Auditor’s report

(Translation from the Finnish Original)
To the Annual General Meeting of HKScan Oyj

Report on the Audit of the Financial Statements

Opinion

In our opinion

  • the consolidated financial statements give a true and fair view of the group’s financial position and financial performance and cash flows in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU
  • the financial statements give a true and fair view of the parent company’s financial performance and financial position in accordance with the laws and regulations governing the preparation of the financial statements in Finland and comply with statutory requirements.

Our opinion is consistent with the additional report to the Board of directors and Audit Committee.

What we have audited

We have audited the financial statements of HKScan Oyj (business identity code 0111425-3) for the year ended 31 December 2017. The financial statements comprise:

  • the consolidated balance sheet, statement of comprehensive income, statement of changes in equity, statement of cash flows and notes, including a summary of significant accounting policies
  • the parent company’s balance sheet, income statement, statement of cash flows and notes.

Basis for Opinion

We conducted our audit in accordance with good auditing practice in Finland. Our responsibilities under good auditing practice are further described in the Auditor’s 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 are independent of the parent company and of the group companies in accordance with the ethical requirements that are applicable in Finland and are relevant to our audit, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

To the best of our knowledge and belief, the non-audit services that we have provided to the parent company and to the group companies are in accordance with the applicable law and regulations in Finland and we have not provided non-audit services that are prohibited under Article 5(1) of Regulation (EU) No 537/2014. The non-audit services that we have provided are disclosed in note 6 to the Consolidated Financial Statements.

 

Our Audit Approach

Overview

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain.

Materiality

The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They 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.

Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall group materiality for the consolidated financial statements as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial statements as a whole.

Overall group materiality

EUR 4 million

How we determined it

We determined materiality by using a combination of profit before tax from continuing operations and net sales.

Rationale for the materiality benchmark applied

We chose a combination of net sales and profit before tax as the benchmark because in our view it represents a relevant basis for readers of the financial statements when they consider the performance of the group. We chose 0.5% of net sales and 5.0% of profit before taxes, which are within the range of acceptable quantitative materiality thresholds in auditing standards.

Group audit scope

HKScan Group had substantial operations in Finland, Sweden, Denmark and the Baltics during the financial period. We tailored the scope of our audit, taking into account the structure of the HKScan Group and the accounting processes and controls.

We performed an audit in HKScan Group companies that are most significant based on the financial position and result. Our audit scope included Group’s parent company and companies that have significant operations in Finland, Sweden, Denmark and Estonia. We considered that the remaining other Group companies do not present a reasonable risk of material misstatement for consolidated financial statements and thus our procedures were limited mainly to analytical procedures.

By performing the procedures above, we have obtained sufficient and appropriate evidence regarding the financial information of HKScan Group as a whole to provide a basis for our opinion on the consolidated financial statements.

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 of the current period. 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.

As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.

Key audit matter in the audit of the group

How our audit addressed the Key audit matter

The accounting treatment for the investment in the Rauma poultry unit

Refer to Accounting policies and Note 12 (Tangible assets).

The company is the process of investing in a new poultry unit in Rauma. At 31 December 2017 the book value of the investment in Rauma was EUR 117.5 million.

The investment in Rauma is significant to the company due to the magnitude of the investment. The estimated economic useful life of the investment and the accounting for the asset retirement obligation, require management judgement.

We identified the Rauma investment as an area of focus in the audit as there is a risk related to the application of the appropriate accounting treatment of the investment and its valuation.

We evaluated the Group's property, plant and equipment accounting principles and compared these with applicable accounting standards.

We obtained an understanding of the company’s investment process and applied accounting treatment for investments, including how management determines which costs are to be expensed and which capitalised.

We tested a sample of capitalized transactions.

We evaluated the key assumptions applied by management to ensure that they were compliant with the Group’s accounting policies.

Valuation of goodwill and non-current assets

Refer to Accounting Policies, Note 11 (Goodwill), Note 10 (Intangible assets), Note 12 (Tangible Assets) and Note 5 (Depreciation and impairment).

At 31 December 2017 the group’s goodwill balance was EUR 72.4 million (2016: 77.0), intangible assets EUR 64.8 million (2016: 66.0) and tangible assets EUR 458.2 million (2016: 401.7).

Impairment losses aggregating to EUR 10,1 million were recognized during the year 2017 relating to the market area Denmark.

The company is required to, at least annually, test goodwill for impairment.

This area was important to our audit because impairment testing result is based on several assumptions including estimated growth rate, future cash flows and applied discount rate. Also, impairment test result may reveal the need for impairment of the other assets, most significant of which are production facilities.

We evaluated the Group's impairment testing principles and compared these with applicable accounting standards.

We evaluated the key assumptions, the growth rate, cash flow forecasts and applied discount rate, used in goodwill impairment calculations and traced these to the latest financial plans approved by the Board of Directors. While evaluating key assumptions, including weighted average cost of capital, we involved also our valuation experts.

We performed back testing comparing cash flow forecasts used in previous years’ testing to actual results to assess accuracy of the forecasts.

We tested the mathematical accuracy of the company’s calculations and verified that the impairment losses had been appropriately accounted for.

We also assessed adequacy of the relevant disclosures.

 

Inventories

Refer to Accounting policies and Note 16 (Inventories).

At 31 December 2017 the Group’s inventories balance is valued at EUR 111.8 million (2016: 116.1).

The inventories consist mainly of materials and supplies, as well as unfinished and finished products.

We focused on unfinished and finished products because the inventory cost accounting in meat production and evaluation of inventories is a complex area and it involves judgment.

We evaluated the Group's accounting policies on inventories cost accounting and net realizable value determination and compared these with applicable accounting standards.

We gained understanding of Group’s processes and controls over unfinished and finished products cost accounting and determination of net realizable value.

We tested relevant calculations and bookings by sample to ensure these are in compliance with the Group’s accounting policies.

Net sales recognition

Refer to Accounting policies and Note 1 (Business segments).

The sales contracts include various types of sales price components such as discounts and rebates based on sales volumes and marketing support.

We focused on this area because the recognition of net sales requires judgment from the management, for example estimates with respect to sales volumes to support net sales recognition.

This matter is a significant risk of material misstatement referred to in Article 10(2c) of Regulation (EU) No 537/2014.

We evaluated the Group's accounting policies on net sales recognition and compared these with applicable accounting standards.

We gained understanding of Group’s processes and controls over revenue recognition.

We tested a sample of calculations of discounts, sales volume based rebates, correct timing of revenue recognition and traced the terms and conditions to the agreements made with the customers.

We assessed on a sample basis sales transactions and credit notes taking place close to the reporting date to assess whether that revenue has been recognized in the correct period.

We have no key audit matters to report with respect to our audit of the parent company financial statement

Responsibilities of the Board of Directors and the Managing Director for the Financial Statements

The Board of Directors and the Managing Director are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, and of financial statements that give a true and fair view in accordance with the laws and regulations governing the preparation of financial statements in Finland and comply with statutory requirements. The Board of Directors and the Managing Director 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 Board of Directors and the Managing Director are responsible for assessing the parent company’s and 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. The financial statements are prepared using the going concern basis of accounting unless there is an intention to liquidate the parent company or the group or to cease operations, or there is no realistic alternative but to do so.

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 good auditing practice will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with good auditing practice, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

  • Identify and assess the risks of material misstatement of the financial statements, 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.
  • Obtain 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 parent company’s or the group’s internal control.
  • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
  • Conclude on the appropriateness of the Board of Directors’ and the Managing Director’s use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the parent company’s or 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’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. However, future events or conditions may cause the parent company or the group to cease to continue as a going concern.
  • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events so that the financial statements give a true and fair view.
  • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance 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 those charged with governance 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 those charged with governance, 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, 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.

Other Reporting Requirements

Appointment

We were first appointed as auditors by the annual general meeting on 23 August 1988. Our appointment represents a total period of uninterrupted engagement of 30 years. HKScan Oyj became a publicly listed company on 6 February 1997.

Other Information

The Board of Directors and the Managing Director are responsible for the other information. The other information comprises the report of the Board of Directors and the information included in the Annual Report, but does not include the financial statements and our auditor’s report thereon. We have obtained the report of the Board of Directors prior to the date of this auditor’s report and the Annual Report is expected to be made available to us after that date.

Our opinion on the financial statements does not cover the other information.

In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. With respect to the report of the Board of Directors, our responsibility also includes considering whether the report of the Board of Directors has been prepared in accordance with the applicable laws and regulations.

In our opinion

  • the information in the report of the Board of Directors is consistent with the information in the financial statements
  • the report of the Board of Directors has been prepared in accordance with the applicable laws and regulations.

If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

 

Helsinki 7 February 2018

PricewaterhouseCoopers Oy
Authorised Public Accountants

 

Markku Katajisto
Authorised Public Accountant (KHT)