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Independent auditor’s report

To: the Annual General Meeting of shareholders and the Supervisory Board of Akzo Nobel N.V.

Report on the Financial statements 2017

Our opinion

In our opinion:

  • Akzo Nobel N.V.’s consolidated financial statements give a true and fair view of the financial position of the Group 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; and
  • Akzo Nobel N.V.’s company financial statements give a true and fair view of the financial position of the Company 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 2017 of Akzo Nobel N.V., Amsterdam (‘the Company’). The financial statements include the consolidated financial statements of Akzo Nobel N.V. and its subsidiaries (together: ‘the Group’) and the company financial statements.

The consolidated financial statements comprise:

  • the consolidated balance sheet as at December 31, 2017;
  • the following statements for 2017: the consolidated statement of income and the consolidated statements of , changes in equity and cash flows; and
  • the notes, comprising a summary of significant accounting policies and other explanatory information.

The Company financial statements comprise:

  • the balance sheet as at December 31, 2017;
  • the statement of income for the year then ended;
  • the notes, comprising a summary of the 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 2 of the Dutch Civil Code for the consolidated financial statements and Part 9 of Book 2 of the Dutch Civil Code for the 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 Akzo Nobel 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 for Professional Accountants, a regulation with respect to rules of professional conduct).

Our audit approach

Overview and context

Akzo Nobel N.V. is a global paints and performance coatings company and a major producer of specialty chemicals headquartered in the Netherlands. The group is comprised of several components and therefore we considered our group audit scope and approach as set out in the section ‘The scope of our group audit’. We paid specific attention to the areas of focus driven by the operations of the Group, as set out below.

The financial year 2017 was characterised by management’s announcement in April 2017 for plans to separate the Specialty Chemicals Business. The company received approval of the EGM on 30 November 2017 to proceed with the separation through either a legal demerger or private sale. Furthermore, management concluded that the Specialty Chemicals Business will be reported in accordance with IFRS 5 – ‘Non-Current Assets Held for Sale and discontinued operations’ in the 2017 consolidated financial statements. Further details of the implications of this event are described in the section on key audit matters.

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements also taking into account the aforementioned separation plans for the Specialty Chemicals Business. In particular, we considered where the Board of Management made important judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. In note 1 of the consolidated financial statements the company describes the areas of judgment in applying accounting policies and the key sources of estimation uncertainty. Given the significant estimation uncertainty and the related higher inherent risk of material misstatement in the valuation of goodwill and other intangibles with indefinite useful lives, valuation of the post-retirement benefit provisions and accounting for and valuation of income tax positions (including the impact of the US tax reform), we considered these to be key audit matters as set out in the key audit matter section of this report. In addition, we identified the application of IFRS 5 for the Specialty Chemicals Business as a new key audit matter this year as this accounting treatment is complex, non-recurring and it materially impacts the financial statements. Last year we also included a key audit matter related to the transition to a new auditor which is no longer applicable this year.

Other areas of focus, that were not considered to be key audit matters were the disclosures relating to the transition in 2018 from accounting standard IAS 18 – ‘Revenue’ to IFRS 15 ‘Revenue from contracts with customers’, and from IAS 39 - ‘Financial Instruments’ to IFRS 9 ‘Financial Instruments, environmental-, sundry- and legal provisions, the overall impact of the planned separation on our audit including understanding of management’s separation process, as well as information technology general controls (‘ITGCs’). The ITGC’s are the policies and procedures used by the Company to ensure information technology (‘IT’) operates as intended and provides reliable data for financial reporting purposes. As in all of our audits, we also addressed the risk of fraud due to management override of internal control, including evaluating whether there was evidence of bias by the Board of Management that may represent a risk of material misstatement.

We ensured that the audit teams both at group and at component levels included the appropriate skills and competences which are needed for the audit of a paints and performance coatings company and a producer of specialty chemicals. We also included specialists or experts in the areas of tax, pensions, IT, treasury and valuations on our team.

The outlines of our audit approach were as follows:

Materiality

  • Overall materiality: €70 million

Audit scope

  • We conducted audit work at 44 components in 14 countries
  • Site visits by the group team were conducted in 8 countries – US, China, Sweden, UK, Brazil, Germany, Singapore and the Netherlands
  • Audit coverage: 71% of consolidated revenue, 72% of consolidated total assets and 75% of consolidated profit before tax

Key audit matters

  • Specialty Chemicals Business recorded as Held for sale and disconinued operations (IFRS5)
  • Impairment testing of goodwill and other intangibles with indefinite useful lives
  • Valuation of post-retirement benefit provisions
  • Valuation of deferred tax assets and uncertain tax positions

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 determined 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 the individual 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.

Materiality

Overall group materiality

€70 million (2016: €65 million)

Basis for determining materiality

We used our professional judgment to determine overall materiality. As a basis for our judgment we used 5% of total profit before tax for continued and discontinued operations, and excluded separation related identified items.

Rationale for benchmark applied

We used profit before tax from continued and discontinued operations as the primary benchmark based on our analysis of the common information needs of users of the financial statements. On this basis we believe that profit before tax is an important metric for the financial performance of the company. We excluded separation related identified items as these are non-recurring and are not representative of normal operating results.

Component materiality

To each component in our audit scope, we, based on our judgement, allocate materiality that is less than our overall group materiality. The range of materiality allocated across components was between €8 million and €60 million.

We also take misstatements and/or possible misstatements into account that, in our judgement, are material for qualitative reasons. We agreed with the Supervisory Board that we would report to them misstatements identified during our audit above €3.5 million (2016: €3 million) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.

The scope of our group audit

Akzo Nobel N.V. is the parent company of a global group of entities managed by the Board of Management and Executive Committee. The financial information of this group is included in the consolidated financial statements of Akzo Nobel 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 the component level by the group engagement team and by each component auditor.

The group audit includes the following individual financially significant component: Decorative Paints Europe & Africa. Thirty components, including the aforementioned significant component, were subjected to audits of their complete financial information as those components are material to the group. Twelve components were subjected to specific risk-focussed audit procedures as they include significant or higher risk areas. Additionally, two components were selected for audit procedures to achieve appropriate coverage on financial line items in the consolidated financial statements. In total, in performing these procedures, we achieved the following coverage on the financial line items (which include both continued and discontinued operations, as well as assets held for sale):

Decorative Paints

71%

Performance Coatings

72%

Specialty Chemicals

75%

None of the remaining components represented more than 1% of total group revenue or total group assets. For the remaining components not in our group scope we performed, among others, analytical procedures to corroborate our assessment that there were no risks of material misstatements within those components.

The group consolidation, financial statement disclosures and a number of complex items are controlled and monitored centrally by Akzo Nobel N.V. and are audited by the group engagement team at the head office. These include impairment testing of goodwill and other intangibles with indefinite useful lives, valuation of post-retirement benefit provisions, valuation of deferred tax assets and uncertain tax positions, assets held for sale / discontinued operations, environmental-, sundry- and legal provisions, share based payments, treasury, IT and the Akzo Nobel N.V. standalone entity.

The group team also performed central procedures over the controls performed by the Business Areas and other central functions, where relevant for our audit. This included: Business performance review controls and indirect entity level controls, such as a , relevant code of conduct trainings and a whistle-blower policy.

For all other components we used component auditors who are familiar with the local laws and regulations to perform the audit work. For all components in scope we performed hard close audit procedures on the interim October balance sheet positions and results. These hard close audit procedures include substantive audit work on material balances and transactions at group level as well as components in scope for our group audit.

Where the work was performed by component auditors, we determined the level of involvement we needed to have in their audit work to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the consolidated financial statements as a whole. The group engagement team visits the component teams on a rotational basis. The most significant components are visited every year and other components are visited depending on specific considerations which include amongst others audit observations, specific risks identified or other major events. In the current year the group engagement team visited the component teams and local management in the US, China, Sweden, UK, Brazil, Germany, Singapore and the Netherlands and conference/video calls were held with all the component auditors on various moments during the year. During these visits and calls, the audit approach, findings and observations reported to the group audit team were discussed in more detail. Furthermore, we reviewed selected working papers of the component teams and performed any further work considered necessary by the group audit team.

By performing the procedures above at components, combined with additional procedures at group level, we have been able to obtain sufficient and appropriate audit evidence on the Group’s financial information, as a whole, to provide a basis for our opinion on the financial statements.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in the 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 that were identified by 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 not provide separate opinions on these matters or on specific elements of the financial statements. Any comments or observations we make on the results of our procedures should be read in this context.

Key audit matter

How our audit addressed the matter

Specialty Chemicals Business recorded as Held for sale and Discontinued Operations (IFRS5)
Note 2

In April 2017 Akzo Nobel N.V. announced their plans to separate the Specialty Chemicals Business and received the approval of the EGM on November 30, 2017 to proceed with the separation through either demerger or private sale. Management concluded that the Specialty Chemicals Business will be reported in accordance with IFRS 5 – ‘Non-Current Assets Held for Sale and discontinued operations’ in the 2017 consolidated financial statements.

The application of IFRS 5 ‘Non-Current Asset Held for Sale and Discontinued operations’ is significant to our audit because the assessment of the classification is complex, the transaction and its accounting is non-routine and involves significant management judgements. These include, amongst others, the date of classification of the non-current assets as held for sale, the identification of the disposal group and the presentation of its results as discontinued operations. As a result of these conclusions, there are requirements around the valuation of the assets of the disposal group and presentation in the consolidated financial statements and disclosure notes, the identification of income and expenses allocated to the Specialty Chemicals Business, assumptions and estimates made with regard to the allocations, and adjustments to be recorded (e.g. central cost allocations, seizing of depreciation and amortization).

Our audit procedures included, among others, an evaluation of the client’s conclusions on the classification of the disposal group as held for sale and the results of the Specialty Chemicals Business as discontinued operations.

This included evaluating whether the Specialty Chemicals Business classifies as one disposal group, assessing the valuation of the assets of the disposal group as the lower of the carrying amount and fair value less cost to sell, the presentation of the assets in the financial statements and the date as of which the Specialty Chemicals Business is classified as held for sale. In addition we evaluated the presentation of the results of the Specialty Chemicals Business as discontinued operations, the allocated income and expenses including assumptions and estimates made with regard to the allocation, as well as the adjustments recorded relating to central cost allocations and reversal of depreciation and amortization. We have made use of technical accounting specialists as part of our audit.

Impairment testing of goodwill and other intangibles with indefinite useful lives
Note 9

As at December 31, 2017 the Company’s Goodwill and other intangibles with indefinite useful lives are valued at €3.3 billion (of which €0.5 billion is classified as held for sale). The key assumptions and sensitivities are disclosed in note 9 to the consolidated financial statements. The annual impairment test for Goodwill and indefinite life intangible assets is significant to our audit because the assessment process is complex, involves significant management judgement and is based on assumptions that are affected by expected future market and economic conditions, revenue growth, margin developments, the discount rates and terminal growth rates. This is consistent with prior year. Based on the annual goodwill impairment test, including sensitivity tests, the Board of Management concluded that no impairment of goodwill and other intangibles with indefinite useful lives was necessary.

Our procedures included, among others, evaluation of the assumptions and methodologies used in the annual impairment test prepared by the company, an assessment of the mathematical accuracy of the calculations and a reconciliation to the 2018 five year outlook as approved by the Board of Management. We have challenged management, primarily on their assumptions applied to which the outcome of the impairment test is the most sensitive, in particular, the projected revenue growth, margin developments, discount rates and terminal growth rates. We performed independent testing and analysis of the basic peer group composition, amongst others, and challenged management by comparing the assumptions to historic performance of the company and local economic developments, taking into account the sensitivity tests of the goodwill balances for any changes in the respective assumptions. We assessed the adequacy of the company’s disclosures in note 9 to the consolidated financial statements and in particular the key assumptions to which the outcome of the impairment test is most sensitive.

Valuation of post-retirement benefit provisions
Note 16

The Post-retirement benefit provisions consist of defined benefit obligations (€15.3 billion, of which €0.9 billion is classified as held for sale) offset by plan assets (€14.9 billion, of which €0.3 billion is classified as held for sale). The largest pension plans are the ICI Pension Fund (ICIPF) and the AkzoNobel Pension Scheme (CPS) in the UK which together account for 82 percent of defined benefit obligations (DBO) and 90 percent of plan assets. Management procedures over the Post-retirement benefit provisions, specifically the procedures on the DBO, the de-risking transactions during the year, and updates to the assumptions were significant to our audit because the assessment process is complex, involves significant management judgement and is based on actuarial assumptions, including discount rates, compensation increase, expected inflation rates, mortality tables and indexation percentages, as disclosed in note 16 to the consolidated financial statements. This is consistent with prior year. Technical expertise is required to determine the amounts and significant de-risking transactions that have occurred.

We evaluated the Board of Management’s actuarial assumptions, specifically the changes in assumptions applied in the UK, the valuation methodologies used and we assessed the objectivity and competence of the company’s external pension experts used for the calculation of the Post-retirement benefit positions. We have challenged management, primarily on their assumptions applied to which the Post-retirement benefit provisions are the most sensitive, by performing independent testing and comparing to the published actuarial tables, amongst other. We also tested the participant census data and the valuation of the plan assets through independent price testing. Further, we tested the de-risking transactions to the UK pension plans and we verified the appropriate accounting. We also assessed the adequacy of the company’s disclosure in note 16 to the consolidated financial statements.

Valuation of deferred tax assets and uncertain tax positions
Note 7

The Group operates in various countries and is subject to income taxes in various tax jurisdictions. The assessment of the valuation of deferred tax assets, resulting from net operating losses and temporary differences, and provisions for uncertain tax positions is significant to our audit as the calculations are complex and depend on sensitive and judgmental assumptions. These include, amongst others, long-term future profitability and local fiscal regulations and new developments (e.g. the US Tax reform and impact of the separation of the company). The company’s disclosures concerning income taxes are included in note 7 to the consolidated financial statements.

Our procedures included, among others, procedures on the completeness and accuracy of the deferred tax assets and uncertain tax positions recognized. We challenged and tested the Board of Management’s assessment of the recoverability of the deferred tax assets, including the projected revenue growth and margin development based on the 2018 five year outlook as approved by the Board of Management, the probability of future cash outflows of the uncertain tax positions identified by the company and the impact of the planned separation on the business projections. We also assessed the applicable local fiscal regulations and developments, in particular those related to changes in the statutory income tax rate (e.g. the US Tax reform) and of the statutes of limitation since these are key assumptions underlying the valuation of the deferred tax assets and uncertain tax positions. We analysed the tax positions and evaluated the assumptions and methodologies used. In addition, we also focused on the adequacy of the company’s disclosures on deferred tax assets and uncertain tax positions and assumptions used.

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 report of the Board of Management, as defined in note 1 to the financial statements;
  • the other information pursuant to Part 9 of Book 2 of the Dutch Civil Code;
  • other parts of the annual report: How AkzoNobel performed in 2017, Business Performance, Leadership, Governance and compliance, Sustainability statements, Index, Financial calendar and Glossary.

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 have considered whether the other information contains material misstatements.

By performing our procedures, we comply with the requirements of Part 9 of Book 2 of the Dutch Civil Code and the Dutch Standard 720. The scope of such procedures was substantially less than the scope of those performed in our audit of the financial statements.

The Board of Management is responsible for the preparation of the other information, including the directors’ report and the other information in accordance with Part 9 of Book 2 of the Dutch Civil Code.

Report on other legal and regulatory requirements

Our appointment

We were appointed as auditors of Akzo Nobel N.V. on April 19, 2014 by the Supervisory Board following the passing of a resolution by the shareholders at the annual meeting held on April 29, 2014 and the appointment has been renewed annually by shareholders representing a total period of uninterrupted engagement appointment of 2 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 that we have provided to the company and its controlled entities in addition to the audit, for the period to which our statutory audit relates, are disclosed in note J to the financial statements.

Responsibilities for the financial statements and the audit

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 with Part 9 of Book 2 of the Dutch Civil Code; and 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 fraud or error.

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 responsibility is to plan and perform an audit engagement in a manner that allows us to obtain sufficient and appropriate audit evidence to provide a basis 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, March 7, 2018
PricewaterhouseCoopers Accountants N.V.

Original has been signed by R. Dekkers RA

 

Appendix to our auditor’s report on the financial statements 2017 of Akzo Nobel 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 and explained what an audit involves.

The auditor’s responsibilities for the audit of the financial statements

We have exercised professional judgement 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 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 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 for the 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 the Board of Management.
  • Concluding on the appropriateness of the Board of Management’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 as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report and are made in the context of our opinion on the financial statements as a whole. However, future events or conditions may cause the company 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 and performance 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 this basis, 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 Supervisory Board 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 statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, not communicating the matter is in the public interest.

Comprehensive income

The change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with shareholders in their capacity as shareholders.

Code of Conduct

Our Code of Conduct defines our core principles and how we work. It incorporates fundamental principles on issues such as business integrity, labor relations, human rights, health, safety, environment and security and community involvement.