5.7 Statutory Auditors’ report on the consolidated financial statements

To the General Meeting of Lagardère SCA,

OPINION
In compliance with the engagement entrusted to us by your General Meetings, we have audited the accompanying consolidated financial statements of Lagardère SCA for the year ended 31 December 2019. In our opinion, the consolidated financial statements give a true and fair view of the assets and liabilities and of the financial position of the Group as at 31 December 2019 and of the results of its operations for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union.
The audit opinion expressed above is consistent with our report to the Audit Committee.

BASIS FOR OPINION

AUDIT FRAMEWORK
We conducted our audit in accordance with professional standards applicable in France. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Our responsibilities under those standards are further described in the Statutory Auditors’ Responsibilities for the audit of the consolidated financial statements section of our report.

INDEPENDENCE
We conducted our audit engagement in compliance with independence rules applicable to us, for the period from 1 January 2019 to the date of our report and specifically we did not provide any prohibited non-audit services referred to in Article 5 (1) of Regulation (EU) no. 537/2014 or in the French Code of Ethics (Code de déontologie) for Statutory Auditors.

EMPHASIS OF MATTER
We draw attention to note 1.1 to the consolidated financial statements which describes the impacts of the first-time application of IFRS 16 “Leases” in 2019.

JUSTIFICATION OF ASSESSMENTS – KEY AUDIT MATTERS
In accordance with the requirements of articles L. 823-9 and R. 823-7 of the French Commercial Code (Code de commerce) relating to the justification of our assessments, we inform you of the key audit matters relating to risks of material misstatement that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period, as well as how we addressed those risks.
These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and therefore contributed to the opinion we formed as expressed above. We do not provide a separate opinion on specific items of the consolidated financial statements.

IMPACTS OF THE GROUP’S STRATEGIC REPOSITIONING

Risk identified
Note 4.3 “Assets held for sale, associated liabilities and discontinued operations” to the consolidated financial statements describes the strategic repositioning the Group has made around two priority areas, Lagardère Publishing and Lagardère Travel Retail. In this context, the Group is continuing its withdrawal from the Lagardère Studios and Lagardère Sports activities.
The accounting impact of these decisions is based on assumptions made by management concerning the classification of certain assets and associated liabilities as held for sale or discontinued operations, as well as the measurement of these assets and associated liabilities and of restructuring costs incurred in connection with the strategic repositioning.
We deemed the impacts of the Group’s strategic repositioning to be a key audit matter as it requires significant judgement from management.

Our response
We engaged in several discussions with Group management and with the management of the divisions concerned in order to gain an understanding of the progress made in the various sale processes that have been initiated, and their impacts on the presentation of the consolidated financial statements.
We analysed the criteria used by management to present certain assets as held for sale or discontinued operations and assessed their conformity with the applicable accounting standards. We performed a critical review of the valuation tests carried out on these assets, based on the preliminary offers received by the Group, where applicable.
We conducted a critical review of the methods used to measure the restructuring provisions set aside in respect of the strategic repositioning.
We verified the appropriate accounting for assets divested during the year, notably based on any underlying legal agreements. We also examined the appropriateness of the disclosures provided in notes 4.3 and 8 to the consolidated financial statements

VALUATION OF GOODWILL AND INTANGIBLE ASSETS WITH INDEFINITE USEFUL LIVES

Risk identified
Goodwill and other intangible assets with indefinite useful lives, which have net book values of €1,564 million and €174 million, respectively, meet the definitions set out in notes 3.7 and 3.8 to the consolidated financial statements.
Management assesses at each closing date that the recoverable amount of goodwill and intangible assets with indefinite useful lives is higher than their carrying amount, and that there is no indication of impairment loss. The estimated future cash flows used for the impairment test are based on the internal budgets drawn up at the end of the year. They are determined using key assumptions and assessments that take into consideration effects of the economic environment, as identified at the date of the budget, on forecast future cash flows for the coming three years.
The cash flows are discounted using a post-tax discount rate specific to each business. A perpetuity growth rate, which is also specific to each business, is used for periods subsequent to those covered in the budgets. The methods for implementing impairment tests at the level of the cash-generating units (“CGUs”) to which assets have been allocated, are described in note 3.12, and the assumptions used are indicated in note 10 to the consolidated financial statements.
Because of the importance of management judgement and of the uncertainties associated with the assumptions used, we have considered goodwill and intangible assets with indefinite useful life valuation as a key audit matter.

Items appearing in the Annual Financial Report are cross‑referenced with the following symbol AFR

Our response
We have analysed the method applied and made sure it complies with the accounting standards in force.
We have held discussions with management in order to assess the assumptions used and performed a critical review of the method implemented and have analysed in particular:

  • the completeness of figures included in the book values of CGUs that are tested, and the consistency of the calculated values with the cash flow forecasts used to determine the recoverable amounts;
  • the reasonableness of the cash flow forecasts compared to the economic and financial environment for the most sensitive CGUs, and the reliability of the estimation process;
  • the consistency of those cash flow forecasts with the latest estimates established by management under the supervision of the Managing Partners in the context of the budget process;
  • the consistency of the growth and discount rates used for cash flow projections, with the assistance of our valuation experts;
  • the calculation of the discount applied to future cash flows;
  • the sensitivity calculations performed by management to changes in the main assumptions used.

Lastly, we have assessed the reasonableness of the information included in note 10 to the consolidated financial statements.

REVENUE RECOGNITION IN THE LAGARDÈRE PUBLISHING DIVISION – RETURNS ESTIMATES

Risk identified
Revenue recognition for Lagardère Publishing is subject to management estimates mainly in respect of returns estimates. Revenue recognition principles are described in notes 3.1 and note 32 to the consolidated financial statements; returns estimates recognised as a deduction from revenue amount to €289 million as at 31 December 2019.
That amount represents distributors’ right to return unsold copies to Lagardère Publishing. This is recognised as a deduction from revenue and estimated on the basis of forecast sales invoiced during the year and of historical returns data. The calculation is statistical and reflects the return rate for the prior year adjusted for fluctuations in sales volumes and for the economic climate of the current year. Given the importance of the returns estimates, and of the assumptions and areas of judgement involved in the calculation, we consider revenue recognition for Lagardère Publishing as a key audit matter.

Our response
Our audit procedures involved in particular:

  • describing and testing the sales process including the treatment of returns;
  • obtaining an understanding of the basis of calculation of returns and of the main assumptions used to estimate the amount of returns at the closing date;
  • performing a critical review of the return rates applied and of the applicable calculation assumptions, including in particular the corresponding margins;
  • comparing the estimated return rates with the corresponding historical rates;
  • testing the consistency of the flows of sales and returns retained for calculation purposes;
  • verifying the arithmetical accuracy of the statistical method applied;
  • identifying any specific factors resulting in manual adjustments.

FIRST-TIME APPLICATION OF IFRS 16 “LEASES”

Risk identified
IFRS 16, applied as of 1 January 2019, modifies the accounting treatment of leases: on inception of a lease, a liability is recognised in the balance sheet, corresponding to the discounted present value of the fixed portion of future lease payments, against a right-of-use asset depreciated over the lease term.
The Group’s main leases correspond to concession agreements in transport hubs and, to a lesser extent, property. The Group applies IFRS using the “full retrospective” transition method; details on the first-time application of the standard are provided in notes 1.1 and 3.9 to the consolidated financial statements.
As of 1 January 2019, the first-time application of IFRS 16 led to the recognition of:

  • right-of-use assets with a carrying amount of €2,552 million within non-current assets, including €2,009 million relating to concession agreements;
  • lease liabilities totalling €2,741 million, including €2,283 million in non-current liabilities.

We consider the first-time application of IFRS 16 “Leases” to be a key audit matter, given the large number of leases and the material value of right-of-use assets and lease liabilities in the Group’s consolidated financial statements, especially at Lagardère Travel Retail.

Our response
Our audit procedures involved in particular:

  • comparing the compliance of accounting principles with IFRS 16 “Leases”;
  • familiarising ourselves with process and key controls implemented by management to ensure the completeness of leases;
  • testing the effectiveness of key information systems controls in verifying the accurate calculation of lease liabilities, right‑of‑use assets, depreciation and interest charges as measured and recognised by the Group;
  • performing test of details on data entered in the information systems relating to leases;
  • reviewing the assumptions made and analysing the methods used by management to determine the discount rates used to calculate lease liabilities;
  • assessing the appropriateness of the financial disclosures regarding the first-time application of the standard in notes 1.1 and 3.9 to the consolidated financial statements.

SPECIFIC VERIFICATIONS
We have also performed, in accordance with professional standards applicable in France, the specific verifications required by laws and regulations of the Group’s information in the management report of the Managing Partners.
We have no matters to report as to their fair presentation and their consistency with the consolidated financial statements. We attest that the consolidated non-financial statement required by article L. 225-102-1 of the French Commercial Code (Code de commerce) is included in the management report of the Managing Partners, it being specified that, in accordance with article L. 823-10 of said Code, we have verified neither the fair presentation nor the consistency with the consolidated financial statements of the information contained therein. This information is reported on by an independent third party.

REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS

APPOINTMENT OF THE STATUTORY AUDITORS
We were appointed as Statutory Auditors of Lagardère SCA by the General Meeting held on 20 June 1996 for MAZARS and on 29 June 1987 for ERNST & YOUNG et Autres.
As at 31 December 2019, MAZARS and ERNST & YOUNG et Autres were in the 24th year and 33rd year of total uninterrupted engagement, respectively..

RESPONSIBILITIES OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE FOR THE CONSOLIDATED FINANCIAL STATEMENTS
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and for such internal control as management 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, management is responsible for assessing the Company’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 it is expected to liquidate the Company or to cease operations. The Audit Committee is responsible for monitoring the financial reporting process and the effectiveness of internal control and risk management systems, and where applicable, any internal audit systems, relating to accounting and financial reporting procedures. The consolidated financial statements were approved by the Managing Partners.

STATUTORY AUDITORS’ RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS

OBJECTIVE AND AUDIT APPROACH
Our role is to issue a report on the consolidated financial statements. Our objective is to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with professional standards 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 specified in article L. 823-10-1 of the French Commercial Code (Code de commerce), our audit does not include assurance on the viability of the Company or the quality of management of the affairs of the Company.
As part of an audit conducted in accordance with professional standards applicable in France, the Statutory Auditor exercises professional judgement throughout the audit and furthermore:

  • identifies and assesses the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, designs and performs audit procedures responsive to those risks, and obtains audit evidence considered to be sufficient and appropriate to provide a basis for his 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;
  • obtains 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 internal control;
  • evaluates the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management in the consolidated financial statements;
  • assesses the appropriateness of management’s 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 Company’s ability to continue as a going concern. This assessment is based on the audit evidence obtained up to the date of this audit report. However, future events or conditions may cause the Company to cease to continue as a going concern. If the Statutory Auditor concludes that a material uncertainty exists, there is a requirement to draw attention in the audit report to the related disclosures in the consolidated financial statements or, if such disclosures are not provided or inadequate, to modify the opinion expressed therein;
  • evaluates the overall presentation of the consolidated financial statements and assesses whether these statements represent the underlying transactions and events in a manner that achieves fair presentation;
  • obtains 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. The Statutory Auditor is responsible for the direction, supervision and performance of the audit of the consolidated financial statements and for the opinion expressed on these consolidated financial statements.

REPORT TO THE AUDIT COMMITTEE
We submit a report to the Audit Committee which includes in particular a description of the scope of the audit and the audit program implemented, as well as the results of our audit. We also report, if any, significant deficiencies in internal control regarding the accounting and financial reporting procedures that we have identified.
Our report to the Audit Committee includes the risks of material misstatement that, in our professional judgement, were of most significance in the audit of the consolidated financial statements and which are therefore the key audit matters that we are required to describe in this report.
We also provide the Audit Committee with the declaration provided for in Article 6 of Regulation (EU) no. 537/2014, confirming our independence within the meaning of the rules applicable in France such as they are set in particular by articles L. 822-10 to L. 822-14 of the French Commercial Code (Code de commerce) and in the French Code of Ethics (Code de déontologie) for Statutory Auditors. Where appropriate, we discuss with the Audit Committee the risks that may reasonably be thought to bear on our independence, and the related safeguards.

French original signed in Courbevoie and Paris-La Défense,
17 March 2020
The Statutory Auditors

MAZARS
Thierry BLANCHETIER

ERNST & YOUNG et Autres
Bruno BIZET