Independent auditor’s report

To the Annual General Meeting of shareholders of Akzo Nobel N.V.

Report on the audit of the Financial statements 2014

Our opinion

We have audited the Financial statements 2014 of Akzo Nobel N.V. (the Company), based in Amsterdam. The Financial statements include the Consolidated financial statements and the Company financial statements.

In our opinion:

  • The Consolidated financial statements give a true and fair view of the balance sheet of Akzo Nobel N.V. as at December 31, 2014 and of its result and its cash flows for 2014 in accordance with International Financial Reporting Standards as adopted by the European Union (EU-IFRS) and with Part 9 of Book 2 of the Netherlands Civil Code
  • The Company financial statements give a true and fair view of the balance sheet of Akzo Nobel N.V. as at December 31, 2014 and of its result for 2014 in accordance with Part 9 of Book 2 of the Netherlands Civil Code

The Consolidated financial statements comprise:

  1. Consolidated balance sheet as at December 31, 2014
  2. The following Consolidated statements for 2014: the statement of income, and the statements of comprehensive income, changes in equity and cash flows
  3. Notes, comprising a summary of the significant accounting policies and other explanatory information

The Company financial statements comprise:

  1. The Company balance sheet as at December 31, 2014
  2. The Company statement of income for 2014
  3. Notes, comprising a summary of the significant accounting policies and other explanatory information

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 are independent of Akzo Nobel N.V. in accordance with the “Verordening inzake de onafhankelijkheid van accountants bij assurance-opdrachten”(ViO) and other relevant independence requirements in the Netherlands. Furthermore we have complied with the “Verordening gedrags- en beroepsregels accountants” (VGBA).

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Materiality

Misstatements can arise from fraud or errors and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these Financial statements. The materiality affects the nature, timing and extent of our audit procedures and the evaluation of the effect of identified misstatements on our opinion.

Based on our professional judgment we determined the materiality for the Financial statements as a whole at €64 million. The materiality is determined with reference to consolidated profit before taxation (7.5 percent). In addition, the appropriateness for the materiality was assessed by comparing the amount to consolidated revenue (0.4 percent) and total assets (0.4 percent). We have also taken into account misstatements and/or possible misstatements, if any, that in our opinion are material for qualitative reasons.

Audits of group entities (components) were performed to component materiality levels, the majority of which were based on the relevant local statutory audit materiality which is lower than the materiality for the Financial statements as a whole. In the other cases, component materiality was determined between €30 and €50 million by the judgment of the group audit team, having regard to the materiality for the Financial statements as a whole and the reporting structure within the group.

We agreed with the Supervisory Board that misstatements in excess of €3 million, which are identified during the audit, would be reported to them, as well as smaller misstatements that in our view must be reported on qualitative grounds.

Scope of the group audit

Akzo Nobel N.V. is head of a group of entities. The financial information of this group is included in the Financial statements of Akzo Nobel N.V.

Because we are ultimately responsible for the opinion, we are also responsible for directing, supervising and performing the group audit. In this respect we have determined the nature and extent of the audit procedures to be carried out for group entities. Decisive were the size and/or the risk profile of the groupentities or operations. On this basis, we selected groupentities for which an audit or review had to be carried out on the complete set of financial information or specific items.

We scoped components of Akzo Nobel N.V. into the group audit where they are of significant size, have significant risks to the group or are considered significant for other reasons. In case this determination does not provide adequate coverage over the Financial statements, we used our judgment to scope-in additional components. Operating companies and operating business units are reporting components in our group audit. Applying these scoping criteria led to 51 components in scope, in total covering 15 countries. Furthermore, we performed specified audit procedures at corporate level and at business unit level on significant risk areas such as post-retirement benefit provisions, goodwill and other asset impairment testing and tax positions. This resulted in coverage of 61 percent of group revenue, 68 percent of group profit before taxation and 81 percent of total group assets. In addition, we performed analytical procedures at the aggregated group level on the remaining components in order to corroborate our assessment that there are no significant risks of material misstatement within these remaining components.

The group audit team provided detailed instructions to all component auditors which covered the significant audit areas, including the relevant risks of material misstatement, and set out the information required to be reported back to the group audit team. The group audit team visited component locations in the US, UK, France, Germany and China. Telephone calls were also held with the auditors of these components and of all other components that were not physically visited. During these visits and calls, the findings and observations reported to the group audit team were discussed in more detail. Furthermore, we performed detailed file reviews and any further work deemed necessary by the group audit team was then performed.

By performing the procedures mentioned above at group entities, together with additional procedures at group level, we have been able to obtain sufficient and appropriate audit evidence about the group’s financial information to provide a basis for our opinion on the Financial statements.

Our key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the Financial statements. We have communicated the key audit matters to the Supervisory Board. The key audit matters are not a comprehensive reflection of all matters discussed.

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.

Goodwill and other asset impairment testing

The annual impairment test was significant to our audit because the assessment process is complex and the test imposes estimates. In performing the impairment testing for goodwill and other assets, the company used various assumptions in respect of future market and economic conditions, market share, revenue and margin development. For our audit we assessed and tested the assumptions, methodologies, the weighted average cost of capital and other data used by the company, for example by comparing them to external data, such as expected inflation rates, external market growth expectations and by analyzing sensitivities in Akzo Nobel’s valuation model. We included in our team a valuation specialist to assist us with these procedures. We specifically focused on the sensitivity in the available headroom for the cash generating units, evaluating whether a reasonably possible change in assumptions could cause the carrying amount to exceed its recoverable amount. We also assessed the historical accuracy of the Board of Management’s estimates. We assessed the adequacy of the company’s disclosures included in Note 7 about those assumptions to which the outcome of the impairment test is most sensitive.

Post-retirement benefit provisions

The total amount of post-retirement benefit provisions consists of total defined benefit obligations of €17 billion offset by total plan assets amounting to €16 billion as per December 31, 2014. The largest pension plans are the ICI Pension Fund (ICIPF) and the AkzoNobel Pension Scheme in the UK, which together account for 83 percent of the defined benefit obligation and 91 percent of plan assets. As part of our audit we have tested internal controls as well as assessed and challenged the Board of Management’s actuarial assumptions such as discount rates, expected inflation rates, mortality tables, indexation percentages, valuation of plan assets and future salary increases. We benchmarked the discount rates utilized by the company with external sources such as the AA Corporate yield curve published by Merrill Lynch and peer companies. In performing our audit we have used pension specialists including actuarial and valuation specialists. We specifically focused on the de-risking transactions executed by the trustee of ICIPF and we verified the appropriate accounting through other comprehensive income. We also assessed the adequacy of the company’s disclosure in Note 15 in respect of post-retirement benefit provisions.

Accounting for income tax positions

Income tax positions were significant to our audit because the assessment process is complex and imposes estimates. AkzoNobel’s operations are subject to income taxes in various jurisdictions and changes in the company’s business model might have certain tax implications. We have performed audit procedures on the completeness and accuracy of the amounts recognized as current and deferred tax, including the assessment of correspondence with tax authorities and the evaluation of tax exposures. In addition, in respect of deferred tax assets, we assessed the Board of Management’s analysis and assumptions supporting the probability that deferred tax assets recognized in the balance sheet will be recovered through taxable income in future years and available tax planning strategies. We included in our team local and international tax specialists to analyze the tax positions and to challenge the assumptions used to determine tax positions. We also assessed the adequacy of the company’s disclosure in Note 6 in respect of tax and uncertain tax positions.

Fraud at US subsidiary

In November 2014, the company announced it had been subject to fraud targeted at one of its subsidiaries located in the US, where external payments were made. The company engaged external advisors to investigate the fraud and to assess the internal control framework of this subsidiary. Furthermore, the company determined the impact on the Financial statements. We discussed the scoping of the work by the external advisors and we reviewed the outcome of the work performed by them. In addition to the already planned procedures, we expanded our audit procedures on payments made to external parties by the company in order to verify that these payments are appropriately authorized and supported by evidence as part of the regular business activities. We also verified that there is no evidence of any involvement of AkzoNobel’s Board of Management serving in a financial reporting oversight role. We assessed the adequacy of the Board of Management’s response including investigations and corrective actions. The company disclosed the financial impact of the fraud in the US in Note 3 of the Financial statements.

Responsibilities of the Board of Management and the Supervisory Board for the Financial statements

The Board of Management is responsible for the preparation and fair presentation of the Financial statements in accordance with EU-IFRS and Part 9 of Book 2 of the Netherlands Civil Code, and for the preparation of the report of the Board of Management in accordance with Part 9 of Book 2 of the Netherlands Civil Code. Furthermore, the Board of Management is responsible for such internal control as the Board of Management determines is necessary to enable the preparation of the Financial statements that are free from material misstatement, whether due to errors or fraud.

As part of the preparation of the Financial statements, the Board of Management is responsible for assessing the company’s ability to continue as a going concern. Based on the financial reporting frameworks mentioned, the Board of Management should prepare the Financial statements using the going concern basis of accounting unless the Board of Management either intends to liquidate the company or to cease operations, or has no realistic alternative but to do so. The Board of Management 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 objective is to plan and perform the audit assignment in a manner that allows us to obtain sufficient and appropriate audit evidence for our opinion.

Our audit has been performed with a high, but not absolute, level of assurance, which means we may not have detected all errors and fraud.

For more information about an audit of financial statements, we refer to the NBA website: www.nba.nl/standardtexts-auditorsreport.

Report on other legal and regulatory requirements

Report on the report of the Board of Management and the other information

Pursuant to legal requirements of Part 9 of Book 2 of the Netherlands Civil Code (concerning our obligation to report about the report of the Board of Management and other information):

  • We have no deficiencies to report as a result of our examination whether the report of the Board of Management, as set out on pages 1 to 138, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of the Netherlands Civil Code, and whether the information as required by Part 9 of Book 2 of the Netherlands Civil Code has been annexed
  • We report that the report of the Board of Management, to the extent we can assess, is consistent with the Financial statements

Engagement

We were appointed before 2008 for the first time as auditor of Akzo Nobel N.V. and operated as auditor since then. We were re-appointed by the Annual General Meeting of Shareholders on April 29, 2014, as auditor of Akzo Nobel N.V. for the years 2014 and 2015.

Amsterdam, February 11, 2015
KPMG Accountants N.V.

E.J.L. van Leeuwen RA