To: the General Meeting of DSM-Firmenich AG, Kaiseraugst.
Report on the audit of the Consolidated Financial Statements
Opinion
We have audited the consolidated financial statements of DSM-Firmenich AG and its subsidiaries (the Group), which comprise the consolidated balance sheet as at 31 December 2023, the consolidated income statement, consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, and notes to the consolidated financial statements, includ-ing material accounting policy information.
In our opinion, the consolidated financial statements (pages 192 to 267) give a true and fair view of the consolidated financial position of the Group as at 31 December 2023, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with IFRS Accounting Standards and comply with Swiss law.
Basis for opinion
We conducted our audit in accordance with Swiss law, International Standards on Auditing (ISA) and Swiss Standards on Auditing (SA-CH). 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, together with the requirements of the Swiss audit profession, as well as those of the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (including International Independence Standards) (IESBA Code), 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.
Key Audit Matters
- Accounting for the merger between DSM and Firmenich
- Valuation of goodwill
- Vitamin transformation program
Key audit matters are those matters that, in our professional judgment, 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.
The transaction was closed on 8 May 2023 and is accounted for as a business combination.
As part of the acquisition accounting, IFRS Accounting Standards require the recognition and measurement of the identifiable assets acquired and liabilities assumed at their fair values. As a result, DSM-Firmenich recognized goodwill of EUR 8,251 million, representing the difference of the total consideration paid and the fair value of Firmenich's net assets.
Given the size and the judgment applied by management in the provisional purchase price allocation, specifically the valuation of identified intangible assets and property, plant and equipment, we consider it a key audit matter.
For further information on accounting for the merger between DSM and Firmenich refer to the following:
We obtained and read the underlying legal agreements and other transaction related documents and assessed the accounting treatment of various terms.
We obtained the fair value assessment of intangible assets and property, plant and equipment prepared by third party valuation experts engaged by the company to assist management with the purchase price accounting. We assessed the third party valuation firm's qualifications, experience and expertise regarding the assets being valued.
With the assistance of our in-house valuation specialists, we assessed whether the methodologies and mod- els used to value intangible assets and property, plant and equipment are appropriate. We challenged the main assumptions and judgements that affected the valuation by comparing these with market data and our experience of similar transactions.
We also evaluated the presentation and disclosure of the transaction in the consolidated financial statements.
Goodwill is assessed for impairment by management at least annually by determining the recoverable amount (the higher of its value in use and fair value less costs of disposal), which is then compared to the carrying amount.
Management applies judgment in assessing the cash flow projections of the (groups of) cash generating units at which level goodwill is allocated and determining the relevant valuation assumptions.
Valuation of goodwill is a key audit matter because the impairment test process is complex. It involves a high degree of management judgment and assumptions, such as cash flow forecasts, growth rates and discount rates of the CGUs, being used in the Group’s impairment tests.
As disclosed in note 29 to the financial statements and announced on 15 February 2024, DSM-Firmenich AG announced the initiation of a process to carve-out and separate out the Business Unit Animal Nutrition & Health (ANH) from the Group. Management considered the effects of the decision in the preparation of the consolidated financial statements.
For further information on valuation of goodwill refer to the following:
We assessed the determination of the CGUs taking into account the IFRS accounting standards and our knowledge of the organisation, structure and govern-ance of the DSM-Firmenich Group.
We evaluated the accuracy of impairment tests, the reasonableness of the key assumptions used to determine the recoverable amounts – including long term growth rates and discount rates based on our understanding of the related CGUs’ cash flow projections – and the methodology used by management to prepare its cash flow forecasts.
We involved our in-house valuation specialists with specialized skills and knowledge who assisted in assessing the reasonableness of the discount rates and long term growth rates through testing the source information underlying their determination, and in developing a range of independent estimates and comparing those to the discount and long term growth rates applied by management.
We assessed the Group’s ability to accurately prepare cash flow projections for their CGUs by comparing the actual financial performance to the projections made earlier.
We also considered the adequacy of the disclosures on impairment testing and sensitivity tests in the consoli-dated financial statements. We have also considered the accuracy of the disclosure regarding the ANH separation.
The plan included a restructuring of the vitamin asset footprint resulting in the closure of the vitamin B6 plant in Xinghuo (China) and the termination of vitamin C pro-duction in the plant in Jiangshan (China).
As the company has ceased to use these plants, management prepared an impairment assessment for the plants and related assets on a stand-alone basis. Based on the impairment assessment, losses for the affected property, plant and equipment were recognized in the amount of EUR 106 million for the vitamin B6 Xinghuo plant respectively EUR 119 million for the vitamin C Jiangshan plant. Furthermore, a liability was recognized for remaining contractual obligations.
As per 31 December 2023 the assets and liabilities related to the vitamin C business in Jiangshan are classi-fied as held for sale.
Given the financial impact and the non-recurring nature of these events, the accounting for these impairments is significant to our audit of the financial statements.
For further information on the assets and liabilities held for sale and the impairments related to the vitamin transformation program refer to the following:
As a result of the identified impairment indicators, the management has prepared impairment tests. We assessed the results of management’s impairment tests and evaluated the appropriateness of the recoverable amount determined for both plants.
For both plants we inspected underlying documentation, amongst others related to internal and external communication of the closure and applicable contractual obli-gations.
In addition for the closure of the Xinghuo vitamin B6 plant, we performed a site visit and observed that the plant is no longer in use. We enquired local employees and management about future plans and relevant gov-ernment regulations.
We also considered the adequacy of the disclosures on the impairments in the consolidated financial statements.
Other information
The Board of Directors is responsible for the other information. The other information comprises the information included in the annual report, but does not include the consolidated financial statements, the stand-alone financial statements of the company, the compensation report and our auditor’s reports thereon.
Our opinion on the consolidated financial statements does not cover the other information 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 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.
Board of Directors’ Responsibilities 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 Accounting Standards 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, ISA and SA-CH 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.
As part of an audit in accordance with Swiss law, ISA and SA-CH, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
- Identify and assess the risks of material misstatement of the consolidated financial statements, 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 opinion. 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 internal control relevant to the 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 Group’s internal control.
- Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made.
- Conclude on the appropriateness of the Board of Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on 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 consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. 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 the Group to cease to continue as a going concern.
- Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
- Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.
We communicate with the Board of Directors or its relevant committee 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 the Board of Directors or its relevant committee with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied.
From the matters communicated with the Board of Directors or its relevant committee, we determine those matters that were of most significance in the audit of the consolidated 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.
We have also been engaged by the Board of Directors to assess whether the consolidated financial statements have been prepared, in all material respects, in compliance with the requirements laid down in the ESEF Regulation.
Report on Other Legal and Regulatory Requirements
In accordance with Art. 728a para. 1 item 3 CO and PS-CH 890, we confirm that an internal control system exists, which has been designed for the preparation of the consolidated financial statements according to the instructions of the Board of Directors.
We have checked the compliance of the consolidated financial statements of the Group as at 31 December 2023 with the relevant requirements set out in the ESEF Regulation that are applicable to the consolidated financial statements.
- For the Group it relates to:
- The consolidated financial statements prepared in a valid xHTML format;
- The XBRL markup of the consolidated financial statements uses the core taxonomy and the common rules on markups specified in the ESEF regulation.
In our opinion, the consolidated financial statements of the Group as at 31 December 2023, identified as DSM-Firmenich_consolidated_ESEF_31-12-2023.zip have been prepared, in all material respects, in compliance with the requirements laid down in the ESEF Regulation.
We recommend that the consolidated financial statements submitted to you be approved.
KPMG AG
Petra Groenland van der Linden
Licensed Audit Expert
Auditor in Charge
Carlos Alvarez
Licensed Audit Expert
Basel, 28 February 2024