular the likelihood of achieving forecast results included in such measurement.
How our audit addressed this risk
We performed a critical review of the methods applied by management to determine the recoverable amount of goodwill. Our audit work consisted in:
- assessing the components of the carrying amount of cash-generating units (CGUs) or groups of CGUs, corresponding to the level at which goodwill is monitored by Group management, and their consistency with those used in projecting future cash flows;
- assessing the consistency of the projected future cash flows with the economic environments in which the Group operates;
- assessing the consistency of the growth rates used for projected cash flows with available long-term inflation forecasts for the geographical areas concerned;
- assessing the reasonableness of the discount rates applied to projected future cash flows, verifying in particular that the various inputs used to calculate the weighted average cost of capital for each CGU or group of CGUs were sufficient to approximate the return expected by market participants for similar activities;
- assessing the sensitivity analyses of value in use to changes in the main assumptions used by Management;
- verifying that note 6.4 to the consolidated financial statements contains the appropriate disclosures on the sensitivity analyses of the results of goodwill impairment tests.
Tax risks
(Note 10.2 to the consolidated financial statements)
Description of risk
The Group has operations in numerous countries around the world and, in the normal course of business, is subject to regular inspections by local tax authorities.
Such inspections may give rise to tax adjustments and disputes with tax authorities.
Estimates of the impacts of these tax risks and any related provisions involve significant judgment by management, especially as regards the expected outcome of disputes in progress or the probability of identified risks occurring. Accordingly, we deemed this subject to be a key audit matter.
How our audit addressed this risk
We held meetings with management to gain an understanding of the internal control procedures implemented to identify tax risks and uncertain tax positions, and, when necessary, determine any provisions.
With the support of our tax experts, we also:
- held meetings with the Group tax department and local management to assess the latest status of any inspections in progress and tax adjustments notified by the tax authorities, and to monitor developments in any disputes in progress;
- consulted the recent decisions and correspondence of Group companies with the tax authorities, and gained an understanding of the correspondence between the companies concerned and their tax advisors;
- analyzed the responses of the tax advisors to our requests for information or their analyses of disputes in progress;
- conducted a critical review of the estimates and positions adopted by management;
- verified that the latest developments had been factored into the risk analysis and the estimates of the provisions set aside in the statement of financial position.
