UK の主要小売企業の監査報告書に記載されている KAM
会社名
連結売上高
監査人
1

【2017/2018 年の年次報告書から】

KAM の
個数

KAM の項目
固定資産の減損

仕入業者からのリベート等

その他の資
産の評価

年金負債の
評価

引当金
偶発債務

収益認識

７

①

②

③

④

⑤

£38.7bn

店舗の固定

リベート等の認

棚卸資産の

確定給付年

（5.6 兆円）

資産の減損

識

評価

金の負債の

Tesco

Deloittea.監査人の見解等の記載
b KAM の前年からの
変化の説明

IT 環境

その他

⑥

➆

‐

偶発債務

損益計算書

小売業の ITb 新しく KAM に加えた(訴訟関連)の表示（営

環境（IT セ

項目はない旨記載

業利益の操

キュリティを

作の可能

含む）

評価

a あり

性）
2

Sainsbury s

５

‐

①

‐

‐

➂

②

➄

➃

a あり

£27.9bn

仕入業者との

金融サービ

売上調整の

IT 環境（IT

当期買収しb あり（昨年買収した（4 兆円）

契約

スの顧客に

マニュアル

システムが

た Nectar

会社の会計処理を

対する債権

仕訳、内部

複雑で、イ

の会計処理

削除し、当期買収し

の評価

統制の無効

ンテグレショ

た会社の会計処理

化リスク

ンのレベル

を加えた）。

EY

が様々）
３

Wm

６

①

➂

➃

➅

Morrison

所有店舗資仕入リベート等

ソフトウエア

確定給付年£17.3bn

産の減損

及び販促活動

等の無形資

金の会計

への賛助

の評価

（2.5 兆円）

‐

PwC
➁

⑤

リース資産

棚卸資産の

(店舗)の評価

評価

等
1

‐

‐

‐

a あり
b なし

４

５

会社名
連結売上高
監査人

KAM の
個数

KAM の項目
固定資産の減損

仕入業者からのリベート等

その他の資
産の評価

年金負債の
評価

引当金
偶発債務

収益認識

John Lewis

５

➀

‐

➃

➁

➂

‐

£10.2bn

有形固定資（今年は認識し

無形資産

確定給付年

（1.5 兆円）

産の評価ない旨の記載（ソフトウエ金負債

KPMG（Waitrose(ス

あり）

ア）の評価

Marks &

IT 環境

その他

‐

➄

a.

あり

４つの引当

親会社の単

b.

あり

金（長期休

体 FS の監

暇、サービ

査における

ーパー事業)

ス保証、返KAM−子会

の減損リス

品、最低賃

社投資の評

ク）

金）

価

➂

‐

➃

➄

➁

➅

Spencer

UK 店舗資産（今年は認識し

棚卸資産

確定給付年

店舗合理化

£9.6bnの減損ない旨の記載

（衣料品及

金負債

あり）

（1.4 兆円）
Deloitte

６a.監査人の見解等の記載
b KAM の前年からの
変化の説明

➀

a. あり

(ギフトカー

調整後利益

b. あり

プログラム

ド、返品な

（NON-

び家庭用

（閉鎖、縮

ど)売上調整GAAP 指

品）の評価

小、移転な

のためのマ

標）

ど）の会計

ニュアル仕

処理

訳

￡１＝145 円で換算
注） KAM に振られた番号は監査報告書における記載の順番を表す。

2‐

その他の国の主要小売企業の監査報告書に記載されている KAM

6

７

8

国名
会社名
連結売上高
監査人

KAM の
個数

KAM の項目
固定資産の
減損

仕入業者か
らのリベート
等

その他の資
産の評価

年金負債の
評価

引当金
偶発債務

収益認識

フランス
Carrefour€79 bn（9.9 兆円）
Deloitte
KPMG
MAZARS
オランダ
Ahold
Delhazie€63 bn（7.9 兆円）
PwC

３

‐

①

➂

‐

②

‐

リベート等

イタリア及び
ポーランド
の暖簾の評
価

オーストラリア
Wesfarmers
A$ 67bn.
（5.2 兆円）
EY

４

の認識

‐

３

➁

①

仕入業者か のれん
（Delhaize
らのリベート
関連）の評
等の認識
価

➀
Target に関する無形資産を含む、固
定資産の減
損

➁

‐

IT 環境

その他

‐

‐

ブラジル子
会社の税金
引当及び偶
発債務

➂

‐

‐

‐

‐

Curragh の廃止事業➃

らのリベート

英国及びア
イルランドのBunnings の廃止事業€１＝125 円、A＄1＝78 円で換算
注） KAM に振られた番号は監査報告書における記載の順番を表す。
3

a.あり
b.あり（2016 年に合併した Delhaize の会計処理については削除
し、代わりにのれんの評価を追加した。また、
店舗資産の減損についても、2017 年は重要なトリガーイベントがなかったため削除した。）

➂

仕入業者か

a なし
b なし

従業員向け
確定給付年
金にかかわ
る測定と注
記

‐

a.監査人の見解等の記
載b KAM の前年からの
変化の説明

‐

‐

‐

a なし
b なし

KAM の経年比較−TESCO Plc.

2016・2 期➀店舗の固定資産の減損
Store impairment review

2017・2 期➀店舗の固定資産の減損 ⇔Store impairment review

2018・2 期➀店舗の固定資産の減損
Store impairment review➁リベート等の認識
Recognition of commercial income➁リベート等の認識 ⇔Recognition of commercial income➁リベート等の認識
Recognition of commercial income➂棚卸資産の評価及び引当Inventory valuation and provisions➂確定給付年金の負債の評価 ⇔Pension obligation valuation➂棚卸資産の評価
Inventory valuation➃確定給付年金の負債の評価及び年金制度の縮小
Pension obligation valuation and accounting for thepension curtailment➄Tesco 銀行の引当（貸倒引当、保険請求に対する積
立て等）
Provisions and reserves in Tesco Bank
➅法令遵守
Compliance with laws and regulations➃偶発債務(訴訟関連) ⇔Contingent liabilities➃確定給付年金の負債の評価
Pension obligation valuation➄棚卸資産の評価 ⇔Inventory valuation➄偶発債務(訴訟関連)
Contingent liabilities➆経営者による内部統制の無効化
Management override of controls➆Tesco 銀行の不正なカード支払い ↑Tesco Bank payment fraud➇小売業の IT 環境（IT セキュリティを含む）
Retail technology environment , including IT security➇小売業の IT 環境（IT セキュリティを含む）⇔
Retail technology environment , including IT security

KAM の前年度からの変化についての説明
Last year the previous auditor’s report included twoother risks which are not included in our report thisyear: commercial income– impact on prior periods(there have been no such adjustment recognised in
the current period) and impairment of investments inassociated undertakings (following the impairment
recognized in the prior period, we do not believe that
this risk requires separate identification).
There are two new risks which have been detailed
above in the current year: pension obligation
valuation and accounting for the pension curtailment(following the closure of the Group’s UK defined
benefit scheme to future accrual during the year)
and IT environment, including IT security (in light of
the identified weaknesses in relation to user accessand change management controls).

➅経営者による内部統制の無効化
Management override of controls⇔➅損益計算書の表示（営業利益の操作の可能性）
Presentation of the Group s income statement➆小売業の IT 環境（IT セキュリティを含む）
Retail technology environment , including IT security-

Within this report, any new risks are identified with ↑and any risks which are the same as the prior year,
updated where required, are identified with ⇔.

No new key audit matters have been included in thisreport compared to the prior year report. Key audit
matters have been updated for the current year whererequired.

Significant changes in our approach

Significant changes in our approach

In our 2016/17 report the following changes to the risks
identified have been made compared to our 2015/16
report:- we have included a new risk relating to the Bank’s
November 2016 external payment fraud;- provisions and reserves relating to the Bank are
identified as a significant risk for the audit, however it
has not required the same level of focus as thosematters included in our report and therefore we nolonger report on this risk here

In our 2017/18 report the following change to the key
audit matters identified has been made, comparedwith our 2016/17 report:
the Tesco Bank payment fraud is no longer
considered to be a key audit matter following ourconclusion in 2016/17 that the Group had
appropriately accounted for liabilities associatedwith the incident

42016・2 期

2017・2 期

2018・2 期- we continue to report on the pension obligation
valuation risk, however accounting for the pension
curtailment was only applicable to 2015/16;- the inventory valuation risk has been revised anddoes not include the capitalisation of directly
attributable costs due to the reduced level ofjudgement exercised by management; and- the risk relating to compliance with laws andregulations has been refined to only relate tocontingent liabilities since this is where the key risk
lies.

5

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Tesco PLC Annual Report and Financial Statements 2018

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Financial Statements

J Sainsbury plc Annual Report 201889

Conclusions relating to principal risks, going concern andviability statement
We have nothing to report in respect of the following information in the
Annual Report, in relation to which the ISAs(UK) require us to report to you
whether we have anything material to add or draw attention to:— the Group financial statements have been properly prepared inaccordance with IFRSs as adopted by the European Union;— the disclosures in the Annual Report set out on page 30 that describe theprincipal risks and explain how they are being managed or mitigated;— the parent company financial statements have been properly preparedin accordance with United Kingdom Generally Accepted Accounting
Practice; and— the Directors’ confirmation set out on page 62 in the Annual Report thatthey have carried out a robust assessment of the principal risks facing
the entity, including those that would threaten its business model,
future performance, solvency or liquidity;— the financial statements have been prepared in accordance with therequirements of the Companies Act 2006, and, as regards the Groupfinancial statements, Article 4 of the IAS Regulation.
We have audited J Sainsbury plc’s financial statements for the 52 weeks
ended 10 March 2018 which comprise:Group

Parent company

Consolidated income statement

Balance sheet

Consolidated statement ofcomprehensive income

Statement of changes in equity

Consolidated balance sheet

Related notes 1 to 11 to the financial
statements

Consolidated cash flow statement
Consolidated statement of changes
in equity

The financial reporting framework that has been applied in the preparationof the Group financial statements is applicable law and International
Financial Reporting Standards (IFRSs) as adopted by the European Union.
The financial reporting framework that has been applied in the preparationof the parent company financial statements is applicable law and United
Kingdom Accounting Standards, including FRS 101 “Reduced Disclosure
Framework”(United Kingdom Generally Accepted Accounting Practice).

Basis for opinion
We conducted our audit in accordance with International Standards on
Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities underthose standards are further described in the Auditor’s responsibilities forthe audit of the financial statements section of our report below. We are
independent of the Group and parent company in accordance with the ethicalrequirements that are relevant to our audit of the financial statements in theUK, including the FRC’s Ethical Standard as applied to listed public interest
entities, and we have fulfilled our other ethical responsibilities in accordancewith these requirements.
We believe that the audit evidence we have obtained is sufficient andappropriate to provide a basis for our opinion.
Use of our report
This report is made solely to the Company’s members, as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit
work has been undertaken so that we might state to the Company’s members
those matters we are required to state to them in an auditor’s report and forno other purpose. To the fullest extent permitted by law, we do not accept orassume responsibility to anyone other than the Company and the Company’s
members as a body, for our audit work, for this report, or for the opinions wehave formed.

— whether the Directors’ statement in relation to going concern required
under the Listing Rules in accordance with Listing Rule 9.8.6R(3) ismaterially inconsistent with our knowledge obtained in the audit; or— the Directors’ explanation set out on page 35 in the Annual Report asto how they have assessed the prospects of the entity, over what period
they have done so and why they consider that period to be appropriate,
and their statement as to whether they have a reasonable expectationthat the entity will be able to continue in operation and meet its liabilities
as they fall due over the period of their assessment, including any
related disclosures drawing attention to any necessary qualifications
or assumptions.

Overview of our audit approach
Key audit matters— Supplier arrangements— Aspects of revenue recognition— Financial Services customer receivables impairment— Nectar acquisition— IT environment
Audit scope— We performed a full scope audit of the complete financial
information of the following components: J Sainsbury plc,
Sainsbury’s Supermarkets, Argos and Sainsbury’s Bank. We
performed audit procedures on specific balances including for
Argos Financial Services, Nectar, the property companies, material
joint ventures and the insurance company due to the size and riskof certain individual balances within these components.
— The components where we performed full or specific audit
procedures accounted for 92 per cent of Profit before tax
before one off items, 99 per cent of Revenue and 96 per centof Total assets.
Materiality— Overall Group materiality is £30.8 million which represents
five per cent of profit before tax and before non-recurring
Argos integration costs, Sainsbury’s Bank transition costs andrestructuring costs. A reconciliation is provided below.

Financial Statements

Related notes 1 to 38 to the financial
statements including a summary ofsignificant accounting policies— the Directors’ statement set out on page 35 in the Annual Report about
whether they considered it appropriate to adopt the going concern basisof accounting in preparing them, and their identification of any material
uncertainties to the entity’s ability to continue to do so over a period ofat least 12 months from the date of approval of the financial statements

Governance Report— J Sainsbury plc’s consolidated financial statements and parent company
financial statements (the “financial statements”) give a true and fairview of the state of the Group’s and of the parent company’s affairs as
at 10 March 2018 and of the Group’s profit for the year then ended;

In our opinion:

Strategic Report

Independent auditor’s reportto the members of J Sainsbury plc

90

Financial Statements
Independent auditor’s report to the membersof J Sainsbury plc continued

J Sainsbury plc Annual Report 2018

Key audit matters

Risk

Key audit matters are those matters that, in our professional judgement,
were of most significance in our audit of the financial statements of thecurrent period and include the most significant assessed risks of material
misstatement (whether or not due to fraud) that we identified. These matters
included those which had the greatest effect on: the overall audit strategy,
the allocation of resources in the audit; and directing the efforts of theengagement team. These matters were addressed in the context of ouraudit of the financial statements as a whole, and in our opinion thereon,
and we do not provide a separate opinion on these matters.

Aspects of revenue recognition
Refer to the Audit Committee Report (page 61); Accounting policies(page 109); and note 4 of the Consolidated Financial Statements (page 106)

Changes from the prior year
The Group acquired three UK entities and the remaining share of the
Insight 2 Communication LLP joint venture from Aimia Inc. (referred toas the “Nectar acquisition”). We have reflected this in our risk assessment,
the results of which are below. We have designated the significant Nectarbalances as specific scope. We have included the Nectar acquisition as a
key audit matter.
In the prior year because of the acquisition of HRG in that year we included“HRG acquisition purchase price allocation” as a key audit matter. We haveremoved this risk for this year.

Risk
Supplier arrangements
Refer to Accounting policies (page 103); and note 2 of the Consolidated
Financial Statements (page 103)

Our assessment is that the vast majority of the Group’s revenue transactions
are non-complex, with no judgement applied over the amount recorded.
We focused our work on the manual adjustments that are made to revenue.
Our procedures were designed to address the risk of manipulation of
accounting records and the ability to override controls.
Our response to the risk
— We obtained a detailed understanding of these manual adjustments.
Due to the manual nature of these adjustments, we performed
substantive audit procedures.
— We used our computer-aided analytics tools to identify those revenue
journals for which the corresponding entry was not cash. These entries
include Nectar points, coupons, vouchers and commission arrangements.
— We obtained corroborating evidence for such corresponding entries.
For the Nectar points adjustment we obtained evidence from theadministrator of the scheme. For third party coupons and vouchers
we obtained evidence of collection and settlement.
— Using data extracted from the accounting system, we tested theappropriateness of journal entries impacting revenue, as well as otheradjustments made in the preparation of the financial statements. We
considered unusual journals such as those posted outside of expected
hours, or by unexpected individuals and, for large or unusual amounts.

The Group receives material discounts from suppliers, referred to as supplierarrangements. The accounting for some of these supplier arrangements iscomplex since management applies judgement, processing is either manualor more complex and the quantum of agreements is high. We focused our
audit procedures on these complex supplier arrangements.

Key observations communicated to the Audit Committee
Adjustments to revenue have been appropriately recognised.

Complex supplier arrangements recognised in the income statement for thefinancial year are £450 million (2016/17: £343 million).

Financial Services customer receivables impairment
Refer to the Audit Committee Report (page 61); Accounting policies note 15b;and note 15c of the Consolidated Financial Statements (page 122)

Our response to the risk
— We walked through the controls in place within the supplier arrangements
process. We were able to take a controls-reliance approach over certain
aspects of the process, testing the key controls, although there are areas
where we cannot as the process for recording deals is manual.

Financial Services customer receivables relate to Sainsbury’s Bank credit
cards, loans and mortgages; and Argos store cards. Total amounts recognised
at year end are £5,692 million (2016/17: £4,602 million). The provision for
impairment is £132 million (2016/17: £89 million).

— We selected a sample of suppliers to whom we sent confirmations acrossall “deal” types to confirm key deal input terms. Where we did not receivea response from the supplier, we performed alternative procedures,
including obtaining evidence of initiation and where possible settlementof the arrangement.

The risk of collectability of Financial Services customer receivables, througheither credit cards, loans, mortgages or Argos store cards is significant.
There is judgement in the assumptions applied to calculate the loan provisions
against outstanding balances.

— We tested the existence and valuation of balance sheet amounts
recognised in accounts receivable and as a contra-asset in accounts
payable by reviewing post-period end settlement. We also performeda ‘look-back’ analysis of prior period balance sheet amounts to checkthat these amounts were appropriately recovered.

Our response to the risk
— The loan impairment methodology was reviewed, to confirm it wasconsistent with both the IFRS requirements and that previously applied.

— We tested the settlement of a sample of supplier arrangements
recognised in the income statement, which included settlement in cash
or by off-set to accounts payable.

— Key assumptions including the probability of default and the size ofthe loss if default occurred were assessed against internal and external
evidence. The key assumptions within the models were comparedto knowledge of assumptions used and also with internal historical
trends, concluding that, based on the evidence obtained, management’s
conclusions were supportable.

— Using data extracted from the accounting system, we tested theappropriateness of journal entries and other adjustments to supplierarrangements to corroborating evidence.
— We tested deals recorded post period end and obtained the supplier
agreement to validate that the deal was correctly recorded post
period end.
— We read management’s disclosure in respect of supplier arrangements
amounts recorded in the income statement and balance sheet to confirm
completeness and accuracy of amounts disclosed.
Key observations communicated to the Audit Committee
Supplier arrangement amounts are appropriately recognised in the income
statement and balance sheet and the disclosure in the financial statements
is appropriate.

Risk— The completeness and accuracy of the data from underlying systems
that were used in the impairment models were tested.

— Changes to the modelling assumptions were assessed to confirm thesewere appropriate and in line with accounting standards.
— The accuracy of prior year impairment reserves was considered to assess
the quality of management’s estimation process.
Key observations communicated to the Audit Committee
The provision for impairment of Financial Services receivables due from
customers is appropriately recognised.

J Sainsbury plc Annual Report 2018

Risk

An overview of the scope of our audit

Nectar acquisition
Refer to the Audit Committee Report (page 61); Accounting policies(page 109); and note 2e of the Consolidated Financial Statements (page 103)

Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocationof performance materiality determine our audit scope for each entity
within the Group. Taken together, this enables us to form an opinion on the
consolidated financial statements. We take into account size, risk profile, theorganisation of the Group and effectiveness of Group-wide controls, changes
in the business environment and other factors such as recent Internal Audit
results when assessing the level of work to be performed at each entity.

The Group acquired Nectar during the year. The provisional businesscombination fair values are outlined in note 31 to the financial statements.
We focused our audit effort on the IFRIC 13 accounting treatment for theloyalty points and the acquisition accounting of the acquired companies,
with a particular focus on the valuation of the Nectar points liability,
including the breakage assumption.
Our response to the risk
— We walked through the controls in place within the purchase priceaccounting process including specifically around the fair valueof acquired assets and liabilities and the estimates applied in therecognised intangibles.

— We corroborated management’s estimate on the breakage assumption
and understood how management arrived at a reasonable range.
— We understood the underlying accounting model IFRIC 13, and verified
its application to the Nectar points accounting.
Key observations communicated to the Audit Committee
The Nectar acquisition has been appropriately recognised.

Risk
The IT environment
The IT systems across the Group are complex and there are varying levels
of integration between them. The systems are vital to the ongoing operationsof the business and to the integrity of the financial reporting process.
For Sainsbury’s Bank the key system relating to the customer loan receivable
impairment as described above, is provided by an external party.

— We assessed the IT general controls environment for the key systems
impacting the accurate recording of transactions and the presentationof the financial statements.
— We designed our IT audit procedures to assess the IT environment,
including an assessment of controls over changes made to the systemand controls over appropriate access to the systems.
— Where we found that adequate IT general controls were not in place,
we performed additional substantive testing to mitigate the risk ofmaterial misstatement.
— For Sainsbury’s Bank we received a report from the auditors on thegeneral control environment of the outsourced systems and followed
up on matters arising, performing further procedures as necessary.
Key observations communicated to the Audit Committee
We have not identified any misstatements in the financial statements
due to the limitations of the IT environment.

For other entities including Argos Financial Services, Nectar, the property
companies, material joint ventures and insurance components weperformed audit procedures on specific accounts which we considered
had the potential for the greatest impact on the significant accounts inthe financial statements either because of the size of these accounts ortheir risk profile.
The audit scope of these components may not have included testing of
all significant accounts of the component but will have contributed to thecoverage of significant accounts tested for the Group.
Of the remaining balances, none are individually greater than five per centof the Group’s profit before tax excluding one off items. For these accounts,
we performed other procedures, including analytical review, testing of
consolidation journals and intercompany eliminations, to respond to any
potential risks of material misstatement to the Group financial statements.
Involvement with component teams
In establishing our overall approach to the Group audit, we determined thetype of work that needed to be undertaken at each of the components by
us, as the primary audit engagement team, or by component auditors fromother EY network firms operating under our instruction. Of the full scope
components, audit procedures were performed on the head office company,
J Sainsbury plc, Sainsbury’s and Argos trading entities and consolidationof the Group by the primary team. The work at the specific scope locations
was performed by EY components in Edinburgh, the Isle of Man and theprimary team.
For the Sainsbury’s Bank full scope component this was our first year asauditor. During the current period’s audit cycle, the Senior Statutory Auditor
visited Sainsbury’s Bank and held discussions with management. The teamdiscussed the audit approach with the component team and significant
issues arising from their work, reviewing key audit working papers on risk
areas. The closing discussion was attended by the primary team. This,
together with the additional procedures performed at Group level, gave
us appropriate evidence for our opinion on the Group financial statements.

Financial Statements

Our response to the risk
— We held discussions with management to understand the IT environment
and walked through the key financial processes to understand where
IT systems were integral to the Group’s controls over financial reporting.
From this we identified which IT systems to include in the scope for our
detailed IT testing.

In assessing the risk of material misstatement to the Group financial
statements, and to ensure we had adequate quantitative coverage ofsignificant accounts of the components of the Group in the Group financial
statements, we selected the head office company J Sainsbury plc,
Sainsbury’s Supermarkets, Argos and Sainsbury’s Bank components toperform full scope procedures. These represent the principal business
units within the Group based on their size and risk characteristics.
Governance Report— We understood management’s processes and controls surrounding
the Nectar points liability and verified the inputs to the calculation.

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J Sainsbury plc Annual Report 2018

Our application of materiality

Other information

We apply the concept of materiality in planning and performing the audit,in evaluating the effect of identified misstatements on the audit and informing our audit opinion.

The other information comprises the information included in the Annual
Report as set out on pages 1 to 86 other than the financial statements
and our auditor’s report thereon. The Directors are responsible for theother information.

Materiality
The magnitude of an omission or misstatement that, individually or in
the aggregate, could reasonably be expected to influence the economic
decisions of the users of the financial statements. Materiality provides
a basis for determining the nature and extent of our audit procedures.
We determined materiality for the Group to be £30.8 million, which isfive per cent of profit before tax excluding the items described below.
We believe that this materiality basis provides us with the best assessmentof the requirements of the users of the financial statements. This isconsistent with the approach taken in the prior period.
Starting basis Profit before tax£409m

Adjustments£85m

Materiality

Argos related non-underlying costs

Our opinion on the financial statements does not cover the other information
and, except to the extent otherwise explicitly stated in this report, we do not
express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility
is to read the other information and, in doing so, consider whether the otherinformation is materially inconsistent with the financial statements or our
knowledge obtained in the audit or otherwise appears to be materially
misstated. If we identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a material
misstatement in the financial statements or a material misstatement of theother information. If, based on the work we have performed, we conclude that
there is a material misstatement of the other information, we are required toreport that fact.

Sainsbury’s Bank transition costs£38m

Restructuring costs£85m

We have nothing to report in this regard.

Total

£208m

Profit before tax and adjustments£617m

In this context, we also have nothing to report in regard to our responsibility
to specifically address the following items in the other information and toreport as uncorrected material misstatements of the other information where
we conclude that those items meet the following conditions:

Materiality of £30.8 million (five per cent of profit before
tax and after making the adjustments noted above).

We determined materiality for the Parent Company to be £155 million(2016/17: £145 million), which is two per cent (2016/17: two per cent) of net assets.
The materiality of the parent company is greater than the Group because
the Parent Company is a holding Company with significant net assets.
Performance materiality
The application of materiality at the individual account or balance level.
It is set at an amount to reduce to an appropriately low level the probability
that the aggregate of uncorrected and undetected misstatements
exceeds materiality.
On the basis of our risk assessments, together with our assessment of theGroup’s overall control environment, our judgement was that performancemateriality was approximately 75 per cent (2016/17: 75 per cent) of ourplanning materiality, namely £23 million (2016/17: £25 million). We have set
performance materiality at this percentage due to our assessment that therisk of material misstatement is not high.
Audit work at component locations for the purpose of obtaining audit
coverage over significant financial statement accounts is undertaken
based on a percentage of total performance materiality. The performancemateriality set for each component is based on the relative scale and riskof the component to the Group as a whole and our assessment of therisk of misstatement at that component. In the current year, the rangeof performance materiality allocated to components was £4 million to£17 million (2016/17: £5 million to £19 million).
Reporting threshold
An amount below which identified misstatements are considered as
being clearly trivial.
We agreed with the Audit Committee that we would report to them all
uncorrected audit differences in excess of £1.5 million (2016/17: £1.7 million),
which is set at five per cent of planning materiality, as well as differences belowthat threshold that, in our view, warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative
measures of materiality discussed above and in light of other relevant
qualitative considerations in forming our opinion.

— Fair, balanced and understandable set out on page 88 – the statement
given by the Directors that they consider the Annual Report and Financial
Statements taken as a whole is fair, balanced and understandable andprovides the information necessary for shareholders to assess the Group’s
performance, business model and strategy, is materially inconsistent with
our knowledge obtained in the audit; or— Audit Committee reporting set out on page 56 – the section describing
the work of the Audit Committee does not appropriately address matterscommunicated by us to the Audit Committee; or— Directors’ statement of compliance with the UK Corporate Governance
Code set out on page 47 – the parts of the Directors’ statement required
under the Listing Rules relating to the Company’s compliance with the
UK Corporate Governance Code containing provisions specified for review
by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly
disclose a departure from a relevant provision of the UK Corporate
Governance Code.

Opinions on other matters prescribed by theCompanies Act 2006
In our opinion, the part of the Directors’ Remuneration Report to be audited
has been properly prepared in accordance with the Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:— the information given in the Strategic Report and the Directors’ Reportfor the financial year for which the financial statements are preparedis consistent with the financial statements; and— the Strategic Report and the Directors’ Report have been preparedin accordance with applicable legal requirements.

J Sainsbury plc Annual Report 2018

Matters on which we are required to reportby exception

We understood how J Sainsbury plc is complying with those frameworks
by observing the oversight of those charged with governance, the cultureof honesty and ethical behaviour and a strong emphasis placed on fraud
prevention, which may reduce opportunities for fraud to take place, andfraud deterrence, which could persuade individuals not to commit fraud
because of the likelihood of detection and punishment.

In the light of the knowledge and understanding of the Group and theparent company and its environment obtained in the course of the audit,
we have not identified material misstatements in the Strategic Report or
the Directors’ Report.
We have nothing to report in respect of the following matters in relation towhich the Companies Act 2006 requires us to report to you if, in our opinion:— adequate accounting records have not been kept by the parent company,or returns adequate for our audit have not been received from branches
not visited by us; or— the parent company financial statements and the part of the Directors’
Remuneration Report to be audited are not in agreement with theaccounting records and returns; or— certain disclosures of Directors’ remuneration specified by law are notmade; orResponsibilities of Directors
As explained more fully in the Directors’ responsibilities statement set out
on page 88, the Directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view,and for such internal control as the Directors determine is necessary toenable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible forassessing the Group and parent company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern andusing the going concern basis of accounting unless the Directors either
intend to liquidate the Group or the parent company or to cease operations,or have no realistic alternative but to do so.

Explanation as to what extent the audit was considered capableof detecting irregularities, including fraud
The objectives of our audit, in respect to fraud, are; to identify and assess
the risks of material misstatement of the financial statements due to fraud;
to obtain sufficient appropriate audit evidence regarding the assessed risks
of material misstatement due to fraud, through designing and implementing
appropriate responses; and to respond appropriately to fraud or suspectedfraud identified during the audit. However, the primary responsibility forthe prevention and detection of fraud rests with both those charged withgovernance of the entity and management.
Our approach was as follows:
We obtained an understanding of the legal and regulatory frameworks thatare applicable to the Group and determined that the most significant are:— those that relate to the form and content of the financial statements,
such as the Group accounting policy, International Financial ReportingStandards as adopted by the EU (IFRS), the UK Companies Act 2006 andthe UK Corporate Governance Code;— those that relate to the payment of employees; and— industry related such as compliance with the requirements of the Grocery
Supply Code of Practice.

Based on this understanding we designed our audit procedures to identify
non-compliance with such laws and regulations. Where the risk wasconsidered to be higher, we performed audit procedures to address eachidentified fraud risk. These procedures included testing manual journals
and were designed to provide reasonable assurance that the financial
statements were free of fraud or error. We evaluated the design andoperational effectiveness of controls put in place to address the risks
identified, or that otherwise prevent, deter and detect fraud. We also
considered performance targets and their influence on efforts made bymanagement to manage earnings.
A further description of our responsibilities for the audit of the financial
statements is located on the Financial Reporting Council’s website athttps://www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditor’s report.

Other matters we are required to address— Following the recommendation of the Audit Committee we wereappointed by the Company at its Annual General Meeting on 8 July 2015.
We have been the statutory auditor since that date.
— The non-audit services prohibited by the FRC’s Ethical Standard were notprovided to the Group or the parent company and we remain independentof the Group and the parent company in conducting the audit.
— The audit opinion is consistent with the Financial Statements.

Nigel Jones(Senior statutory auditor)
For and on behalf of Ernst & Young LLPStatutory Auditor
London1 May 2018

1 The maintenance and integrity of the J Sainsbury plc website is the responsibility of the
Directors; the work carried out by the auditors does not involve consideration of these mattersand, accordingly, the auditors accept no responsibility for any changes that may have occurred
to the financial statements since they were initially presented on the website.
2 Legislation in the United Kingdom governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.

Financial Statements

Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the 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 ISAs (UK) 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 takenon the basis of these financial statements.

We assessed the susceptibility of the Group’s financial statements to material
misstatement, including how fraud might occur by making an assessmentof the key fraud risks to the Group and the manner in which such risks may
manifest themselves in practice, based on our previous knowledge of theGroup as well as an assessment of the current business environment.

Governance Report— we have not received all the information and explanations we require
for our audit.

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Governance

Financial Statements

Investor information

Independent auditors’ report
Independent auditors’ report to the membersof Wm Morrison Supermarkets PLC

Report on the audit of the financial statements
OpinionIn our opinion,• Wm Morrison Supermarkets PLC’s Group financial statements and Company financial statements (the ‘financial statements’) give a true and fairview of the state of the Group’s and of the Company’s affairs as at 4 February 2018 and of the Group’s profit and cash flows for the 53 week
period (the ‘period’) then ended;• the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;• the Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice(United Kingdom Accounting Standards, comprising FRS 101 ‘Reduced Disclosure Framework’, and applicable law); and• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial
statements, Article 4 of the IAS Regulation.
We have audited the financial statements, included within the Annual Report and Financial Statements (the ‘Annual Report’), which comprise: theconsolidated balance sheet and Company balance sheet as at 4 February 2018; the consolidated statement of comprehensive income; the consolidated
cash flow statement; the consolidated statement of changes in equity; the Company statement of changes in equity for the 53 week period thenended; the general information; and the notes to the financial statements, which include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (‘ISAs (UK)’) and applicable law. Our responsibilities under ISAs (UK)are further described in the Auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence
we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence

We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in theUK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities inaccordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Groupor the Company.
Other than those disclosed in note 1.6 to the financial statements, we have provided no non-audit services to the Group or the Company in the period
from 30 January 2017 to 4 February 2018.
Our audit approach
Overview

Materiality

Materiality

Areas of focus• Overall Group materiality: £18.7m (2017: £16.9m), based
on 5% of underlying profit before tax.
• Overall Company materiality: £16.8m (2017: £16.0m), basedon the amount of component materiality allocatedto the Company as part of the Group audit.

• Impairment of property, plant andequipment (Group and Company).
• Onerous property contracts(Group and Company).
• Commercial income and manual
promotional funding (Groupand Company).
• Impairment of intangible assets(Group and Company).
• Stock valuation (Group and Company).
• Pension accounting(Group and Company).

Audit scope

Audit scope

Areas offocus

• We identified two reporting units, Wm Morrison
Supermarkets PLC and Safeway Stores Limited, whichin our view, required a full scope audit based on theirsize and risk. In addition, we determined that certain
account balances of a further four reporting units werein the scope of our Group audit to address specific risk
characteristics or to provide sufficient overall Group
coverage of particular financial statement line items.
• The Group engagement team performed the audit
procedures for each reporting unit in the scope of ourGroup audit, which accounted for 99% of total Grouprevenue and 84% of profit before tax. Our audit scope
provided sufficient appropriate audit evidence as a basis
for our opinion on the Group financial statements as
a whole.

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Independent auditors’ report continued
Independent auditors’ report to the membersof Wm Morrison Supermarkets PLC

The scope of our audit

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular,
we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates that involved making
assumptions and considering future events that are inherently uncertain.
We gained an understanding of the legal and regulatory framework applicable to the Group and the industry in which it operates, and considered
the risk of acts by the Group which were contrary to applicable laws and regulations, including fraud. We designed audit procedures at Group andsignificant component level to respond to the risk, recognising that the risk of not detecting a material misstatement due to fraud is higher than the riskof not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or
through collusion. We focused on laws and regulations that could give rise to a material misstatement in the Group and Company financial statements,
including, but not limited to, the Companies Act 2006, the Listing Rules, Pensions legislation and UK tax legislation. Our tests included, but were notlimited to, review of the financial statement disclosures to underlying supporting documentation, review of correspondence with, and reports to, theregulators, review of correspondence with legal advisers, enquiries of management and review of internal audit reports in so far as they related to thefinancial statements. There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws andregulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it.
We did not identify any key audit matters relating to irregularities, including fraud. As in all of our audits we also addressed the risk of management
override of internal controls, including testing journals and evaluating whether there was evidence of bias by the Directors that represented a riskof material misstatement due to fraud.
Key audit matters

Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statementsof the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors,
including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of theengagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our auditof the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not
a complete list of all risks identified by our audit.
Key audit matter

Impairment of property, plant and equipment
Refer to page 69 (sources of estimation uncertainty), note 3.1 (accounting policies)and note 3.3 (property, plant and equipment).
The Group has a large freehold store estate (£5,770m at 4 February 2018).
Given the challenging trading conditions in the UK grocery retail market in recent
years and the subsequent adverse impact on the market value of traditional
supermarket freehold stores, the possibility of impairment of these assets andthe related trading assets is an area of focus for management, as is the possibility
that previously charged impairments may need reversing where store trading
conditions have improved.
We focused on this area because of the judgemental factors involved in testingfor impairment and the significant carrying value of freehold property.
Management considers each store to be a cash generating unit (‘CGU’) and has
calculated the recoverable amount of each CGU as the higher of value in use
and fair value less costs of disposal.
Value in use
Value in use is based on discounted future cash flow forecasts, requiring
management to make judgements on certain key inputs including, for example,
discount rates and long-term growth rates.
Fair value less costs of disposal
Fair value less costs of disposal is estimated by management based on theirknowledge of individual stores, likely demand from grocers or other retailers in theevent those stores were for sale and also informed by a valuation performed bya third party valuer. The key judgements made by the Directors in this fair value
calculation relate to the estimated rental values and the yields of the stores.
Management has calculated that an impairment charge of £118m is required as
at 4 February 2018. A release of impairment charged in previous years of £126m
has also been calculated following an improvement in the performance of
certain stores.

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How our audit addressed the key audit matter
Value in use
We have obtained the Group’s approved budget (upon which forecasts
underlying the value in use calculations are based). Our audit procedures included
an assessment of management’s discounted cash flow models. We tested themathematical accuracy of the calculations derived from each forecast modeland assessed key inputs in the calculations, such as the discount rate of 9%,
by reference to management’s forecasts, industry reports and our valuation
experts. We focused on these key assumptions because small changes canhave a material impact on the value in use assessment and any resultant
impairment charge. We found, based on our audit work, that the key assumptions
used by management were supportable and appropriate in light of thecurrent environment.
Fair value less costs of disposal
Management has determined its own view of estimated rental values and yields
for each store used in their calculation of market values. Management derived
these assumptions having considered available information such as industry
data on market conditions, purchase offers recently received for properties andinformation from an independent third party valuer. We evaluated management’s
supporting information, and assessed this using our own internal experts, with aparticular focus on the assumptions and methodology used, obtaining third party
evidence and market data to corroborate the assumptions. We determined thatthe valuations performed by management were reasonable.
Disclosures
In addition, we evaluated the adequacy of the disclosures made in note 3.3 ofthe financial statements, including those regarding the key assumptions andsensitivities to changes in such assumptions by comparing the disclosures against
the requirements of IAS 36 ‘Impairment of assets’ and found them
to be consistent.

Strategic report

Governance

Key audit matter

Onerous lease provisions and onerous property contracts
Refer to page 69 (sources of estimation uncertainty), note 5.1 (accounting policies)and note 5.5 (provisions).
Onerous lease provisions
Accounting standards require management to assess the Group’s leaseholdproperties to identify where the expected future benefits from a property are lessthan the future lease commitments which would indicate that an onerous leaseprovision is required. Under IAS 37 ‘Provisions, contingent liabilities and contingent
assets’ such a provision is made for the unavoidable costs of the contract, definedin the standard as the ‘least net cost of exit’.

Financial Statements

Investor information

How our audit addressed the key audit matter
Onerous lease provisions
Having considered the possibility of impairment in the value of freehold properties(see above), we also tested management’s calculations in respect of leasehold
stores where the estimated future benefits are not expected to exceed the futurelease commitments, resulting in an onerous lease.
We obtained management’s onerous lease model, which includes all leased stores,
and tested the accuracy and completeness of key data by agreeing inputs suchas individual store cash flows. This helps provide an insight into store profitability.
We agreed lease expiry dates for a sample of stores to the original signed leaseagreements, noting no issues.

We focused on this area because of the judgements required to be made bymanagement in identifying those stores requiring an onerous lease provision andthe assumptions used in the models, such as the discount rate and those used indeveloping the associated cash flow forecasts. We also note that management
judgement is required to assess the level of provision for lease guarantees inrespect of convenience stores previously disposed of.

We obtained the Group’s approved budget (upon which forecasts are based)
and assessed the principles of the Group’s discounted cash flow model, noting
no exceptions. We tested the mathematical accuracy of the calculation derived
from each forecast model and assessed key inputs in the calculations such as
revenue growth and discount rate, by reference to management’s forecasts,
analyst reports and our own valuation experts, with no issues noted.

Onerous property contracts
The Group recognises a provision in respect of committed onerous property
contracts. For example, where management believes that no economic benefit
would result from developing sites, a provision is made. There are judgements
involved in determining the expected realisable value of these sites and associatedcontract exit costs, therefore this has been an area of focus during our audit.

We obtained management’s calculation of the required provision for former
convenience store leases which reverted back to the Group in a prior year.
We assessed the principles of the model and tested key inputs such as leasecommitment information and sub-let assumptions, with no issues noted.
Onerous property contracts
In respect of onerous property contracts, we obtained original contracts andmanagement’s calculations and considered the accuracy of these provisions byperforming recalculations and testing key inputs such as estimates of contract exit
costs, contractual payments due and by reviewing evidence of the status of any
negotiations with landlords. We considered the completeness of these provisions
by reviewing documentation in relation to these contracts. We found no issues
in this area.
Disclosures
We read the disclosures within the Annual Report in respect of onerous leaseprovisions and onerous property contracts, and, based on our work, determinedthat they are consistent with accounting standards.

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Key audit matter

Commercial income and manual promotional funding
Refer to page 69 (sources of estimation uncertainty), note 1.1 (accounting policies)and notes 1.6 (operating profit).
Commercial income
The Group has two categories of commercial income: marketing and advertisingfunding, and volume-based rebates on purchases.
Commercial income is recognised as a deduction from cost of sales and isearned over the period of the contractual agreements with individual suppliers,
as disclosed in the Group’s accounting policy on page 70. The total income
recognised in the income statement in a year is based on the expected entitlement
earned up to the balance sheet date under each supplier agreement. It requires
management to apply judgement based on the contractual terms in place witheach of its suppliers, together with estimates of amounts the Group is entitledto where transactions span the financial period end.
The relative level of judgement in each category of commercial income isconsidered below:
Commercial income – marketing and advertising funding
This income is varied with regards to the nature and timing of the activity to which
it relates, and is recognised in accordance with written agreements with suppliers.
This income is based on specific agreements, and its recognition requires limited
judgement or estimation by management in determining the amount that theGroup is entitled to. Our focus was on assessing whether a written agreement
for the marketing and advertising funding existed, whether the relevant marketingor advertising had taken place and whether the income recognised was recordedin the appropriate period.
Commercial income – volume-based rebates
Volume-based rebates are driven by the Group achieving purchase volume targets
set by individual suppliers for specific products over a predetermined period.
There is therefore judgement involved in estimating the volume of purchases,
particularly where rebate agreements span a financial period end. In order tonarrow this judgement, management endeavours to structure agreements tocoincide with the Group’s financial period end, thereby reducing or eliminating
the degree of estimation. In instances where the rebate agreement does not fully
coincide with the period end, the key judgement that we focused on was theestimate of commercial income to be accrued at the period end.
Promotional funding
The Group separately recognises promotional funding on promotions that are
partially funded by suppliers.
The majority of promotional funding is an automated deduction from costof sales, triggered when a sale is recognised. The funding is recognised when
the transaction occurs in accordance with the terms of supplier agreements.
The amount receivable is wholly based on sales volumes achieved, multipliedby rates agreed with each supplier in advance. There are some elements ofpromotional funding which include a manual element to the invoicing.
We focused on the manual elements of promotional funding because of thesignificance of the amounts to the Group’s gross profit, the significant numberof transactions and agreements in place with suppliers covering a range of periods,
the manual nature of the invoicing process and the industry-wide focus on thisarea of accounting.

How our audit addressed the key audit matter
Our audit work in respect of commercial income and the manual elements ofpromotional funding comprised a combination of controls testing, substantive
testing of a sample of income and funding recognised during the period,
testing of amounts recognised in the balance sheet and an assessment of theGroup’s disclosures in this area. Each element of our work is considered in moredetail below.
Controls testing
Our controls work encompassed understanding, evaluating and testing
management’s key controls in respect of the recognition of both commercial
income and manual promotional funding. These key controls included themonitoring of invoices raised and the accuracy of confirmations from suppliers.
We found no significant deficiencies in these key controls, and our testing ofmanagement’s key system controls contributed to our evidence in determining
whether commercial income and manual promotional funding had been recorded
appropriately and in the correct period.
Income statement testing
We tested a sample of commercial income and the manual elements ofpromotional funding to supporting documentation including supplier agreements.
We requested confirmations directly from suppliers in respect of a sample ofcommercial income and the manual elements of promotional funding acrossa large number of suppliers. The confirmations received, and documentation
reviewed, allowed us to evaluate whether commercial income or the manualelements of promotional funding had been appropriately recognised in the
period. No exceptions arose from this work.
We also analysed commercial income and the manual elements of promotional
funding recognised each month and compared it to the previous period to identify
whether there were any unusual trends in the amounts or timing of commercial
income and the manual elements of promotional funding recognised in eachperiod. We used a data analytics approach to identify any unusual items in thecommercial income and the manual elements of promotional funding populations.
Where unusual items were identified these were agreed to supporting
documentation without exception.
Balance sheet testing
We wrote to a sample of suppliers, and obtained independent evidence of thevalue and timing of commercial income and the manual elements of promotional
funding to evaluate whether it had been recognised in the correct period. We
also agreed a sample of accrued income to evidence of post-year end invoicing.
We performed cut-off procedures and credit note testing to provide further
evidence to support the timing of the recognition of both commercial income
and the manual elements of promotional funding. Cut-off work involved testinga sample of commercial income and the manual elements of promotional funding
recognised both pre and post the period end and evaluating by reference todocumentation from suppliers that the timing of recognition was appropriate.
We found no issues as a result of our audit procedures.
Our credit note testing focused on credit notes raised after the period end inorder to identify any instances of commercial income or the manual elements
of promotional funding being subsequently reversed. We did not identify any
exceptions from this work. We tested the recoverability of invoiced commercial
income and the manual elements of promotional funding (unsettled balances
included within trade debtors in note 5.3 to the financial statements and where
the Group does not have the right of offset against trade creditors). This testing
was performed by assessing the ageing of both outstanding commercial
income and the manual elements of promotional funding debtors together
with understanding the details of any disputes, and obtained explanations
from management to assess whether any provisions were appropriate. We also
considered management’s commercial income and promotional funding Key
Performance Indicators in this analysis. No exceptions were noted.
Disclosures
We read the disclosures within the Annual Report in respect of commercial
income and manual promotional funding and, based on our work, determined thatthey are consistent with accounting standards and the guidance on the reportingof complex supplier arrangements issued by the Financial Reporting Council.

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Governance

Key audit matter

Financial Statements

Investor information

Refer to page 69 (sources of estimation uncertainty), note 3.1 (accounting policies)and note 3.2 (goodwill and intangible assets).

How our audit addressed the key audit matter
We obtained management’s assessment as to whether the development of new
software or systems superseded or impaired any of the existing assets on thebalance sheet.

The Group balance sheet includes intangible assets of £428m, of which the
majority relates to software development costs incurred in connection with
the Group’s technology improvement programme, details of which are shownon pages 79 to 81 of the Annual Report.

We re-visited the expected costs budgeted by management within the costbenefit analysis and compared them to actual outcomes in the current period
and we assessed the future expected benefits of the projects, with no issues
being identified from our work.

We focused on this area because judgement is required to assess whether the
carrying value of the existing capitalised software or systems is impaired.

We also applied our own understanding of both new and existing projects andconsidered whether, in our view, any existing software was no longer in use orwhether its life had been shortened by development activity. We found nosuch items.

Impairment of intangible assets

No material impairment of the intangible assets was identified from our work.
Disclosures
We read the disclosures within the Annual Report in respect of intangible
assets, and, based on our work, determined that they are consistent withaccounting standards.

Stock valuation
Refer to page 69 (sources of estimation uncertainty), note 5.1 (accounting policies)and note 5.2 (stock).
The stock valuation of £686m (2017: £614m) was focused on due to the nature ofjudgements made by management when assessing the level of provisions required.
As disclosed in note 5.1, the stock valuation is reduced by commercial income
and promotional funding (as the stock which this income and/or funding relates
to, is yet to be sold). When the stock is sold, the commercial income and/or
promotional funding is recognised in the income statement.
The stock valuation is additionally reduced for provisions related to estimatedlosses due to shrinkage, obsolescence and other known specific risks. As stock is
counted by the Group on a cyclical basis, rather than in full at the period end date,the shrinkage provision at 4 February 2018 contains a degree of estimation.

We attended stock counts and performed sample counts at a number of theGroup’s supermarkets and petrol forecourts throughout the period. In addition
to performing sample test counts, we assessed the effectiveness of the countcontrols in operation, with no material issues identified from our work.
We also evaluated the results of cycle counts performed by management andthird parties through re-performance and inspection at a sample of distribution
centres throughout the period to assess the level of count variances. We foundno material variances or count control deficiencies across these sites.
We tested the unearned commercial income and promotional funding deduction
by verifying the inputs of the calculation and methodology of the provision,noting no issues.
We tested management’s shrinkage assumptions determined by the countprocedures and the comparison of this to historical data. The historical data
included the results of the recent counts at each location, and our procedures
did not identify any significant unusual fluctuations in the data.
The obsolescence provision is calculated by applying a judgemental percentage tothe period end stock levels, with this judgement being informed by management’sview of the current stock profile and expected stock life. We considered thisprovision by assessing the explanations provided by management on the current
profile and expected stock life noting no issues.
We have assessed the other specific provisions with reference to the risks
identified by management and noted no issues.
Disclosures
We read the disclosures within the Annual Report in respect of stock, and, basedon our work, determined that they are consistent with accounting standards.

Pension accounting
Refer to page 69 (sources of estimation uncertainty) and note 8 (pensions).
We have focused on the valuation of the Group’s defined benefit pension
schemes because of the level of judgement required in determining the year end
valuation. In addition, the size of the gross assets (£4,857m) and liabilities (£4,263m)
within the schemes are significant and material.

We obtained the IAS 19 valuation reports produced by the Group’s actuaries.
We used our own actuarial experts to assess the judgemental assumptions usedwithin the reports to form the valuation of the pension schemes’ liabilities, suchas discount rate, inflation and mortality rates. We obtained the detailed reports
underlying the valuation of the schemes’ assets and agreed the valuations tothird party confirmations. We assessed the membership data used in valuing theschemes’ liabilities and tested any significant changes since the last valuation.
We agreed a sample of contributions made by the Group to bank statements.
We have no exceptions to report as a result of this testing.
The net surplus position of the schemes at 4 February 2018 was £594m. We havereviewed management’s assessment of the right to recognise the net surplus in
two of the three schemes under the requirements of IFRIC 14, including inspecting
updated legal advice, and are satisfied that it is appropriate to recognise the net
asset on the balance sheet. The third scheme (RSP) is recognised as a net liability
and therefore this aspect of IFRIC 14 is not applicable.
Disclosures
We read the disclosures within the Annual Report in respect of pensions,and, based on our work, determined that they are consistent withaccounting standards.

59

Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18

Independent auditors’ report continued
Independent auditors’ report to the membersof Wm Morrison Supermarkets PLC

How we tailored the audit scope

We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole,taking into account the structure of the Group and the Company, the accounting processes and controls, and the industry in which they operate.
The Group’s accounting process is structured around a Group finance function at its head office in Bradford who are responsible for the Group’sreporting units. For each reporting unit we determined whether we required an audit of their reported financial information (‘full scope’), or whether
certain account balances of reporting units were required to be in the scope of our Group audit to address specific risk characteristics or to provide
sufficient overall Group coverage of particular financial statement line items.
A full scope audit was required for Wm Morrison Supermarkets PLC and Safeway Stores Limited determined as financially significant because they
individually contribute more than 15% of the Group’s profit before tax. We also considered that certain account balances of a further four reporting
units were in the scope of our Group audit to address specific risk characteristics or to provide sufficient overall Group coverage of particular financial
statement line items. All of the audit procedures have been performed by the Group audit engagement team.
In aggregate, our audit procedures accounted for 99% of Group revenues and 84% of profit before tax. In addition, the Group audit team performed
analytical review procedures over a number of smaller reporting units. This included an analysis of year-on-year movements, at a level of disaggregation
to enable a focus on higher risk balances and unusual movements. Those not subject to analytical review procedures were individually, and in aggregate,
immaterial. This gave us the evidence we needed for our opinion on the financial statements as a whole.
Materiality

The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together withqualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual
financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial
statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements

Company financial statements

Overall materiality£18.7m (2017: £16.9m).

£16.8m (2017: £16.0m).

How we determined it

5% of underlying profit before tax.

The amount of component materiality allocatedto the Company as part of the Group audit.

Rationale for benchmark applied

Consistent with last year, we applied this benchmark
because, in our view, this is the most relevant metricagainst which the performance of the Group is mostcommonly measured. Underlying profit is defined bymanagement as profit before impairment, onerous
contracts and other items that do not relate to theGroup’s principal activities on an ongoing basis, profit/
loss arising on disposal and exit of properties and sale ofinvestments and IAS 19 pension interest, at a normalised
tax rate, as reconciled in note 1.4 of the Group financial
statements.

In our view, users focus on the consolidated resultsof the Group rather than the individual resultsof the Company, therefore we determined ourmateriality in the overall context of the Group.

For the two reporting units in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The materiality
allocated to the two components was £16.8m.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £0.9m (Group audit) (2017: £0.8m)
and £0.8m (Company audit) (2017: £0.8m) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
Going concern

In accordance with ISAs (UK) we report as follows:
Reporting obligation

Outcome

We are required to report if we have anything material to add or draw attention to in respectof the Directors’ statement in the financial statements about whether the Directors considered
it appropriate to adopt the going concern basis of accounting in preparing the financial
statements and the Directors’ identification of any material uncertainties to the Group’s and theCompany’s ability to continue as a going concern over a period of at least 12 months from thedate of approval of the financial statements.

We have nothing material to add or to draw
attention to. However, because not all future
events or conditions can be predicted, thisstatement is not a guarantee as to the Group’sand Company’s ability to continue as agoing concern.

We are required to report if the Directors’ statement relating to Going Concern in accordancewith Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit.

We have nothing to report.

60

Strategic report

Governance

Financial Statements

Investor information

Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’ report thereon.
The Directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly,
we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether theother information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially
misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether
there is a material misstatement of the financial statements or a material misstatement of the other information. 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 reportbased on these responsibilities.
With respect to the Strategic report and Directors’ report, we also considered whether the disclosures required by the UK Companies Act 2006 havebeen included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006, (CA06), ISAs (UK) and theListing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and matters as described below (required by ISAs (UK)
unless otherwise stated).
Strategic report and Directors’ report

In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Directors’ reportfor the period ended 4 February 2018 is consistent with the financial statements and has been prepared in accordance with applicable legal
requirements. (CA06)
In light of the knowledge and understanding of the Group and Company and their environment obtained in the course of the audit, we did not identify
any material misstatements in the Strategic report and Directors’ report. (CA06)
The Directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the GroupWe have nothing material to add or draw attention to regarding:• The Directors’ confirmation on page 23 of the Annual Report that they have carried out a robust assessment of the principal risks facing the Group,
including those that would threaten its business model, future performance, solvency or liquidity.
• The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
• The Directors’ explanation on page 26 of the Annual Report as to how they have assessed the prospects of the Group, over what period they havedone so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Groupwill be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures
drawing attention to any necessary qualifications or assumptions.
We have nothing to report having performed a review of the Directors’ statement that they have carried out a robust assessment of the principal risksfacing the Group and statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than an audit and only
consisted of making inquiries and considering the Directors’ process supporting their statements; checking that the statements are in alignment with therelevant provisions of the UK Corporate Governance Code (the ‘Code’); and considering whether the statements are consistent with the knowledge andunderstanding of the Group and Company and their environment obtained in the course of the audit. (Listing Rules)
Other Code Provisions

We have nothing to report in respect of our responsibility to report when:• The statement given by the Directors, on page 54, that they consider the Annual Report taken as a whole to be fair, balanced and understandable, andprovides the information necessary for the members to assess the Group’s and Company’s position and performance, business model and strategy
is materially inconsistent with our knowledge of the Group and Company obtained in the course of performing our audit.
• The section of the Annual Report on pages 34 to 37 describing the work of the Audit Committee does not appropriately address matterscommunicated by us to the Audit Committee.
• The Directors’ statement relating to the Company’s compliance with the Code does not properly disclose a departure from a relevant provisionof the Code specified, under the Listing Rules, for review by the auditors.
Directors’ remuneration

In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
(CA06)

61

Wm Morrison Supermarkets PLC Annual Report and Financial Statements 2017/18

Independent auditors’ report continued
Independent auditors’ report to the membersof Wm Morrison Supermarkets PLC

Responsibilities for the financial statements and the audit
Responsibilities of the Directors for the financial statements

As explained more fully in the Statement of Directors’ responsibilities set out on page 54, the Directors are responsible for the preparation of thefinancial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The Directors are also
responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group’s and 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 the Directors either intend to liquidate
the Group or the Company or to cease operations, or have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due
to fraud or error, and to issue an auditors’ 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 ISAs (UK) 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 takenon the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/
auditorsresponsibilities. This description forms part of our auditors’ report.
Use of this report

This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of
the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any
other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:• we have not received all the information and explanations we require for our audit; or• adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not
visited by us; or• certain disclosures of Directors’ remuneration specified by law are not made; or• the Company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records
and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the Audit Committee, we were appointed by the members on 5 June 2014 to audit the financial statements for theyear ended 1 February 2015 and subsequent financial periods. The period of total uninterrupted engagement is four years, covering the years ended
1 February 2015 to 4 February 2018.
Andrew Paynter (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Leeds
13 March 2018

62

141

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF JOHN LEWIS PARTNERSHIP PLC
1. OUR OPINION IS UNMODIFIED
We have audited the ﬁnancial statements of John Lewis Partnership plc(“the Company”) for the year ended 27 January 2018 which comprise theconsolidated income statement, consolidated statement of comprehensive
income/(expense), consolidated balance sheet, consolidated statement ofchanges in equity, consolidated statement of cash ﬂows, Company balance
sheet, Company statement of changes in equity, Company statement ofcash ﬂows and the related notes, including the accounting policies in note 1.
In our opinion:– the ﬁnancial statements give a true and fair view of the state of thePartnership’s and of the parent Company’s affairs as at 27 January 2018
and of the Partnership’s proﬁt for the year then ended;– the Partnership’s ﬁnancial statements have been properly prepared inaccordance with International Financial Reporting Standards as adopted
by the European Union (IFRSs as adopted by the EU);
– the ﬁnancial statements have been prepared in accordance with therequirements of the Companies Act 2006; and– the parent Company ﬁnancial statements have been properly prepared inaccordance with IFRSs as adopted by the EU and as applied in accordancewith the provisions of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing(UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below.
We have fulﬁlled our ethical responsibilities under, and are independent of
the Partnership in accordance with, UK ethical requirements including the
FRC Ethical Standard. We believe that the audit evidence we have obtained
is a sufficient and appropriate basis for our opinion.
Overview
Materiality
Partnership ﬁnancial
statements as a whole£14.5m (2017: £16.0m)
5.0% (2017: 4.3%) of Partnership proﬁt before
tax, Partnership Bonus and exceptional items

Coverage

97% (2017: 99.0%) of Partnership proﬁt before tax

Risks of material misstatement
Recurring risks

Carrying amount of Property,
Plant and Equipment
Pensions deﬁned beneﬁt obligation
Rebates/supplier income
Provisions – long leave, service guarantee
and customer returns
Carrying amount of Intangibles

Event driven

Provisions – pay provision in respect of
National Minimum Wagevs 2017

2. KEY AUDIT MATTERS: OUR ASSESSMENT
OF RISKS OF MATERIAL MISSTATEMENT
Key audit matters are those matters that, in our professional judgement,
were of most signiﬁcance in the audit of the ﬁnancial statements and include
the most signiﬁcant assessed risks of material misstatement (whether or not
due to fraud) identiﬁed by us, including those which had the greatest effect on:
the overall audit strategy; the allocation of resources in the audit; and directing
the efforts of the engagement team. These matters were addressed in thecontext of our audit of the ﬁnancial statements as a whole, and in forming our
opinion thereon and we do not provide a separate opinion on these matters.
In arriving at our audit opinion, the key audit matters in decreasing order ofaudit signiﬁcance, were as follows:

CARRYING AMOUNT OF PROPERTY,
PLANT AND EQUIPMENT£3,971.2M (2017: £4,112.4M)
Refer to page 62 (Audit and Risk Committee Report), page 105 (accounting
policy) and page 106 (ﬁnancial disclosures).
The risk
Forecast-based valuation
Impairment considerations:
The Partnership has signiﬁcant Property, Plant and Equipment (PPE) assets heldon its consolidated balance sheet. The impairment risk relates to the Waitrose
Division. The Directors perform trigger testing annually to identify any assets
which may require impairment. The recoverable amount is calculated for thoseassets which fail the trigger tests to determine any impairment. The trigger tests
take into account recent performance of the individual branches and anychanges made to the business plan. If the trigger tests do not include suitable
assumptions, or are incorrectly performed, branches possibly requiring
impairment may not be identiﬁed. In the current year 73 branches at
Waitrose failed these initial trigger tests. For all such branches, an impairment
is recorded against the carrying value of the assets within that related cash
generating unit to the extent that the carrying value would otherwise exceed
its recoverable amount.
In relation to the Waitrose branches, an impairment charge of £38.9m has
been recognised.
The key assumptions used in the value in use (ViU) calculations for estimating
the recoverable amounts are short-term cash-ﬂow forecasts, the long-term(LT) growth rate and the discount rate. These assumptions are based on
forecasts which give risk to estimation uncertainty within the impairment test.
Subjective judgement
Residual values and useful economic lives:
The judgement around allocating residual values and useful economic lives(UELs) drives the depreciation charged to the income statement. In particular
the valuation of the allocated residual value requires speciﬁc expertise andknowledge of the market. Given the magnitude of the PPE balance, movementsin these judgements could result in a material misstatement. The Directors
engage third party specialists to review a sample of the property portfolio
to assist them determine the value of the residual values.

142

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF JOHN LEWIS PARTNERSHIP PLC(CONTINUED)
Our response
Our procedures included:– Assessing principles: We challenged whether the assumptions used in thetrigger tests were suitable, through discussions with divisional management,
our own knowledge of the business and market, inspection of Board minutes
and other management information.
– Re-performance: We re-performed the calculations that management
performed for the initial trigger testing and ViU, checking the source of theinformation was reasonable.
– Our business knowledge: For the cash ﬂows that drive the ViU calculation
forecasts, we considered the risks built into the Board approved short-term(three year) forecasts and challenged the Directors as to the achievability ofthe plan, taking into account the historical accuracy of previous forecasts andwider market factors (such as performance of competitors).
– Benchmarking assumptions: Evaluating assumptions used, in particular thoserelating to i) LT growth rate, ii) the discount rate and iii) the margin rateapplied, comparing these with externally derived data.
– Sensitivity analysis: For all of the above key assumptions we performed
sensitivity analysis to stress-test the assumptions.
– Our property valuation expertise: With the assistance of our property
valuation specialist we examined the third party valuation reports produced
for a sample of the assets to establish residual values. Our specialist criticallyassessed the methodology and assumptions behind the valuations, using theirown expertise and market understanding.
– Assessing application: We compared the UELs on each of the categories
of assets to industry averages. We also examined the Fixed Asset Register to
identify any assets fully depreciated but still in use or disposals of assets whichstill had a Net Book Value. For those assets identiﬁed we considered whether
this indicated the UEL was incorrect.
– Assessing disclosures: We considered the appropriateness of the disclosureof Waitrose impairment as an exceptional item.
– We also assessed whether the Partnership’s disclosures about the sensitivityof the outcome of the impairment assessment to changes in key assumptions
reﬂected the risks inherent in the carrying amount of PPE.
Our results:– We found the resulting estimate of the recoverable amount of PPE and thePartnership’s treatment of residual values and UELs as adopted policy to be
acceptable (2017 result: acceptable).

PENSIONS DEFINED BENEFIT OBLIGATION£6,224.0M (2017: £6,059.0M)
Refer to page 63 (Audit and Risk Committee Report), page 119(accounting policy) and pages 120 to 127 (ﬁnancial disclosures).
The risk
Subjective valuation
A signiﬁcant level of estimation is required in order to determine the valuationof the gross liability. Small changes in the key assumptions (in particular, discountrates, inﬂation, mortality rates and salary increases) can have a material impact
on the gross liability. During the year management changed the methodology
used to calculate the discount rate, please see page 121 for further detail.
Due to the volume of members both joining and moving categories(i.e. between active, deferred and pensioner) errors in the membership records
could result in a material misstatement if not complete and accurately includedin the calculation of the gross liability.

Our response
Our procedures included:– Benchmarking assumptions: We used our actuarial specialists to challenge
the key assumptions and the new discount rate methodology. This involved
comparing the assumptions to available market data, our expectations andother similar UK pension schemes’ assumptions.
– Assessing base data: We performed trend analysis comparing current year
movement in members to historical movements. We also conﬁrmed that
there have been no changes to membership terms in the current year.
We used our actuarial specialists to challenge the methodology used toroll-forward the results of the triennial valuation as at 31 March 2016.
– Assessing disclosures: We also considered the adequacy of the Partnership’s
disclosures in respect of the sensitivity of the deﬁcit to these assumptions.
Our results:– We found the valuation of the pensions deﬁned beneﬁt obligation to be
acceptable (2017 result: acceptable).

PROVISIONSLONG LEAVE £139.6M (2017: £140.1M),
SERVICE GUAR ANTEE £55.1M (2017: £64.8M),
CUSTOMER RETURNS £39.4M (2017: £35.1M),
PAY PROVISION IN RESPECT OF
NATIONAL MINIMUM WAGE £34.6M (2017: £36.0M)
Refer to page 63 (Audit and Risk Committee Report), page 112(accounting policy) and page 112 (ﬁnancial disclosures).
The risk
Subjective estimate
The ﬁnancial statements contain a number of provisions which when
considered in aggregate are signiﬁcant and involve estimation. The key
assumptions are:– Long leave: Assumptions relating to salary increases, staff turnover rates
and discount rate.
– Service guarantee costs: Assumptions around frequency and value of the
expected future service costs and use of appropriate historical data to form
the assumptions.
– Customer returns: Assumptions around the expected customer returns
from the sales made in the period.
– Pay provision in respect of National Minimum Wage: The use of
appropriate data to form the calculation and the assumptions aroundthe scope and associated costs of the probable settlement amount.
Our response
Our procedures included:Long leave:– Benchmarking assumptions: We used our own actuarial specialists toconsider the key assumptions used. This involved comparing the assumptions
to available market data and our expected range.
– Sensitivity analysis: We also performed sensitivity analysis overthese assumptions.
Service guarantee costs:– Assessing base data: We considered the underlying data inputs into the
management’s calculations, checking the source of the historical data
was accurate based on our understanding of the industry and businessand performing trend analysis in respect of historical costs per unit.
– Sensitivity analysis: We performed sensitivity analysis over the assumptions
made, including the product repair and replacement frequency rates.
– Independent re-performance: We have re-performed the calculation
using the underlying data inputs.

143

Customer returns:– Historical comparisons and assessed base data: We have considered theappropriateness of the base data used in the calculation by checking thedata inputs to historical data and performing a trend analysis.
– Sensitivity analysis: We have performed sensitivity analysis around theyear end period over which the customer return liability is calculated.
Pay provision in respect of National Minimum Wage:– Assessing application: We examined the legal advice from the Partnership’s
external legal advisers and the correspondence with HMRC.
– Our expertise: We used our own specialists to challenge the assumptions
based on their experience of similar scenarios.
– Test of detail: We also re-calculated the liability, including sampling therelevant information used in the calculation back to source data.
– Assessing disclosures: We considered the disclosure of the fact that theultimate settlement amount may change.
Assessing disclosures: We also considered the adequacy of the Partnership’s
disclosures in respect of these provisions.
Our results:– From the evidence obtained, we considered the level of provisioning to be
acceptable (2017 result: acceptable).

CARRYING AMOUNT OF INTANGIBLES£495.7M (2017: £432.7M)
Refer to page 62 (Audit and Risk Committee Report), page 103 (accounting
policy) and page 104 (ﬁnancial disclosures).
Forecast-based valuation
In order to continually improve its operating systems the Partnership develops
a signiﬁcant amount of software, which is capitalised on the balance sheet.
For the year-ended January 2018, there were £182.5m (2017: £157.2m)
of additions to computer software. When developing software the Directors
have regularly to judge whether the projects are still expected to bring sufficienteconomic value to the Partnership. Work in progress of £239.1m (2017: £157.4m)
is made up of a number of projects being undertaken in the Partnership,
the most signiﬁcant of which are:
– New supply chain systems;– Enhancements to the customer-facing websites; and– New ordering systems.
We continue to focus on the material work in progress amounts as judgement
is required to assess the economic beneﬁts that would ﬂow from each project
and whether any elements of the projects need to be impaired.
Our response
Our procedures included:– Our business knowledge: We challenged the Directors’ assessment of theeconomic beneﬁts that would ﬂow from a sample of projects, comparing
this to our understanding of the business and the future strategy to conﬁrm
it was aligned.
– Personnel interviews: At a more granular level, we also met withthe project managers to understand the work being undertaken andthe expected beneﬁts of the projects. Through our understanding of
the business, discussions with divisional management and inspection ofmanagement information and Board minutes we challenged any changes
in scope or any work performed which did not yield a successful output.
– Assessing recognition: We considered the ageing proﬁle of work in progress
to challenge whether any elements of the project previously capitalised
needed to be impaired.
Our results:– The results of our testing were satisfactory and we considered the carrying
amount of intangibles recognised to be acceptable (2017 result: acceptable).

PARENT COMPANY FINANCIAL STATEMENTS –VALUATION OF INVESTMENTS£121.1M (2017: £121.2M)
Refer to page 137 (ﬁnancial disclosures).
The risk
Low risk, high value
The carrying amount of the Company’s investments in subsidiaries are valued
at cost, less allowances for impairment. We do not consider the valuationof these investments to be at a high risk of signiﬁcant misstatement, or to be
subject to a signiﬁcant level of judgement.
However, due to their materiality in the context of the parent Company
ﬁnancial statements, this is considered to be the area that had the greatest
effect on our overall parent Company audit.
Our response
Our procedures included:– Test of details: Comparing the investment carrying values to the net assetsof the investment to identify whether the net asset values of the subsidiaries,
being an approximation of their minimum recoverable amount, were inexcess of their carrying amount.
– Assessing subsidiary audits: Assessing the work performed by the audit
team on the subsidiaries and considering the results of the work on thosesubsidiaries’ proﬁts and net assets.
Our results:– We found the assessment of the carrying value of investments to be
acceptable (2017 result: acceptable).

REBATES AND SUPPLIER INCOME
We continue to perform procedures over rebates/supplier income acrossWaitrose and John Lewis. However, following our assessment of the processes
in place across the two divisions around supplier income and examining thecontracts in place, we consider there to be limited estimation. We have notassessed this as one of the risks that has the greatest effect on our audit and,
therefore, it is not separately identiﬁed in our report this year.

144

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF JOHN LEWIS PARTNERSHIP PLC(CONTINUED)
3. OUR APPLICATION OF PARTNERSHIP MATERIALITY
AND AN OVERVIEW OF THE SCOPE OF OUR AUDIT
Materiality for the consolidated ﬁnancial statements as a whole was set at£14.5m, determined with reference to a benchmark of £289.2m which isPartnership proﬁt before tax, normalised to exclude this year’s Partnership
Bonus as disclosed in note 2.6.2 ‘Partner pay and beneﬁts’, of £74.0m, andexceptional items as disclosed in note 2.3 ‘Exceptional items’, of £111.3m.
Materiality on this basis represents 5.0%. Audit work was performed overthe exceptional items and Partnership Bonus separately.

PARTNERSHIP PROFITBEFORE TAX, PARTNERSHIP
BONUS AND EXCEPTIONALITEMS £289.2M£14.5mWhile ﬁnancial statements
materiality (2017: £16.0m)

A

B

Materiality for the parent Company ﬁnancial statements was set at £3.6m,
determined with reference to a benchmark of £121.1m which is total assets.
Materiality on this basis represents 3.0%.
We reported to the Audit and Risk Committee any corrected or uncorrected
identiﬁed misstatements exceeding £0.7m, in addition to other identiﬁed
misstatements that warranted reporting on qualitative grounds.
The Partnership has 16 reporting components each representing a statutory
entity based in the UK or Channel Islands.
Of the Partnership’s 16 reporting components, we subjected 11 to audits
for group reporting purposes, including the audit of the parent Company,
and one to speciﬁed risk-focused audit procedures over an account balance.
The latter was not individually ﬁnancially signiﬁcant enough to require an audit
for group reporting purposes, but did present speciﬁc individual risks thatneeded to be addressed. We conducted reviews of ﬁnancial information(including enquiry) at the remaining four non-signiﬁcant components.
The Partnership operates a shared service centre, the outputs of which areincluded in the ﬁnancial information of the reporting components it services
and therefore it is not a separate reporting component. The service centre is
subject to speciﬁed risk-focused audit procedures, predominantly the testingof transaction processing and review controls. Additional procedures are
performed at certain reporting components to address the audit risks
not covered by the work performed over the shared service centre.
The components within the scope of our work accounted for the percentagesof the Partnership’s results noted in the chart opposite. We have performed
speciﬁc risk-focused audit procedures over a liability balance which is nottotalled in the chart opposite.

MATERIALITY £14.5 M

A Partnership Proﬁt before tax,
Partnership Bonus and exceptional items
B Partnership materiality

PARTNERSHIP REVENUEPARTNERSHIP TOTAL ASSETS

100%

100%
(2017 100%)

100%

100%

100%

100%

100%
100%

PARTNERSHIP PROFITBEFORE TAX
3%
1%

97%
(2017 99%)
99%
97%

2018
2017

£0.7m
Misstatements reported
to the audit committee(2017: £0.8m)(2017 100%)

2018
2017

The senior statutory auditor is also responsible for all of the reporting
components including setting the component materialities, which ranged
from £0.3m to £14.0m, having regard to the mix of size and risk proﬁleof the Partnership across the components.

£14.0mRange of materiality
at 15 components£0.3m–£14.0m)(2017: £0.4m–£15.2m)

97%
99%

2018
2017

100%
100%

145

4. WE HAVE NOTHING TO REPORTON GOING CONCERN
We are required to report to you if we have anything material to add or
draw attention to in relation to the Directors’ statement in note 1.1 to theﬁnancial statements on the use of the going concern basis of accounting withno material uncertainties that may cast signiﬁcant doubt over the Partnershipand Company’s use of that basis for a period of at least 12 months from thedate of approval of the ﬁnancial statements. We have nothing to reportin these respects.

5. WE HAVE NOTHING TO REPORT ON THE OTHERINFORMATION IN THE ANNUAL REPORTThe Directors are responsible for the other information presented in the
Annual Report together with the ﬁnancial statements. Our opinion on theﬁnancial statements does not cover the other information and, accordingly,
we do not express an audit opinion or, except as explicitly stated below, any
form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider
whether, based on our ﬁnancial statements audit work, the information therein
is materially misstated or inconsistent with the ﬁnancial statements or our
audit knowledge. Based solely on that work we have not identiﬁed material
misstatements in the other information.
Strategic report and Directors’ report
Based solely on our work on the other information:– We have not identiﬁed material misstatements in the Strategic report andthe Directors’ report;– In our opinion the information given in those reports for the ﬁnancial year
is consistent with the ﬁnancial statements; and– In our opinion those reports have been prepared in accordance with theCompanies Act 2006.
Disclosures of principal risks and longer term viability
Based on the knowledge we acquired during our ﬁnancial statements audit,
we have nothing material to add or draw attention to in relation to:– The Directors’ conﬁrmation within the viability statement on pages 79 to 80
that they have carried out a robust assessment of the principal risks facing
the Partnership, including those that would threaten its business model,
future performance, solvency and liquidity;– The principal risks and disclosures describing these risks and explaining how
they are being managed and mitigated; and– The Directors’ explanation in the viability statement of how they haveassessed the prospects of the Partnership, over what period they havedone so, why they considered that period to be appropriate, and theirstatement as to whether they have a reasonable expectation that thePartnership will be able to continue in operation and meet its liabilities
as they fall due over the period of their assessment, including any related
disclosures drawing attention to any necessary qualiﬁcations or assumptions.
Corporate governance disclosures
We are required to report to you if:– We have identiﬁed material inconsistencies between the knowledge weacquired during our ﬁnancial statements audit and the Directors’ statementthat they consider that the Annual Report and Accounts taken as a whole
are fair, balanced and understandable and provides the informationnecessary for members to assess the Partnership’s position andperformance, business model and strategy; or– The section of the Annual Report describing the work of the Audit and Risk
Committee does not appropriately address matters communicated by us
to the Audit and Risk Committee.
We have nothing to report in these respects.

6. WE HAVE NOTHING TO REPORT ON
THE OTHER MATTERS ON WHICH WE ARE
REQUIRED TO REPORT BY EXCEPTION
Under the Companies Act 2006, we are required to report to you if,
in our opinion:– Adequate accounting records have not been kept by the parent Company,or returns adequate for our audit have not been received from branches
not visited by us; or– The parent Company ﬁnancial statements are not in agreement with theaccounting records and returns; or– Certain disclosures of Directors’ remuneration speciﬁed by law are notmade; or– We have not received all the information and explanations we require forour audit.
We have nothing to report in these respects.

7. RESPECTIVE RESPONSIBILITIES
Directors’ responsibilities
As explained more fully in their statement set out on page 140, the Directors
are responsible for: the preparation of the ﬁnancial statements including being
satisﬁed that they give a true and fair view; such internal control as they determine
is necessary to enable the preparation of ﬁnancial statements that are free frommaterial misstatement, whether due to fraud or error; assessing the Partnershipand parent Company’s ability to continue as a going concern, disclosing, asapplicable, matters related to going concern; and using the going concern basisof accounting unless they either intend to liquidate the Partnership or the parent
Company or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether the ﬁnancial
statements as a whole are free from material misstatement, whether due tofraud or error, and to issue our opinion in an auditor’s report. Reasonableassurance is a high level of assurance, but does not guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error
and are considered material if, individually or in aggregate, they could reasonably
be expected to inﬂuence the economic decisions of users taken on the basis of
the ﬁnancial statements.
A fuller description of our responsibilities is provided on the FRC’s website atwww.frc.org.uk/auditorsresponsibilities

8. THE PURPOSE OF OUR AUDIT WORK AND
TO WHOM WE OWE OUR RESPONSIBILITIESThis report is made solely to the Company’s members, as a body, in accordancewith Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has
been undertaken so that we might state to the Company’s members thosematters we are required to state to them in an auditor’s report and for noother purpose. To the fullest extent permitted by law, we do not accept orassume responsibility to anyone other than the Company and the Company’s
members, as a body, for our audit work, for this report, or for the opinions
we have formed.

Michael Maloney (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square, London, E14 5GL
12 April 2018

68
MARKS AND SPENCER GROUP PLC

INDEPENDENTAUDITOR’S REPORTREPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS
IN OUR OPINION:BASIS FOR OPINION

the ﬁnancial statements give a trueand fair view of the state of the group’s
and of the parent company’s affairs as
at 31 March 2018 and of the group’s
proﬁt for the 52 weeks then ended;

We conducted our audit in accordance with International Standards on Auditing (UK)
(ISAs (UK)) and applicable law. Our responsibilities under those standards are further
described in the auditor’s responsibilities for the audit of the ﬁnancial statements
section of our report.

the group ﬁnancial statements havebeen properly prepared in accordancewith International Financial ReportingStandards (IFRSs) as adopted by theEuropean Union and IFRSs as issued
by the International AccountingStandards Board (IASB);
the parent company ﬁnancial
statements have been properly
prepared in accordance with IFRSs
as adopted by the European Union
and as applied in accordance withthe provisions of the Companies
Act 2006; andWe are independent of the group and the parent company in accordance with the
ethical requirements that are relevant to our audit of the ﬁnancial statements in the UK,
including the FRC’s Ethical Standard as applied to listed public interest entities, and wehave fulﬁlled our other ethical responsibilities in accordance with these requirements.
We conﬁrm that the non-audit services prohibited by the FRC’s Ethical Standard were
not provided to the group or the parent company.
We believe that the audit evidence we have obtained is sufficient and appropriate toprovide a basis for our opinion.
SUMMARY OF OUR AUDIT APPROACH
KEY AUDIT MATTERSSCOPING

The key audit matters that we identiﬁed in
the current year were:We performed a full scope audit on threecomponents of the business (UK, India andIreland) representing 97% of the Group’s
revenue, 99% of the Group’s adjusted proﬁt
before tax, 95% of the Group’s proﬁt before
tax and 86% of the Group’s net assets.

the financial statements have been
prepared in accordance with therequirements of the Companies
Act 2006 and, as regards the groupfinancial statements, Article 4 of
the IAS Regulation.

– Reporting ﬁnancial performance;

We have audited the ﬁnancial statementsof Marks and Spencer Group plc (the‘parent company’) and its subsidiaries(the ‘group’) which comprise:– Retirement beneﬁts; and– the Consolidated Income Statement;– the Consolidated Statement ofComprehensive Income;– the Consolidated and Company– Accounting for the UK store

rationalisation programme;– Impairment of UK store assets;– UK Clothing & Home inventory provision;– Manual adjustments to reported revenue.

Within this report
Any new key audit matters
are identiﬁed with
Any key audit matters which
are the same as the prioryear identiﬁed with

Statements of Financial Position;– the Consolidated and Company

Statements of Changes in Equity;– the Consolidated and Company

Statements of Cash Flows;– the Reconciliation of Net Cash Flow

to Movement in Net Debt; and– the related notes 1 to 28 and C1 to C6.

The ﬁnancial reporting framework thathas been applied in their preparation isapplicable law and IFRSs as adopted by theEuropean Union and, as regards the parent
company ﬁnancial statements, as appliedin accordance with the provisions of theCompanies Act 2006.

SIGNIFICANT CHANGESIN OUR APPROACH
Our audit approach is consistent with theprevious year, with the exception of:– Accounting for the UK store

rationalisation programme has been
included as a new key audit matter due
to the level of estimation uncertainty(as disclosed in Note 1) and the levelof audit effort required in evaluating
management’s estimate;– Exit costs of certain wholly owned

MATERIALITY
The materiality that we used for the groupﬁnancial statements was £24.5 million
which was determined on the basis of 5%
adjusted proﬁt before tax excluding certain
items based on their nature. We cappedmateriality to £24.5 million so that it was
not higher than the prior period given
the group’s trading performance in thecurrent period.

international businesses has been
removed as a key audit matter as
the Group’s international closure
programme is substantially complete;– Accounting for supplier rebates has

been removed as a key audit matter due
to the limited level of judgement; and– In the current period India and Ireland

were subject to full scope audits
and France had speciﬁc audit work
performed in respect of the remaining
store closure provision. The change
compared with the previous period
reﬂects the reduction in scale of thegroup’s owned international business.

69
ANNUAL REPORT AND FINANCIAL STATEMENTS 2017

CONCLUSIONS RELATING TO GOING CONCERN, PRINCIPAL RISKS AND VIABILITY STATEMENT

We have reviewed the directors’ statement
in note 1 to the ﬁnancial statements about
whether they considered it appropriate
to adopt the going concern basis ofaccounting in preparing them and theiridentiﬁcation of any material uncertainties
to the group’s and company’s ability tocontinue to do so over a period of at least
twelve months from the date of approvalof the ﬁnancial statements.
We are required to state whether we haveanything material to add or draw attention
to in relation to that statement requiredby Listing Rule 9.8.6R(3) and report if thestatement is materially inconsistent with
our knowledge obtained in the audit.

– the directors’ explanation on page 21

PRINCIPAL RISKS AND
VIABILITY STATEMENT

as to how they have assessed theprospects of the group, over what
period they have done so and why they
consider that period to be appropriate,
and their statement as to whether they
have a reasonable expectation thatthe group will be able to continue inoperation and meet its liabilities as
they fall due over the period of theirassessment, including any related
disclosures drawing attention to any
necessary qualiﬁcations or assumptions.

Based solely on reading the directors’
statements and considering whether they
were consistent with the knowledge weobtained in the course of the audit, including
the knowledge obtained in the evaluation of
the directors’ assessment of the group’s andthe company’s ability to continue as a going
concern, we are required to state whether
we have anything material to add or draw
attention to in relation to:– the disclosures on pages 22-24

that describe the principal risks andexplain how they are being managed
or mitigated;– the directors’ conﬁrmation on page 22that they have carried out a robust
assessment of the principal risks facing
the group, including those that would
threaten its business model, future
performance, solvency or liquidity; or

We conﬁrm that we have nothingmaterial to report, add or draw attention
to in respect of these matters.

We are also required to report whether
the directors’ statement relating to theprospects of the group required by Listing
Rule 9.8.6R(3) is materially inconsistent with
our knowledge obtained in the audit.
We conﬁrm that we have nothing material
to report, add or draw attention to in
respect of these matters.

STRATEGIC REPORTGOING CONCERNKEY AUDIT MATTERS
Key audit matters are those matters that, in our professional judgement, were of most signiﬁcance in our audit of the ﬁnancial statementsof the current period and include the most signiﬁcant assessed risks of material misstatement (whether or not due to fraud) that we
identiﬁed. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in theaudit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the ﬁnancial statements as a whole, and in forming our opinion thereon,
and we do not provide a separate opinion on these matters.
KEY AUDIT MATTER1REPORTING FINANCIAL PERFORMANCEThe Group has reported adjusted proﬁts
of £581 million, which is derived fromstatutory proﬁt before tax of £67 million
and a number of adjustments for items
which the company considers meettheir deﬁnition of an adjusting item.
Judgement is exercised by management
in determining the classiﬁcation of items
as ‘adjusting items’. This is a signiﬁcantissue considered by the Audit Committee
on page 38.
Explanations of each adjustment are set
out in note 5 to the ﬁnancial statements
and are summarised in the graphic below:

£m
600
35

31

18

15

13

13

5

581

63
321

GOVERNANCE

KEY AUDIT MATTER DESCRIPTION

400

200
67
0

Statutory
PBT

UK Store UK Store
Estate impairments
and write-offs

M&S
UK
Other
Bank Reorganisation

IT
UK
Restructure Logistics

Pay and International Adjusted
Pensions
PBT

In calculating adjusted proﬁt, we consider that there is a risk of:– items being included in the adjustments inappropriately, distorting the reported

adjusted earnings; and– items being omitted from the adjustments which are material, one-off or signiﬁcantin nature which distort the reported adjusted earnings.

For adjusted proﬁts, we evaluated theappropriateness of the inclusion of items,
both individually and in aggregate, within
adjusting items, including assessing theconsistency of items included year on
year and ensuring adherence to IFRS
requirements and latest Financial
Reporting Council (“FRC”) guidance.
We also agreed a sample of these items
to supporting evidence.

We assessed all items, either highlighted
by management or identiﬁed through thecourse of our audit, which were regarded
as signiﬁcant in nature or value, but
included within adjusted proﬁt todetermine whether these are not material
either individually or in aggregate.
For all adjustments recorded in calculating
proﬁts before adjusting items, we
discussed the appropriateness of theitem with the Audit Committee andany disclosure considerations.
Key observations
We are satisﬁed that the items excluded
from adjusted proﬁt, and the related
disclosure of these items in the ﬁnancial
statements, are appropriate.

FINANCIAL STATEMENTS

HOW THE SCOPE OF OUR AUDIT RESPONDED TO THE KEY AUDIT MATTER

70
MARKS AND SPENCER GROUP PLC

INDEPENDENT AUDITOR’S REPORT CONTINUED

KEY AUDIT MATTERS CONTINUED
KEY AUDIT MATTER2ACCOUNTING FOR THE UK STORE RATIONALISATION PROGRAMMEKEY AUDIT MATTER DESCRIPTION

On 8 November 2017, as part of the Interim
Results statement, the Group announced
the acceleration of the UK store
rationalisation programme, including
closures, space reduction and relocations.
At 31 March 2018, the Group had identiﬁed
a number of stores for potential closure,space reduction or relocation, andrecognised a charge of £321 million for
impairments, accelerated depreciation
and associated provisions. Further detailof the charge is set out in note 5. This isa signiﬁcant issue considered by the
Audit Committee on page 38.
For each of the stores expected to be
impacted by the programme, thecompany prepared a discounted cash
ﬂow model to determine the required
impairments and provisions to reﬂect the

shortened economic lives of the store
assets and, for certain stores, the closureof the store prior to lease expiry. Where theaffected store has been formally approvedor publicly announced, all associatedrestructuring provisions (including any
lease exit and redundancy costs) havebeen recognised. Where the closure of
the affected store has not been formallyapproved or publicly announced,
impairment charges are recognised to theextent that the store’s cash ﬂows do notsupport the carrying value, with an
onerous contract provision being
recognised where appropriate.
We pinpointed our key audit matter to thefollowing elements of accounting for the
UK store rationalisation programme:– The accuracy and completeness of thelist of affected stores and anticipatedclosure dates;– The appropriateness of speciﬁc

assumptions in the discounted cash ﬂow
models, including sublet income, sublet
lease incentives, void periods, freehold
sales proceeds and store closure costs;– The mechanical accuracy of the

discounted cash ﬂow models andintegrity of source data (such as leaseterms and rental values); and– The accuracy and completeness of

associated provisions, including
provisions for dilapidations and strip
out costs, onerous contracts for lossmaking stores, and restructuring where
closures have been publicly announced.

HOW THE SCOPE OF OUR AUDIT RESPONDED TO THE KEY AUDIT MATTER

We focused our audit work on assessing the company’s store exit model and evaluating the appropriateness of the key assumptions
used in calculating the charge of £321 million. As part of our audit procedures, we:– Made inquiries of management andreviewed property board minutes
to evaluate the accuracy andcompleteness of the store closure
list, and considered the commercial
rationale for exiting certain stores
whilst excluding other poor performing
stores from the store closure list;– Inspected the minutes of Board

meetings and relevant sub-committees;– Inspected supporting documentationfor each assumption in the store exit
model which included lease agreements,
agent valuations, surveyor plans andrent invoices;– Evaluated the company’s judgements

for a sample of properties in
consultation with retail real estateexperts and with reference tobenchmarked external data;– Tested the mechanical accuracy ofthe cash ﬂow models and otherkey calculations;– Checked the integrity of lease data tooriginal lease agreements for a sample
of properties;– Recalculated the provisions required fora sample of stores and checked themechanical accuracy of provisioncalculations; and– Evaluated the completeness ofrequired provisions for a sample ofstores based on the status of thestore in the closure programme.
Key observations
We are satisﬁed with the company’s
estimate of the impairment charge butnote that this is at the prudent end of our
acceptable range. The disclosure of theclosure provisions recorded in the ﬁnancial
statements is appropriate.
We have reported to the Audit Committee
where improvements are required to key
internal review controls over store closuresand signiﬁcant property transactions.

71
ANNUAL REPORT AND FINANCIAL STATEMENTS 2017

KEY AUDIT MATTERS CONTINUED
KEY AUDIT MATTER

3IMPAIRMENT OF UK STORE ASSETSThe Group held £2,979 million of UK store
assets at 31 March 2018 in respect of stores
not considered for closure in the UK store
rationalisation programme. The company
has undertaken an annual assessmentof indicators of impairment in respectof these stores and has recognised an
impairment charge in the year of£12 million. This is a signiﬁcant issue
considered by the Audit Committee on
page 38.
As described in note 15 of the ﬁnancial
statements, the company has estimatedthe recoverable amount of store assets
based on value in use calculations. These
rely on certain assumptions and estimatesof future trading performance which

involve a high degree of estimation
uncertainty (as disclosed in Note 1)
particularly in light of current retailmarket conditions.
The key assumptions applied by the
directors in the impairment reviews are:– forecast periods in the context ofstrategic decisions made to exit alocation;– future revenue growth;– gross margin;– store costs, including the impact of the

National Living Wage; and– discount rate.

The company considers that each retailstore constitutes its own cash generating
unit (‘CGU’), with the exception of theoutlet stores which are used to clear old
season Clothing and Home inventories
stock at a discount. The outlet stores are
considered to represent one CGU in
aggregate and strategic stores areevaluated as part of a country-wide
impairment review.
The group’s accounting policy sets out arelevant shelter period for new stores tobe taken into account when assessing
indicators of impairment during initial
years of trading to enable the store toestablish itself in the market.

STRATEGIC REPORTKEY AUDIT MATTER DESCRIPTIONHOW THE SCOPE OF OUR AUDIT RESPONDED TO THE KEY AUDIT MATTER– checking the mechanical accuracy of

the impairment models;– assessing the discount rates applied tothe impairment reviews with support
from our internal valuations specialist
and comparing the rates to our internal– comparing forecast growth rates toeconomic data; and– evaluating the information included in

the impairment models through ourknowledge of the business gained
through reviewing trading plans,
strategic initiatives, minutes of property
board and investment committee
meetings, and meeting with regional
store managers and senior trading
managers from key product categories
and our retail industry knowledge.
We assessed the appropriateness of the
shelter period for each store opened withinthat time frame, and compared the original
investment case for the store against its
current trading performance. Where stores

were trading signiﬁcantly below theoriginal case, we considered the evidence
available to support future improvementsin performance, speciﬁcally by assessing
the trading plans and actions being taken
on an individual store basis.
Key observations
We assessed the level of impairment
recorded in respect of the UK businessand are satisﬁed that the judgements
applied by the company and the levelof impairments recorded in the year
are appropriate.
GOVERNANCE

We assessed the impairment models andcalculations by:benchmark data;

FINANCIAL STATEMENTS

We considered the appropriateness of themethodology applied by the company incalculating the impairment charges, andthe judgements applied in determining
the CGUs of the business. In addition, we
assessed the design and implementationof controls in respect of the impairment
review process, and considered theadequacy of disclosures made in theﬁnancial statements.

72
MARKS AND SPENCER GROUP PLC

INDEPENDENT AUDITOR’S REPORT CONTINUED

KEY AUDIT MATTERS CONTINUED
KEY AUDIT MATTER

4

UK CLOTHING & HOME INVENTORY PROVISIONKEY AUDIT MATTER DESCRIPTION

At 31 March 2018, the Group held UK
Clothing & Home inventories of £591
million (2017: £541 million). As describedin the Accounting Policies in note 1 to
the Financial Statements, inventories
are carried at the lower of cost and net
realisable value. As a result, the directors

apply judgement in determining theappropriate provisions for obsolete stockand stock below cost based upon adetailed analysis of old season inventory
and net realisable value below cost based
upon plans for inventory to go into sale.
We consider the assessment of inventory

provisions within UK Clothing & Home torequire the most judgement, with the riskincreased due to recent trading
performance and the increase in grossinventory. This is a signiﬁcant issue
considered by the Audit Committee on
page 38.

HOW THE SCOPE OF OUR AUDIT RESPONDED TO THE KEY AUDIT MATTERWe obtained assurance over theappropriateness of the company’s
assumptions applied in calculating thevalue of the inventory provisions by:– assessing the validity, accuracy– performing audit analytics on stock– verifying the mathematical accuracy

holding and movement data to identify
product lines with indicators of low
stock turn and post-period negative
margin sales;

and completeness of the information
used by management in computing
the provision;and logic of the models underpinning
the respective provisions;– meeting with buyers to validate theassumptions applied by the company

compared to the current purchasing
strategy and ranging plans; and– testing the validity and completenessof the stock ﬂags and season codes
applied to individual inventory items.
Key observations
The results of our testing were satisfactory
and we concur that the level of UK
inventory provisions is appropriate.

KEY AUDIT MATTER

5RETIREMENT BENEFITSKEY AUDIT MATTER DESCRIPTIONAs described in the Accounting Policies innote 1 and in note 11 to the Financial
Statements, the Group has a deﬁned
beneﬁt pension plan for its UK employees.
This scheme is closed to new entrants andbeneﬁts no longer accrue to members
following the move of all active members
to deferred members on 1 April 2017.
At 31 March 2018, the Group recorded a net
retirement beneﬁt asset of £959 million(2017: £702 million), being the netof scheme assets of £9,989 million(2017: £10,135 million) and scheme liabilitiesof £9,030 million (2017: £9,433 million).
£8,908m of this liability relates to the
UK scheme.
Our key audit matter was pinpointed to
the valuation of UK scheme liabilities as it issensitive to changes in key assumptions
such as the discount rate, inﬂation andmortality estimates.
The setting of these assumptions iscomplex and an area of signiﬁcantjudgement; changes in any of theseassumptions can lead to a material
movement in the net surplus.

The increase /(decrease) in scheme surplus
caused by a change in each of the key
assumptions is set out below:
2018
£m

2017
£m

A decrease in the discountrate of 0.25%

(70)

(70)

A decrease in the inﬂation
rate of 0.25%

(25)

(20)

A decrease in the average life
expectancy of one year

305

370

This is a signiﬁcant issue considered by the
Audit Committee on page 38.

HOW THE SCOPE OF OUR AUDIT RESPONDED TO THE KEY AUDIT MATTER

We evaluated the directors’ assessment of
the assumptions made in the valuation of
the scheme liabilities, and evaluated theinformation contained within the actuarial
valuation reports for each scheme. We
assessed the design and implementationof controls in respect of the pension
scheme valuation process.

With support from our own actuarial
specialists, we considered the processapplied by the Group’s actuaries, the scopeof the valuation performed and the key
assumptions applied and evaluatedtheir expertise. We benchmarked andperformed a sensitivity analysis on the
key variables in the valuation model.

Key observations
We are satisﬁed that all assumptions
applied in respect of the valuation of theliabilities is appropriate.

73
ANNUAL REPORT AND FINANCIAL STATEMENTS 2017

KEY AUDIT MATTERS CONTINUED
KEY AUDIT MATTER6MANUAL ADJUSTMENTS TO REPORTED REVENUE

KEY AUDIT MATTER DESCRIPTION

becoming more signiﬁcantin determining the level ofprovision required.
There is the potential for possible
manipulation of the rates applied to thecompany’s estimate of gift card andvoucher non-redemptions and customer
returns given the signiﬁcant amount ofjudgement involved.
This is a signiﬁcant issue considered by
the Audit Committee on page 38.

HOW THE SCOPE OF OUR AUDIT RESPONDED TO THE KEY AUDIT MATTER

We have considered each revenueimpacting manual adjustment, andassessed the appropriateness of theassumptions and judgements appliedin deriving the material adjustments torevenue. We assessed the design andimplementation of controls in respect ofthese revenue judgements, in addition totesting the effectiveness of key revenue
controls operating across the UK business.

For the key assumptions used in the giftcard and voucher, and loyalty scheme
provisions, we assessed the historic rates
of redemption and compared these to
the directors’ judgements.
We assessed the appropriateness ofthe methodology and inputs used in
calculating the returns provision.

STRATEGIC REPORT

apply an expected redemption rate
to the total value of gift cards
and vouchers in issue based on
historic trends.

return most products up to 35 days
after purchase, giving rise to a riskthat sales recognised during the period
will be reversed in the next ﬁnancial
period. The directors apply judgement
in determining the provision required
for returns based on actual sales
data and recent product return rates.
Returns from online sales are commonlyat a higher level than traditional store
retailing, resulting in this judgement

Key observations
We are satisﬁed that the key assumptions
applied in calculating the returns, gift card,voucher and loyalty scheme provisions areappropriate although note management’s
judgements are at the prudent end of our
acceptable range.

GOVERNANCE– gift cards and vouchers – the directors– returns – customers are entitled to

FINANCIAL STATEMENTS

As described in the Accounting Policies innote 1 to the Financial Statements, thegroup’s revenue recognition policies
require the directors to make a number ofadjustments and estimates in determining
the reported revenue for the period.
The most signiﬁcant adjustments are:

74
MARKS AND SPENCER GROUP PLC

INDEPENDENT AUDITOR’S REPORT CONTINUEDOUR APPLICATION OF MATERIALITY
We deﬁne materiality as the magnitude of
misstatement in the ﬁnancial statementsthat makes it probable that the economic
decisions of a reasonably knowledgeable
person would be changed or inﬂuenced.
We use materiality both in planning thescope of our audit work and in evaluating
the results of our work.

£24.5 million (2017: £24.5 million)£22.1 million(2017: £22.1 million)
Group materiality was based on 5% reported
We used 3% of net
adjusted proﬁt before tax of £581 million excluding assets as the basis ofcertain items based on their nature. The proﬁtmateriality and thenused in our determination was £520 million.
further capped this
The items we excluded from our determination
at 90% of Groupare listed below and explained further in note 5materiality.
to the ﬁnancial statements:

Materiality
Basis fordetermining
materiality

Based on our professional judgement, we
determined materiality for the ﬁnancial
statements as a whole as follows:– M&S Bank PPI charge – £35 million

The materiality applied by the component
auditors for full scope audits (see below)
ranged from £2.2 million to £22.1 million(2017: £2.5 million to £22.5 million)
depending on the scale of the component’s
operations and our assessment ofrisks speciﬁc to each location.
We agreed with the Audit Committeethat we would report to the Committee
all audit differences in excess of £1 million(2017: £1 million) for the group and parent
company, as well as differences belowthat threshold that, in our view, warranted
reporting on qualitative grounds. We
also report to the Audit Committee on
disclosure matters that we identiﬁed whenassessing the overall presentation of the
ﬁnancial statements.

Parent company ﬁnancial
statements

Group ﬁnancial statements– Logistics restructuring – £13 million– UK store impairments and associated charges

within £63 million adjusting item in note 5 –£13 million
We capped materiality to £24.5 million so that it was
not higher than the prior period given the group’s
trading performance in the current period.
Adjusted proﬁt before tax has been used as it is
The Parent Company
the primary measure of performance used byacts principally as a
the group. We have used adjusted proﬁt measures holding company andthat exclude certain items from our determination therefore net assets is
to aid the consistency and comparability of oura key measure.
materiality base each year.

Rationale
for thebenchmarkapplied

MATERIALITY
Group materiality£24.5m£520m

Adjusted PBT
for determining
materiality£520m£24.5mPBTGroup materiality

Componentmateriality range£2.2m to £22.1m
Audit Committee
reporting threshold£1m

75
ANNUAL REPORT AND FINANCIAL STATEMENTS 2017

AN OVERVIEW OF THE SCOPE OF OUR AUDIT

Based on our assessment we focused ourgroup audit scope on the retail businesses
in the UK, Republic of Ireland and India,
which were subject to a full audit. We also
performed audit procedures on speciﬁcbalances for the remaining store exit
provisions in France. This work was
performed by the group audit team. In theprior period, China, Hong Kong and Czech
Republic were also subject to a full audit
but our scope changed following thegroup’s reduction in scale of its owned
international business.
These components were selected toprovide an appropriate basis forundertaking audit work to address the risks
of material misstatement identiﬁed above.
All other wholly owned and joint venturebusinesses were subject to analytical review
procedures. Whilst we audit the revenues
received by the Group from franchise
operations, which account for 3% (2017: 3%)of the Group’s revenue, we do not audit theunderlying franchise operations as part ofour Group audit.

At the parent entity level we also tested
the consolidation process and carried out
analytical procedures to conﬁrm ourconclusion that there were no signiﬁcantrisks of material misstatement of theaggregated ﬁnancial information of theremaining components not subject to afull audit.
3%

5%

95%

97%

REVENUEPROFIT BEFORE TAX

1%

14%

86%

99%

ADJUSTED PROFITBEFORE TAX
Full audit scope

NET ASSETS

Speciﬁed audit procedures andreview at group level

The most signiﬁcant component of thegroup is its retail business in the United
Kingdom, which accounts for 90% (2017:89%) of the Group’s reported revenue of£10,698 million, and generates operating
proﬁt of £23 million (2017: £328 million). The
group audit team performs the audit of the
UK business without the involvement of acomponent team. During the course of ouraudit, the group audit team, conducted 15
distribution centre and 35 retail store visits
in the UK to understand the current trading
performance and, at certain locations,performed tests of internal controls andvalidated levels of inventory held.
We operate a programme of planned visits
to overseas locations so that a senior
member of the group audit team visits eachof the components subject to a full audit
or speciﬁc audit procedures at least once
every two years, and the most signiﬁcant ofthem at least once a year. The programmeof visits are set out below, with future years
subject to change as the Group’s
operations continue to evolve.
Component

2017
2019
2018
(Last year) (This year) (Next year)

India



Republic of Ireland







STRATEGIC REPORTOur group audit was scoped by obtaining
an understanding of the group and its
environment, including group-wide
controls, and assessing the risks of material
misstatement at the group level.

In addition to our programme of planned
visits, we send detailed instructions to ourcomponent audit teams, include them in
our team brieﬁngs, discuss their risk
assessment, attend closing meetings,
and review their component reporting.

OTHER INFORMATION

In connection with our audit of the ﬁnancial
statements, our responsibility is to readthe other information and, in doing so,
consider whether the other information ismaterially inconsistent with the ﬁnancial
statements or our knowledge obtainedin the audit or otherwise appears to bematerially misstated.
If we identify such material inconsistencies
or apparent material misstatements, we are
required to determine whether there is amaterial misstatement in the ﬁnancial– Audit committee reporting – the section

In this context, matters that we are
speciﬁcally required to report to you as
uncorrected material misstatements of
the other information include where weconclude that:

the UK Corporate Governance Code – theparts of the directors’ statement required
under the Listing Rules relating to thecompany’s compliance with the UK
Corporate Governance Code containing
provisions speciﬁed for review by theauditor in accordance with Listing Rule9.8.10R(2) do not properly disclose adeparture from a relevant provision of
the UK Corporate Governance Code.

– Fair, balanced and understandable –the statement given by the directorsthat they consider the annual report andﬁnancial statements taken as a whole isfair, balanced and understandable andprovides the information necessary
for shareholders to assess the group’s
position and performance, businessmodel and strategy, is materiallyinconsistent with our knowledge
obtained in the audit; ordescribing the work of the audit
committee does not appropriately
address matters communicated by us
to the audit committee; or– Directors’ statement of compliance with

GOVERNANCE

Our opinion on the ﬁnancial statements
does not cover the other information and,except to the extent otherwise explicitly
stated in our report, we do not express any
form of assurance conclusion thereon.

statements or a material misstatementof the other information. If, based on thework we have performed, we conclude
that there is a material misstatement of
this other information, we are required toreport that fact.

We have nothing to report in respectof these matters.

FINANCIAL STATEMENTS

The directors are responsible for theother information. The other information
comprises the information included in
the annual report other than the ﬁnancial
statements and our auditor’s report thereon.

CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2017
Statutory Auditors' report on the Consolidated Financial Statements

5.7

Statutory Auditors' report on the Consolidated Financial
Statements

This is a translation into English of the Statutory Auditors’ Report on
the Financial Statements of the Company issued in French and it isprovided solely for the convenience of English speaking users.
This Statutory Auditors’ Report includes information required by
European regulation and French law, such as information about theappointment of the statutory auditors or verification of the
management report and other documents provided to shareholders.
This report should be read in conjunction with, and construed inaccordance with, French law and professional auditing standards
applicable in France.
For the year ended December 31, 2017

Our responsibilities under those standards are further described in
the Statutory Auditors’ Responsibilities for the Audit of theConsolidated Financial Statements section of our report.

Independence
We conducted our audit engagement in compliance withindependence rules applicable to us, for the period from January 1,
2017 to the date of our report and specifically we did not provide
any prohibited non-audit services referred to in Article 5 ofRegulation (EU) No 537/2014 or in the French Code of ethics (codede déontologie) for statutory auditors.

To the Carrefour Shareholders’ Meeting,Justification of Assessments - Key Audit
Matters

OpinionIn compliance with the engagement entrusted to us by yourShareholders’ Meetings, we have audited the accompanying
consolidated financial statements of Carrefour for the year ended
December 31, 2017.
In our opinion, the consolidated financial statements give a trueand fair view of the assets and liabilities and of the financial positionof the Group as at 31 December 2017 and of the results of its
operations for the year then ended in accordance with
International Financial Reporting Standards as adopted by theEuropean Union.
The audit opinion expressed above is consistent with our report to
the Accounts Committee.

In accordance with the requirements of Articles L.823-9 andR.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 judgment, 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 theconsolidated financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on
specific items of the consolidated financial statements.

Basis for Opinion
Audit Framework
We conducted our audit in accordance with professional standards
applicable in France. We believe that the audit evidence we haveobtained is sufficient and appropriate to provide a basis for our
opinion.
Key Audit Matters

Responses as part of our audit

Measurement and recognition of rebates and service agreement(See notes 1.3 and 5.2.1 of the consolidated financial statements)
The Group signed a significant number
agreements with suppliers which include:ofpurchase● Commercial discounts based on the purchase volumes oron other contractual terms such as the achievement ofthreshold or the increase of purchase volumes(« rebates ») ;●

Revenues from services provided to suppliers by theGroup (« service agreements »).

Rebates and service agreement received from suppliers by theGroup are estimated in compliance with the contractual terms
agreed in the purchase agreement with suppliers and arerecorded as a reduction of cost of sales.
Given the significant number of agreements and thespecificities of each agreement, the measurement and therecognition of rebates and service agreement represent a key
audit matter.

We have obtained an understanding on the internal controls
implemented by the Group on the measurement and therecognition of rebates and service agreement. We assessed theirdesign and implementation and we tested their effectivenessthrough a sample of agreement.
Our other procedures based on a sample of rebates and service
agreement consisted mainly of :● Matching the data used for the calculations of rebates andservice agreement with the contractual terms mentioned in
the agreements signed with the suppliers;● Comparing last year’s estimates with actual figures in order toassess the reliability of the rebates and service agreement
measurement’s process;● Matching the purchase volumes used for the calculation of the
expected rebates and service agreement for the year ended
December 31, 2017 with the purchase volumes recorded in theGroup’s procurement system;● Performed substantive analytical procedures on rebates andservice agreement variation.

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293

55. CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2017
Statutory Auditors' report on the Consolidated Financial Statements

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 thetax on the distribution of goods and services (ICMS) and to thecorresponding tax credits recorded, to the federal
contributions related to the social integration programme andto the financing of the social security system (Pis-Cofins) andto the tax amortization of goodwill recognised in 2007 in thecontext of the acquisition of Atacadão.
The assessment of the risk related to each tax litigation isreviewed regularly by the Group’s tax department and thesubsidiary’s Management, with the support of its externalcounsels for the most significant tax litigations in order todetermine the need of recording a provision or not, and in thecase where a provision should be recorded, to estimate theamount of the provision.
We considered the tax risk of the brazilian subsidiaries, forboth 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 complexityof 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 theprovision 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 thefollowing procedures, with the assistance of our tax experts:● Conductedinterviews with the tax department in order toassess the current state of the risks identified, theinvestigations 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 thathave 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 ofthe 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 inwhich 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 fairvalue and the value in use. The estimation of the value in use isperformed through the discounted future cash flows expectedin 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 rateused.
The fair value is defined as the price that would be received tosell the country’s activities within the ordinary course ofbusiness between market participants. It is estimated basedon external data when available or analysis prepared byinternal 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 basedon 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 thecarrying 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 therecoverable 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.

2942017 REGISTRATION DOCUMENT | CARREFOUR

In order to review procedures performed by the management todetermine the recoverable amount of Goodwill allocated to Italy
and Poland, we mainly :● assessed

the appropriateness of the methodology used todetermine the recoverable amount;● analysed for the calculation of the value in use:lthe consistency of the projected cash flows used with ourunderstanding of the Group’s perspectives and strategicorientations 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 theassistance 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 tookaccount multiples observed for comparable companies in theretail sector in Europe as well as the market value of realestate 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.
●

CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2017
Statutory Auditors' report on the Consolidated Financial Statements

Verification of the Information Pertaining
to the Group Presented in theManagement Report

Statutory Auditors’ Responsibilities for the
Audit of the Consolidated Financial
Statements

As required by law we have also verified in accordance withprofessional standards applicable in France the information
pertaining to the Group presented in the management report ofthe Board of Directors.

Objectives and audit approach

We have no matters to report as to its fair presentation and its
consistency with the consolidated financial statements.

Report on Other Legal and Regulatory
Requirements
Appointment of the Statutory Auditors
We were appointed as statutory auditors of Carrefour by the
Shareholders’ Meetings held on April 15, 2003 for Deloitte &Associés, on September 5, 1968 for KPMG S.A. (considering thefirm merger and acquisition during previous years) and on June 21,
2011 for Mazars.
As at December 31, 2017, Deloitte & Associés, KPMG S.A. andMazars were in the 15th year, 50th year and 7th year of total
uninterrupted engagement.

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 freefrom material misstatement. Reasonable assurance is a high levelof assurance, but is not a guarantee that an audit conducted inaccordance with professional standards will always detect amaterial misstatement when it exists. Misstatements can arise fromfraud or error and are considered material if, individually or in theaggregate, they could reasonably be expected to influence theeconomic 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 statutory audit does not include
assurance on the viability of the Company or the quality ofmanagement 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 judgment throughout the audit and furthermore:● Identifies and assesses the risks of material misstatement of the

Responsibilities of Management andThose Charged with Governance for theConsolidated Financial Statements
Management is responsible for the preparation and fairpresentation of the consolidated financial statements inaccordance 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.

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 andappropriate to provide a basis for his opinion. The risk of notdetecting a material misstatement resulting from fraud is higher
than for one resulting from error, as fraud may involve collusion,forgery, intentional omissions, misrepresentations, or theoverride of internal control.
● Obtains

an understanding of internal control relevant to theaudit 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.

In preparing the consolidated financial statements, management is
responsible for assessing the Company’s ability to continue as agoing 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.

● Evaluates the appropriateness of accounting policies used and

The Accounts Committee is responsible for monitoring thefinancial reporting process and the effectiveness of internal control
and risks management systems and where applicable, its internal
audit, regarding the accounting and financial reporting procedures.

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 basedon the audit evidence obtained up to the date of his 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 arequirement to draw attention in the audit report to the related
disclosures in the consolidated financial statements or, if suchdisclosures are not provided or inadequate, to modify theopinion expressed therein.

The consolidated financial statements were approved by the Boardof Directors.

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

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295

55. CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2017
Statutory Auditors' report on the Consolidated Financial Statements● Evaluates the overall presentation of the consolidated financial

statements and assesses whether these statements represent theunderlying transactions and events in a manner that achieves fairpresentation.

● Obtains

sufficient appropriate audit evidence regarding thefinancial 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 Accounts Committee
We submit a report to the Accounts Committee which includes inparticular 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 haveidentified.
Our report to the Accounts Committee includes the risks ofmaterial misstatement that, in our professional judgment, were ofmost significance in the audit of the consolidated financial
statements of the current period and which are therefore the key
audit matters, that we are required to describe in this audit report.

We also provide the Accounts Committee with the declaration
provided for in Article 6 of Regulation (EU) N° 537/2014, confirming
our independence within the meaning of the rules applicable inFrance such as they are set in particular by Articles L.822-10 toL.822-14 of the French commercial code (Code de commerce) andin the French code of ethics (Code de déontologie) for statutory
auditors. Where appropriate, we discuss with the Accounts
Committee the risks that may reasonably be thought to bear on
our independence, and the related safeguards.

The Statutory Auditors
Neuilly sur Seine, Paris-La Défense et Courbevoie, February 28, 2018
French original signed by

296

DELOITTE & ASSOCIÉSKPMG S.A.

MAZARS

Antoine De Riedmatten

Patrick-Hubert PetitDavid Chaudat

Stéphane Rimbeuf

Caroline Bruno-Diaz

Émilie Loreal

2017 REGISTRATION DOCUMENT | CARREFOUR

Who we are

The world around us

Other information
continued

Business review

Governance

Financials

Sustainability performance

Investors

Ahold Delhaize Annual Report 2017241

Independent auditor’s report
To: the General Meeting and Supervisory Board of Koninklijke Ahold Delhaize N.V.

Report on the financial statements for the year ended December 31, 2017
Our opinion
In our opinion:• The accompanying consolidated ﬁnancial statements give a true and fair view of the ﬁnancial position of Koninklijke Ahold Delhaize N.V. as at
December 31, 2017, and of its result and cash ﬂows for the year then ended in accordance with International Financial Reporting Standards
as adopted by the European Union (EU-IFRS) and with Part 9 of Book 2 of the Dutch Civil Code• The accompanying parent company ﬁnancial statements give a true and fair view of the ﬁnancial position of Koninklijke Ahold Delhaize N.V.
as at December 31, 2017, and of its result for the year then ended in accordance with Part 9 of Book 2 of the Dutch Civil Code.
What we have audited
We have audited the accompanying ﬁnancial statements for the ﬁnancial year ended December 31, 2017, of Koninklijke Ahold Delhaize N.V., Zaandam(”the Company”). The ﬁnancial statements include the consolidated ﬁnancial statements of Koninklijke Ahold Delhaize N.V. and its subsidiaries (together:”the Group”) and the parent company ﬁnancial statements.
The consolidated ﬁnancial statements comprise:• The consolidated balance sheet as at December 31, 2017
• The following statements for the ﬁnancial year ended December 31, 2017: The consolidated income statement, consolidated statementof comprehensive income, consolidated statement of changes in equity and consolidated statement of cash ﬂows
• The notes, comprising a summary of signiﬁcant accounting policies and other explanatory information.
The parent company ﬁnancial statements comprise:• The parent company balance sheet as at December 31, 2017
• The parent company income statement for the year then ended• The notes, comprising a summary of accounting policies and other explanatory information.
The ﬁnancial reporting framework that has been applied in the preparation of the ﬁnancial statements is EU-IFRS and the relevant provisions of Part 9 of Book 2of the Dutch Civil Code for the consolidated ﬁnancial statements and Part 9 of Book 2 of the Dutch Civil Code for the parent company ﬁnancial statements.
The basis for our opinion
We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. Our responsibilities under those standards are further
described in the section “Our responsibilities for the audit of the ﬁnancial statements” of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of Koninklijke Ahold Delhaize N.V. in accordance with the European Regulation on speciﬁc requirements regarding statutory audit of public
interest entities, the “Wet toezicht accountantsorganisaties” (Wta, Audit ﬁrms supervision act), the “Verordening inzake de onafhankelijkheid van accountants
bij assuranceopdrachten” (ViO–Code of Ethics for Professional Accountants, a regulation with respect to independence) and other relevant independence
requirements in the Netherlands. Furthermore, we have complied with the “Verordening gedrags- en beroepsregels accountants” (VGBA–Code of Ethics forProfessional Accountants, a regulation with respect to rules of professional conduct).

Who we are

The world around us

Other information
continued

Business review

Governance

Financials

Sustainability performance

Investors

Ahold Delhaize Annual Report 2017242

Our audit approach
Overview and context
Koninklijke Ahold Delhaize N.V. is an international food retail group operating supermarkets and e-commerce through components active in Belgium, theCzech Republic, Greece, Luxembourg, the Netherlands, Romania, Serbia and the United States and through participating in joint ventures in Indonesia
and Portugal. Our group audit scope and approach is set out in ”The scope of our group audit” section. We paid speciﬁc attention to the areas of focus
driven by the operations of the Group as set out below.
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the ﬁnancial statements. In particular, weconsidered where the Management Board made important judgments; for example in respect of signiﬁcant accounting estimates that involved making
assumptions and considering future events that are inherently uncertain.
In Note 2 of the ﬁnancial statements the company describes the areas of judgment in applying accounting policies and the key sources of estimation
uncertainty. Given the higher inherent risks of material misstatement in the impairment testing of goodwill and recognition of vendor allowance income,we considered these to be key audit matters as set out in the section “Key audit matters” of this report. Furthermore, we identiﬁed the employee beneﬁtplan measurement and disclosures as a key audit matter because of the complexity and judgment required.
Another area of focus, that was not considered to be a key audit matter was the risk fraud in revenue recognition. As in all of our audits, we also addressed therisk of management override of internal controls, including evaluating whether there was evidence of bias by management that may represent a risk of material
misstatement due to fraud.
We ensured that the audit teams both at group and at component levels included the appropriate skills and competencies which are needed for the auditof a retail company. The Group’s operations utilize a range of legacy IT systems. The adequacy and effective operation of controls over these systems is an
important element of the integrity of ﬁnancial reporting within the Group. We utilized IT specialists in our audit to evaluate the adequacy and effective operationof these controls. Furthermore, we included specialists in areas requiring valuation, tax and actuarial (including pension accounting) expertise.

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The outlines of our audit approach were as follows:
Materiality

continued

Overall materiality: €96 million which represents 5% of income before income taxes.
Audit scope

We conducted audit work at 10 components.
Each component is audited by local engagement teams that are based in the U.S., the Netherlands, Belgium, Greece,
Switzerland and Curacao.
Site visits were conducted in ﬁve countries: U.S., the Netherlands, Belgium, Greece and Switzerland.
Our audit coverage is 88% of consolidated net sales, 88% of total assets and 92% of income before income taxes.
Key audit matters

Impairment testing of goodwill
Recognition of vendor allowances
Employee beneﬁt plan measurement and disclosures
Materiality
The scope of our audit is inﬂuenced by the application of materiality which is further explained in the section “Our responsibilities for the audit of the
ﬁnancial statements”.
Based on our professional judgment, we set certain quantitative thresholds for materiality, including the overall materiality for the ﬁnancial statements as a whole
as set out in the table below. These, together with qualitative considerations, helped us to determine the nature, timing and extent of our audit procedures on theindividual ﬁnancial statement line items and disclosures and to evaluate the effect of identiﬁed misstatements both individually and in aggregate, on the ﬁnancial
statements as a whole and on our opinion.
Overall group materiality

How we determined it

Rationale for benchmark applied

Component materiality€96 million (2016: €66 million). Our 2017 materiality increased primarily because of the inclusion of the results from the former
Delhaize entities for a full year in 2017 as opposed to ﬁve months in 2016.
We used our professional judgment to determine the overall materiality. As a basis for our judgment we used 5% of income
before income taxes.
We used income before income taxes as the primary benchmark, a generally accepted auditing practice, based on our analysisof the common information needs of users of the ﬁnancial statements. On this basis we believe that income before income taxes
is an important metric for the ﬁnancial performance of the Company.
To each component in our audit scope, we, based on our judgment, allocate materiality that is less than our overall groupmateriality. The range of materiality allocated across components was between €7.5 and €85 million.

We also take misstatements and / or possible misstatements into account that, in our judgment, are material for qualitative reasons.
We agreed with the Supervisory Board that we would report to them misstatements identiﬁed during our audit above €4.8 million (2016: €3.3 million) as well as
misstatements below that amount that, in our view, warranted reporting for qualitative reasons.

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The scope of our group audit
Koninklijke Ahold Delhaize N.V. is the parent company of a group of entities. The ﬁnancial information of this group is included in the consolidated ﬁnancial
statements of Koninklijke Ahold Delhaize N.V.
We tailored the scope of our audit to ensure that we performed sufficient work to be able to give an opinion on the ﬁnancial statements as a whole, taking into
account the management structure of the Group, the nature of operations of its components, the accounting processes and controls, and the markets in which
the components of the Group operate. In establishing the overall group audit strategy and plan, we determined the type of work required to be performed at thecomponent level by the group engagement team and by each component auditor.
Six components were subject to audits of their complete ﬁnancial information, four of which were individually signiﬁcant to the Group. These components
include the retail operations at Ahold USA, Delhaize America, and the Netherlands as well as the Global Support Office activities in the Netherlands (which
includes ﬁnancing activities in Switzerland). The other two components, the Belgian and Greek retail operations, were selected to achieve appropriate audit
coverage over the consolidated ﬁnancial statements. Additionally, four components were selected for audit procedures to achieve appropriate coverage on
speciﬁc ﬁnancial line items in the consolidated ﬁnancial statements. These components included the Global Support Office activities in the United States andthe insurance captives located in the U.S., Ireland and Curacao.
In total, in performing these procedures, we achieved the following coverage on the ﬁnancial line items:
Net sales
Total assets
Income before income taxes

88%
88%
92%

None of the remaining components represented more than 3% of total Group net sales or 3% of total Group assets. For those remaining components we
attended internal quarterly closing meetings with local and Group management and performed, among other things, analytical procedures to corroborate ourassessment that there were no signiﬁcant risks of material misstatements within those components.
The Global Support Office activities in the Netherlands, which includes ﬁnancing activities in Switzerland, Group consolidation, ﬁnancial statement disclosuresand a number of complex items were audited by the group engagement team at the Company’s head office. This included procedures performed over ﬁnancial
instruments such as loans and derivatives, goodwill impairment testing, Management Board remuneration including share-based payments and complianceof accounting positions taken by the Group in accordance with EU-IFRS. For all other components we used component auditors who are familiar with the local
laws and regulations to perform the audit work.
Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those components tobe able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the consolidated ﬁnancial statements as awhole. The group engagement team directed the planning, reviewed the results of the work undertaken by component auditors and assessed and discussed
the ﬁndings with the component auditors during conference calls and site visits. In the current year, the group engagement team visited local management andthe component auditors at the in scope locations in the U.S., the Netherlands, Belgium, Greece and Switzerland.
By performing the procedures above at components, combined with additional procedures at Group level, we have been able to obtain sufficient andappropriate audit evidence on the Group’s ﬁnancial information, as a whole, to provide a basis for our opinion on the consolidated ﬁnancial statements.

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Ahold Delhaize Annual Report 2017245

Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most signiﬁcance in the audit of the ﬁnancial statements. We havecommunicated the key audit matters to the Supervisory Board. The key audit matters are not a comprehensive reﬂection of all matters that were identiﬁedby our audit and that we discussed. In this section, we described the key audit matters and included a summary of the audit procedures we performed on
those matters.
The key audit matters were addressed in the context of our audit of the ﬁnancial statements as a whole, and in forming our opinion thereon. We do notprovide separate opinions on these matters or on speciﬁc elements of the ﬁnancial statements. Any comments or observations we make on the resultsof our procedures should be read in this context.
The context of our audit is set by the Group’s 2017 results and operations. As the Delhaize merger took place in 2016, the key audit matter related to theaccounting for the merger transaction and alignment of accounting policies has been removed. Instead, the impairment testing of goodwill primarily related to
the Delhaize merger has been added as key audit matter. In addition we have removed the key audit matter related to store asset impairment due to absenceof signiﬁcant triggering events in 2017 that would require further impairment analysis at store level compared to 2016. The other key audit matters, recognitionof vendor allowances and employee beneﬁt plan measurement and disclosures, are consistent with prior year in view of their magnitude and the signiﬁcantestimates and assumptions involved.
Key audit matter
Impairment testing of goodwill
As described in Note 13 the Group had €6.9 billion of goodwill
as at December 31, 2017. The majority of this balance (€6 billion)
relates to the former Delhaize business acquired in 2016. This wasallocated at acquisition date to individual cash generating units(CGUs).
As disclosed in Note 2 and Note 3 to the ﬁnancial statements, theGroup tests its CGUs containing goodwill for impairment annuallyand if there is a triggering event at an earlier or later reporting
date. This is done by comparing the recoverable amounts of theindividual CGUs, being the higher of value-in-use and fair valueless costs of disposal, to the carrying amounts.
Our key audit matter focused on the goodwill allocated to
Hannaford, Food Lion and Delhaize Belgium CGUs whichamount to €3 billion of the total goodwill recognized in the
Delhaize acquisition. This was primarily driven by the inherent
limited headroom as the purchase price allocation was recently
performed combined with certain market developments in the
U.S. and Belgium. We also considered this to be a key audit matter
due to the magnitude of the goodwill balance in these CGUs andthe signiﬁcant judgment involved in estimating the recoverable
amounts. The recoverable amounts of these CGUs was basedon fair value less cost of disposal. Such amounts are based on
cash ﬂow forecasts that include management’s estimate of market
participant’s views of key value driver inputs and external market
conditions such as inﬂation, volume growth and competition,
capital expenditures and discount rates applied.

How our audit addressed the matter
We evaluated management’s process and design effectiveness of controls over the
impairment assessment including the appropriateness of management’s identiﬁcationof the Group’s CGUs, indicators of impairment, discount rates and forecasts.
With the support of our valuation experts we challenged management’s assumptions
used in determining the future cash ﬂow forecasts for the Hannaford, Food Lion andDelhaize Belgium CGUs. We benchmarked key market related assumptions (asdisclosed in Note 13) against external data and historical performance and assessed
the reasonableness of the assumptions by comparing the sum of the future cash ﬂow
forecasts of all CGUs to the market capitalization. We also veriﬁed the mathematicalaccuracy of management’s valuation models and agreed relevant data, including
assumptions on timing and future capital and operating expenditure to the ﬁve year plan.
Based on our procedures, we consider management’s key assumptions to be within areasonable range of our own expectations and the related disclosures in Note 13 to theﬁnancial statements to be adequate.

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Key audit matter

continued

Recognition of vendor allowances
The Group receives various types of vendor allowances from its
suppliers, as further disclosed in Note 2 and Note 3 to the ﬁnancial
statements. These allowances are a signiﬁcant component of costof sales. The vendor allowance receivable at December 31, 2017,
amounts to €454 million (Note 17).
The vendor allowance agreements with suppliers contain volumerelated allowances, promotional and marketing allowances andvarious other fees and discounts received in connection with thepurchase of goods for resale from those suppliers. The Group
recognizes vendor allowances as a reduction in cost of sales when
the performance conditions associated with the allowances havebeen met, for example when the product has been sold, placed orwhen the marketing campaign has been held.
We considered this to be a key audit matter because of themagnitude of amounts involved and the judgment required frommanagement to determine the nature and level of fulﬁlment of
the Company’s obligations under the vendor agreements andto recognize the amounts in the correct period. This requires adetailed understanding of the contractual arrangements in addition
to complete and accurate data to estimate purchase and sales
volumes and fulﬁlment of promotional programs.

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Ahold Delhaize Annual Report 2017246

How our audit addressed the matter
Our procedures included evaluating the design and testing the operating effectivenessof management’s controls around the completeness and accuracy of the contractual
agreements recognized in the accounting system.
Furthermore we challenged management’s assumptions used in determining the vendor
allowances through discussions with management and performing the following speciﬁc
substantive audit procedures. On a sample basis we agreed the recorded amounts to thevendor contracts and/or supporting documentation and conﬁrmed the related positions
and terms with the vendors. In addition, to evaluate the reliability of management’s
estimates, we performed a retrospective review of management judgments by testing
subsequent collections on prior period vendor allowance receivables. Finally we tested
cut-off through assessing the obligation fulﬁlment of vendor allowances recorded during
a period before and after year-end.
Based on our procedures we did not identify material exceptions and we foundmanagement’s recognition of vendor allowances to be supported by available evidence.

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Ahold Delhaize Annual Report 2017247

Other information

Key audit matter

How our audit addressed the matter

continued

Employee beneﬁt plan measurement and disclosures
The Group has deﬁned beneﬁt plans, primarily in the Netherlands
and in and the U.S., giving rise to deﬁned beneﬁt obligations of€4.8 billion and €1.4 billion, respectively (Note 23).

Our procedures included understanding and evaluating the design and testing theoperating effectiveness of controls related to key inputs (such as payroll data) and key
outputs of the Group’s pension process.

The Group also has a signiﬁcant number of union employees in the
U.S. whose pension beneﬁts are covered by multi-employer plans(we also refer to the risk factor on pension plan funding on page114 of the Annual Report). In Note 23 management has disclosed
a calculation, which is based on certain assumptions and leads toan estimate of the Group’s possible proportionate share of the total
net deﬁcit in these plans.
We considered this to be a key audit matter because of themagnitude of the amounts involved, management’s signiﬁcantjudgment applied in estimating the actuarial and demographic
assumptions (the most relevant being around salary increases,
inﬂation, discount rates and mortality rates) and the technicalexpertise required to measure the resulting deﬁned beneﬁt
pension obligation for the Group and multi-employer
plan disclosure.

We tested the actuarial and demographic assumptions and valuation methodologies
used by management to determine the Group’s various pension obligations.
We evaluated whether the key actuarial assumptions are reasonable (for example
by comparing to the published actuarial tables) and consistently applied. We tested
payroll data, through a combination of controls and test of details, and reconciled themembership census data used in the actuarial models to the payroll data.
In addition, we evaluated the potential exposure under the multi-employer plans in the
U.S. as disclosed in Note 23. We reconciled the related inputs used by management
to determine the Group’s possible proportionate share of the total net deﬁcit in theseplans to supporting documentation such as the latest available plan information andactuarial calculations.
Finally, we assessed the adequacy of disclosures related to the employee beneﬁt plans.
Our procedures did not identify material exceptions and we considered management’s
key assumptions to be within a reasonable range of our own expectations.

Report on the other information included in the annual report
In addition to the ﬁnancial statements and our auditor’s report thereon, the Annual Report contains other information that consists of:• The Management Report as deﬁned on page 120 of the Annual Report• The other information included in Message from our CEO, Who we are, World around us, Business review, Governance, Sustainability performanceand Investor sections and• The other information pursuant to Part 9 of Book 2 of the Dutch Civil Code.
Based on the procedures performed as set out below, we conclude that the other information:• Is consistent with the ﬁnancial statements and does not contain material misstatements• Contains the information that is required by Part 9 of Book 2 of the Dutch Civil Code.
We have read the other information. Based on our knowledge and understanding obtained in our audit of the ﬁnancial statements or otherwise, we haveconsidered whether the other information contains material misstatements.
By performing our procedures, we comply with the requirements of Part 9 Book 2 of the Dutch Civil Code and the Dutch Standard 720. The scope of suchprocedures was substantially less than the scope of those performed in our audit of the ﬁnancial statements.
The Management Board is responsible for the preparation of the other information, including the Management Report and the other information in accordancewith Part 9 Book 2 of the Dutch Civil Code.

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248

Report on other legal and regulatory requirements
Our appointment
We were appointed as auditors of Koninklijke Ahold Delhaize N.V. by the Supervisory Board following the passing of a resolution by the shareholders
at the Annual Meeting of Shareholders held on April 16, 2013. The appointment has been renewed annually by shareholders representing a total periodof uninterrupted engagement appointment of ﬁve years.
No prohibited non-audit services
To the best of our knowledge and belief, we have not provided prohibited non-audit services as referred to in Article 5(1) of the European Regulation on
speciﬁc requirements regarding statutory audit of public interest entities.
Services rendered
The non-audit services, in addition to the audit, that we have provided to the company and its controlled entities, for the period to which our statutory audit
relates, are disclosed in Note 4 of the notes to the parent company ﬁnancial statements.
Responsibilities for the ﬁnancial statements and the audit
Responsibilities of the Management Board and the Supervisory Board for the ﬁnancial statements
The Management Board is responsible for:
• The preparation and fair presentation of the ﬁnancial statements in accordance with EU-IFRS and with Part 9 of Book 2 of the Dutch Civil Code;• Such internal control as the Management Board determines is necessary to enable the preparation of the ﬁnancial statements that are free from material
misstatement, whether due to fraud or error.
As part of the preparation of the ﬁnancial statements, the Management Board is responsible for assessing the Company’s ability to continue as a going
concern. Based on the ﬁnancial reporting frameworks mentioned, the Management Board should prepare the ﬁnancial statements using the goingconcern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
The Management Board should disclose events and circumstances that may cast signiﬁcant doubt on the Company’s ability to continue as a going concern
in the ﬁnancial statements.
The Supervisory Board is responsible for overseeing the Company’s ﬁnancial reporting process.
Our responsibilities for the audit of the ﬁnancial statements
Our responsibility is to plan and perform an audit engagement in a manner that allows us to obtain sufficient and appropriate audit evidence to provide abasis for our opinion. Our audit opinion aims to provide reasonable assurance about whether the ﬁnancial statements are free from material misstatement.
Reasonable assurance is a high but not absolute level of assurance which makes it possible that we may not detect all misstatements. Misstatements may
arise due to fraud or error. They are considered to be material if, individually or in the aggregate, they could reasonably be expected to inﬂuence the economic
decisions of users taken on the basis of the ﬁnancial statements.
Materiality affects the nature, timing and extent of our audit procedures and the evaluation of the effect of identiﬁed misstatements on our opinion.
A more detailed description of our responsibilities is set out in the appendix to our report.
Amsterdam, February 27, 2018
PricewaterhouseCoopers Accountants N.V.
D. van Ameijden RA

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249

Appendix to our auditor’s report on the financial statements for the year ended December 31, 2017of Koninklijke Ahold Delhaize N.V.
In addition to what is included in our auditor’s report we have further set out in this appendix our responsibilities for the audit of the ﬁnancial statements andexplained what an audit involves.
The auditor’s responsibilities for the audit of the ﬁnancial statements
We have exercised professional judgment and have maintained professional scepticism throughout the audit in accordance with Dutch Standards on Auditing,ethical requirements and independence requirements. Our objectives are to obtain reasonable assurance about whether the ﬁnancial statements as a whole
are free from material misstatement, whether due to fraud or error. Our audit consisted, among other things of the following:• Identifying and assessing the risks of material misstatement of the ﬁnancial statements, whether due to fraud or error, designing and performing audit
procedures responsive to those risks, and obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of notdetecting 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 intentional override of internal control.
• Obtaining an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not forthe purpose of expressing an opinion on the effectiveness of the company’s internal control.
• Evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by theManagement Board.
• Concluding on the appropriateness of the Management Board’s use of the going concern basis of accounting, and based on the audit evidence obtained,
concluding whether a material uncertainty exists related to events and/or conditions that may cast signiﬁcant doubt on the company’s ability to continue asa 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 theﬁnancial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the dateof our auditor’s report and are made in the context of our opinion on the ﬁnancial statements as a whole. However, future events or conditions may cause thecompany to cease to continue as a going concern.
• Evaluating the overall presentation, structure and content of the ﬁnancial statements, including the disclosures, and evaluating whether the ﬁnancial
statements represent the underlying transactions and events in a manner that achieves fair presentation.
Considering our ultimate responsibility for the opinion on the company’s consolidated ﬁnancial statements we are responsible for the direction, supervision andperformance of the group audit. In this context, we have determined the nature and extent of the audit procedures for components of the group to ensure that
we performed enough work to be able to give an opinion on the ﬁnancial statements as a whole. Determining factors are the geographic structure of the group,
the signiﬁcance and / or risk proﬁle of group entities or activities, the accounting processes and controls, and the industry in which the group operates. On thisbasis, we selected group entities for which an audit or review of ﬁnancial information or speciﬁc balances was considered necessary.
We communicate with the Supervisory Board 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. In this respect we also issue an additional report to the Audit,
Finance and Risk Committee in accordance with Article 11 of the EU Regulation on speciﬁc requirements regarding statutory audit of public-interest entities.
The information included in this additional report is consistent with our audit opinion in this auditor’s report.
We provide the Supervisory Board 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 Supervisory Board, we determine those matters that were of most signiﬁcance in the audit of the ﬁnancial statementsof 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, not communicating the matter is in the public interest.

Signed reports

INDEPENDENT AUDITOR’S REPORTto the Members of Wesfarmers Limited

Ernst & Young
11 Mounts Bay Road
Perth WA 6000 Australia
GPO Box M939 Perth WA 6843

Tel: +61 8 9429 2222
Fax: +61 8 9429 2436
ey.com/au

Independent auditor’s report to the Members of Wesfarmers Limited
Report on the audit of the financial report
OpinionWe have audited the financial report of Wesfarmers Limited (the Company) and its subsidiaries (collectively the Group), which comprises
the consolidated balance sheet as at 30 June 2018, the consolidated income statement, the consolidated statement of comprehensive
income, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, notes to thefinancial statements and the directors’ declaration.
In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including:a)giving a true and fair view of the consolidated financial position of the Group as at 30 June 2018 and of its consolidated financial
performance for the year ended on that date; andb)complying with Australian Accounting Standards and the Corporations Regulations 2001.

Basis for opinion
We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further
described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group inaccordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting
Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our auditof the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report ofthe current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion
thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed
the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of ourreport, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to ourassessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the procedures
performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report.

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Wesfarmers 2018 Annual ReportOverview

INDEPENDENT AUDITOR’S REPORTto the Members of Wesfarmers Limited

1.

Impairment of non-current assets including intangible assets in Target
How our audit addressed the key audit matter

The determination of the recoverable amounts of property, plantand equipment (“PPE”), goodwill and other intangible assets
requires significant judgement by the Group.

Our audit procedures included an evaluation of the assumptions
and methodologies utilised in the assessments, with emphasison those relating to the determination of CGUs, forecast cash
flows, growth rates, discount rates, comparative industry valuation
multiples and other market evidence.

As required by Australian Accounting Standards, the Groupassesses at the end of each reporting period whether there are
any triggers indicating that an asset may be impaired. Goodwill
and indefinite life intangibles are assessed for impairment at least
annually.

We involved our valuation specialists to evaluate theappropriateness of key inputs, where relevant to the impairment
tests, including:t Discount rates

During the 2018 financial year, an impairment charge of$306 million was recognised in relation to Target, comprising
goodwill ($47 million), brand name ($238 million) and otherfixed assets ($21 million) as disclosed in Note 17 Impairment of
non-financial assets.

t Long-term inflation and growth rate assumptionst Terminal growth ratest Market evidence of industry earnings valuation multiplest Forecast exchange rate assumptions.

Sustainability

Impairment assessments are typically complex and judgemental,
as they include the modelling of a range of assumptions andestimates that will be impacted by future performance and market
conditions.

We also considered the adequacy of the financial report disclosures
regarding the impairment testing approach, key assumptions andsensitivity analysis.

Governance

There were no material reversals of impairment charges from prioryears during the 2018 financial year.

Operating andfinancial review

Why significant

Key assumptions, judgements and estimates applied in the Group’s
impairment assessment for Target, are set out in Note 17.
Note 17 also includes a statement that Target’s recoverable value
is sensitive to changes in the discount rate and the terminal value.
Based upon the disclosed sensitivity analysis, changes to the key
assumptions applied in the impairment test could give rise to an
impairment of the carrying value of the Target cash generating unit(“CGU”). Critical to supporting the recoverability of the Target CGU,
is the business’ ability to achieve its planned trading results.

Directors’
reportFinancialstatements
Signedreports

Wesfarmers 2018 Annual Report 147

Shareholder and
ASX information

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Signed reports

INDEPENDENT AUDITOR’S REPORTto the Members of Wesfarmers Limited2.

Supplier rebates

Why significant

How our audit addressed the key audit matter

Supplier rebates are rebates received by the Group from suppliers
associated with its retail operations.

Our audit procedures in respect of supplier rebates included thefollowing:

We determined this to be a key audit matter due to the quantumof supplier rebates recognised during the year and the judgement
required to be exercised in relation to a number of factors,
including:t We gained an understanding of the nature of each material
type of supplier rebate including assessing the significant
agreements in placet The commercial terms of each individual rebatet The appropriate timing of recognitiont Consideration of the nature of the rebate and whether theamount should be applied against the carrying value of
inventory or recognised in the income statementt We assessed the effectiveness of relevant controls in place
relating to the recognition and measurement of rebate amountst We performed comparisons of the various rebate arrangements
against the prior year and budget, including analysis of aging
profiles and where material variances were identified, obtained
supporting evidencet The accurate recognition and measurement of rebates inaccordance with Australian Accounting Standards and theGroup’s related processes and controls.

t We selected a sample of supplier rebates and tested whether
documentation existed supporting the recognition andmeasurement of the rebates in the 30 June 2018 financial
statements

Disclosures relating to the measurement and recognition of supplier
rebates can be found in Note 6 Inventories.

t We inspected a sample of material new contracts entered into,
both before and after the balance date and assessed whether
the treatment adopted by the Group was appropriatet We inquired of legal counsel as to the existence of other rebate
contracts or contracts with unusual terms and conditionst We inquired of business representatives including productcategory merchandisers, supply chain managers andprocurement staff as to the existence of any non-standard
agreements or side arrangements.

3.

Discontinued operations of Curragh

Why significant

How our audit addressed the key audit matter

During the period, the Group entered into an agreement to sell the
Curragh coal mine for $700 million. The agreement also included avalue share mechanism linked to future metallurgical coal prices.

Our audit procedures included the following:

Wesfarmers has recognised a $250 million profit after tax fromthe Curragh discontinued operation which incorporates boththe trading result to the point of effective disposal and the gain
on disposal. Refer to Note 20 Discontinued operations to thefinancial statements.

t We obtained and read the sale and purchase agreements andrelated documents to assess the calculation of the post-tax gain
on disposal recorded during the financial yeart We evaluated the key inputs of the post-tax gain on salecalculation, being the consideration received, transaction costs
incurred and working capital adjustments recognisedt We assessed whether the Group accurately determined thevalue of assets and liabilities derecognised as at the transaction
completion date and whether the operating result to the point ofeffective disposal was correctly recordedt Our tax specialists considered the tax impacts of the divestment
including considering external advice obtained by the Groupt We assessed the financial report disclosures, including theclassification of both continued and discontinued operationsin accordance with the requirements of Australian AccountingStandards.

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4.

Discontinued operations of Bunnings UK and Ireland (“BUKI”)

During the six months to 31 December 2017, an impairment
charge of $953 million after tax was recognised in relation to BUKI,
comprising goodwill ($777 million), brand name ($18 million), stock($66 million) and deferred tax assets ($92 million).
The related disclosures are included in the significant accounting
policies and in Note 17.

Our audit procedures in respect of assessing the appropriatenessof impairment recognised, included an evaluation of theassumptions and methodologies utilised in the assessments, inparticular those relating to the determination of the CGU, forecast
cash flows, growth rates, discount rates, comparative industry
valuation multiples and other market evidence.

On 25 May 2018, the Group agreed to divest the BUKI business fora nominal amount.

We involved our valuation specialists to evaluate theappropriateness of key inputs, including:In the 2018 financial statements, the Group has recognised a$1.66 billion loss after tax from the discontinued operations of
BUKI which incorporates the impairment charge recognised in
the first six months of the year, the trading result to the point ofeffective disposal and the loss on disposal.

t Discount rates

The related disclosures are included in the significant accounting
policies and in Note 20.

t Commodity price assumptionst Terminal growth ratest Market evidence of industry earnings valuation multiplest Long-term inflation and growth rate assumptions

Sustainability

How our audit addressed the key audit matter

Operating andfinancial review

Why significantt Forecast exchange rate assumptionst Performing sensitivity analysis on the model forecasts and key
assumptions.

t We read the sale and purchase agreements and related
documents to obtain an understanding of the key provisions of
the sale and to assess the calculation of the post-tax loss on
disposal recorded during the financial year

GovernanceOur audit procedures in respect of the discontinued operations
included the following:t We assessed whether the Group accurately determined thevalue of assets and liabilities derecognised as at the transaction
completion date and whether the operating result to the point ofeffective disposal was correctly recordedt We assessed the financial statement disclosures, including theclassification of both continued and discontinued operationsin accordance with the requirements of Australian AccountingStandards.

Directors’
reportt Our tax specialists considered the tax impacts of the divestment
including considering external advice obtained by the Group

Financialstatements
Signedreports

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Signed reports

INDEPENDENT AUDITOR’S REPORTto the Members of Wesfarmers Limited

Information other than the financial report and auditor’s report thereon
The directors are responsible for the other information. The other information comprises the information included in the Group’s Annual
Report for the year ended 30 June 2018, but does not include the financial report and our auditor’s report thereon.
Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance
conclusion thereon with the exception of the Remuneration Report and our related assurance opinion.
In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether
the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to bematerially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required toreport that fact. We have nothing to report in this regard.

Responsibilities of the directors for the financial report
The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with
Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary toenable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud
or error.
In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing,as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend toliquidate the Group or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the financial report
Our objectives are to obtain reasonable assurance about whether the financial report as a whole is 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 the Australian Auditing 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 this financial report.
As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional
scepticism throughout the audit. We also:t Identify and assess the risks of material misstatement of the financial report, 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.
t Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
t Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures
made by the directors.
t Conclude on the appropriateness of the 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’sreport to the related disclosures in the financial report 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 theGroup to cease to continue as a going concern.
t Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial
report represents the underlying transactions and events in a manner that achieves fair presentation.
t Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to
express an opinion on the financial report. 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 directors 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 directors with a statement that we have complied with relevant ethical requirements regarding independence, andto communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and whereapplicable, related safeguards.
From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial
report of the current year 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.

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INDEPENDENT AUDITOR’S REPORTto the Members of Wesfarmers Limited

Report on the audit of the Remuneration Report

We have audited the Remuneration Report included in the directors’ report for the year ended 30 June 2018.
In our opinion, the Remuneration Report of Wesfarmers Limited for the year ended 30 June 2018 complies with section 300A of the
Corporations Act 2001.

Operating andfinancial review

Opinion on the Remuneration Report

Responsibilities

Ernst & Young

Governance

D S Lewsen
Partner
Perth
14 September 2018

Sustainability

The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section
300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conductedin accordance with Australian Auditing Standards.

Directors’
reportFinancialstatements
Signedreports

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