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Annual Report 2014
Key audit matters
Key audit matters are those matters which, in our professional judgment, were of most significance in the audit of the financial statements. We have communicated the key audit matters to the Supervisory Board, but they are
not a comprehensive reflection of all matters that were identified by our audit and that we discussed. 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 a separate opinion on these matters.
Key audit matter
Recognition of vendor allowances
The group receives various types of vendor allowances, as further discussed in Note 3 of the financial statements.
These allowances are a significant component in the cost of sales. The majority of vendor allowances are settled
during the financial year. The vendor allowance receivable at December 28, 2014 amounted to €203 million
(Note 17).
We focused on this area because the recognition of vendor allowance income and receivables requires, to some
extent, judgment from management, for example concerning the nature and level of fulfilment of the company's
obligations under the vendor agreements, estimates with respect to purchase or sales volumes to support income
recognition and the allocation of vendor allowance income between inventory and cost of sales.
SPAR acquisition - purchase price allocation
The group acquired SPAR's business in the Czech Republic in 2014, as disclosed in Note 4. The purchase
consideration for the 49 stores and one location under construction amounted to €187 million and the goodwill
recognized was €100 million. The accounting for this acquisition required a significant amount of management
estimation. The key judgments relate to the allocation of the purchase price to the assets and liabilities acquired and
adjustments made to align accounting policies.
Impairment testing of store assets
The group operates retail stores in Europe and the United States. The associated store assets are important to our audit
due to the size of the store asset carrying value of €4,177 million as well as the judgment involved in the assessment
of the recoverability of the invested amounts. Such judgment focuses predominantly on future store performance,
which is, amongst others, dependent on the expected store traffic, basket size and the competitive landscape in local
markets. Management assesses, on a quarterly basis, whether there are triggering events indicating potential
impairment. In 2014 management recognized a net impairment charge of €5 million. We refer to Note 11 of the
financial statements.
Contingent liabilities relating to legal matters
The group is involved in various legal matters. We refer to Note 34 of the financial statements for further details. We
focused on this area because of the potential significance of these commitments and contingencies (in particular as
they relate to the asserted claim from the Vereniging Albert Heijn Franchisenemers). The assessment as to whether or
not a liability should be recognized and whether amounts can be reliably estimated includes, to a certain extent,
judgment from management.
How our audit addressed the matter
Our procedures included understanding and testing management's controls around the completeness and accuracy of
the contractual agreements recognized in the accounting systems. We also agreed the recorded amounts during the
year to contractual evidence on a sample basis. For the vendor allowance receivable at December 28, 2014,
amounts are either confirmed by vendors, recalculated by us based on contractual terms confirmed by vendors or
reconciled to post year-end settlements in cash. In addition, to evaluate the reliability of management's estimates, we
performed a retrospective review of subsequent collections on prior year vendor allowance receivables. Finally we
tested cut-off through assessing the obligation fulfilment of vendor allowance income recorded during a period shortly
before and after year-end.
In evaluating the company's purchase price allocation for SPAR, we tested the identification and valuation of the
(in)tangible assets and liabilities assumed against available market data, in particular for the acquired real estate and
(un)favourable rental contracts. We evaluated the competency and objectivity of the external appraiser engaged by
the company and involved our internal valuation experts to support us in our audit work. We also involved our internal
tax experts to assess the recognition and valuation of deferred tax assets and liabilities.
We also reviewed the work of SPAR's predecessor auditor to obtain comfort on the closing balance and, on a
sample basis, attended stock counts close to the acquisition date. Finally we conducted additional audit procedures
to assess other aspects of the accounting including the adjustments made to align accounting policies with those of
the group and the disclosures made in Note 4.
Our audit procedures included, amongst others, an evaluation of the group's policies and procedures to identify
triggering events for potential impairment of assets related to underperforming stores. We challenged management's
main cash flow assumptions and corroborated them by comparing them to internal forecasts and long term and
strategic plans that were approved by senior management as well as historic trend analyses. We also involved our
valuation experts to evaluate the applied WACC calculated by the group.
Our procedures included, amongst others, an assessment of the legal advice obtained by the group as well as
periodic meetings with management and review of board minutes to discuss developments in legal proceedings and
(un)asserted claims. We also obtained confirmations from the group's external legal counsels in order to compare their
expert opinions to management's position on measurement and/or disclosures for each of the material contingencies.