2021 UNIVERSAL REGISTRATION DOCUMENT

Description of risk	How our audit addressed this risk
Measurement of intangible assets See Note 7.1 – Goodwill, Note 7.2 – Other intangible assets, Note 7.3 – Impairment tests on intangible assets, and Note 4 – Other operational income and expenses, to the consolidated financial statements
Description of risk At 31 December 2021, the net carrying amount of goodwill and other intangible assets recognised in the consolidated financial statements totalled €14,537 million, representing 34% of assets. These assets consist primarily of goodwill and non-amortised brands with indefinite useful lives, recognised following business combinations. Whenever there is an indication of impairment, or at least once a year, the Group verifies that the carrying amount of these assets is not greater than their recoverable amount and does not present a risk of impairment (impairment test). The recoverable amount of each Cash Generating Unit (CGU) is determined on the basis of discounted operating future cash flow forecasts covering a period of 10 years (the period considered necessary for the strategic positioning of an acquisition) and a terminal value. The main assumptions taken into account in the measurement of the recoverable amount concern: growth in sales and margin rate; a perpetual growth rate for calculating the terminal value; and discount rates based on the weighted average cost of capital, where necessary adjusted by a country risk premium. The impairment tests performed led to the recognition of an impairment loss of €338 million in 2021, including €255 million on the goodwill of IT Cosmetics. We deemed the measurement of these assets to be a key audit matter because of their relative materiality in the consolidated financial statements and because the calculation of their recoverable amount requires a high degree of judgement from Management in terms of projecting future cash flows and determining the main assumptions to be used.	How our audit addressed this risk We obtained the impairment tests and sensitivity analyses prepared by Management. We assessed the sensitivity analyses, in particular by comparing them to our own sensitivity analyses, to determine the nature and scope of our procedures. We assessed, in particular, the quality of the process for drawing up and approving budgets and forecasts and, for the impairment tests that we deemed the most sensitive, the reasonableness of the main estimates made and, more specifically: the consistency of sales and margin rate projections with the Group’s past performance and the economic and financial context in which the Group operates; the corroboration of the growth rates used with analyses of the performance of the global cosmetics market, taking into account specific features of the local markets and distribution channels in which the Group operates; the discount rates applied to future cash flows, by comparing their inputs with external references, with the guidance of our valuation experts; the analyses of the sensitivity of the recoverable amount to the key main assumptions used, as described by Management in Note 7.3 to the consolidated financial statements, and to our own analyses. We verified the appropriateness of the disclosures provided in the notes to the consolidated financial statements.
Measurement of provisions for liabilities and charges (excluding provisions for product returns), non-current tax liabilities and contingent liabilities See Note 6 – Income tax and Note 12 – Provisions for liabilities and charges – Contingent liabilities and material ongoing disputes, to the consolidated financial statements
Description of risk The Group is exposed to various risks arising in the ordinary course of its business, particularly tax risks, industrial, environmental and commercial risks relating to operations (excluding provisions for product returns), employee-related cost risks and risks related to antitrust investigations. When the amount or due date of a liability can be estimated with sufficient reliability, provisions are recorded for these risks. When this is not the case, the Group provides disclosures on contingent liabilities in the notes to the consolidated financial statements. The contingent liabilities and material ongoing disputes reported in Note 12.2.1 include tax disputes in Brazil and India, for which the tax authorities are claiming €524 million and €202 million, respectively. Provisions for liabilities and charges (excluding provisions for product returns) amounted to €881 million, and non-current tax liabilities to €345 million at 31 December 2021. We deemed the determination and measurement of these items to be a key audit matter, given: the high degree of judgement required from Management to determine which risks should be provisioned and measure with sufficient reliability the amounts of these provisions; the potentially material impact of these provisions on the Group’s profit.	How our audit addressed this risk In order to identify and gain an understanding of all of the existing disputes and liabilities as well as the corresponding judgements made, we made inquiries with General Management and the Legal and Tax Departments at all levels of the organisation, in France and abroad. We corroborated the list of identified disputes with the Group’s risk mapping, as presented by the Legal Department to the Audit Committee, and the information provided by the principal law firms acting for the Group, which we interviewed on the matters. Regarding the most significant disputes for which a provision was recorded, we assessed the quality of Management’s estimates by taking into consideration the data, assumptions and calculations used. We carried out a retrospective review by comparing the amounts paid outwith the provisions recorded in recent years. With the guidance of our experts in the field where applicable, we carried out the following procedures: we examined the procedural aspects and/or the legal or technical opinions prepared by the lawyers or external experts selected by Management in order to assess the merits of the decision to record a provision; on the basis of the information provided to us, we critically assessed the estimated ranges of risk level and verified that the measurements used by Management fall within these ranges; when appropriate, we verified the consistency of the methods used for the reassessments. Regarding contingent liabilities, with the guidance of our experts in the field where applicable,we examined the procedural aspects and/or the legal or technical opinions prepared by the lawyers or external experts selected by Management in order to assess the merits of the decision not to record a provision. We verified the appropriateness of the disclosures provided in the notes to the consolidated financial statements.

Description of risk

How our audit addressed this risk

Measurement of intangible assets

See Note 7.1 – Goodwill, Note 7.2 – Other intangible assets, Note 7.3 – Impairment tests on intangible assets, and Note 4 – Other operational income and expenses, to the consolidated financial statements

At 31 December 2021, the net carrying amount of goodwill and other intangible assets recognised in the consolidated financial statements totalled €14,537 million, representing 34% of assets. These assets consist primarily of goodwill and non-amortised brands with indefinite useful lives, recognised following business combinations.

Whenever there is an indication of impairment, or at least once a year, the Group verifies that the carrying amount of these assets is not greater than their recoverable amount and does not present a risk of impairment (impairment test).

The recoverable amount of each Cash Generating Unit (CGU) is determined on the basis of discounted operating future cash flow forecasts covering a period of 10 years (the period considered necessary for the strategic positioning of an acquisition) and a terminal value. The main assumptions taken into account in the measurement of the recoverable amount concern:

growth in sales and margin rate;
a perpetual growth rate for calculating the terminal value; and
discount rates based on the weighted average cost of capital, where necessary adjusted by a country risk premium.

The impairment tests performed led to the recognition of an impairment loss of €338 million in 2021, including €255 million on the goodwill of IT Cosmetics.

We deemed the measurement of these assets to be a key audit matter because of their relative materiality in the consolidated financial statements and because the calculation of their recoverable amount requires a high degree of judgement from Management in terms of projecting future cash flows and determining the main assumptions to be used.

We obtained the impairment tests and sensitivity analyses prepared by Management. We assessed the sensitivity analyses, in particular by comparing them to our own sensitivity analyses, to determine the nature and scope of our procedures.

We assessed, in particular, the quality of the process for drawing up and approving budgets and forecasts and, for the impairment tests that we deemed the most sensitive, the reasonableness of the main estimates made and, more specifically:

the consistency of sales and margin rate projections with the Group’s past performance and the economic and financial context in which the Group operates;
the corroboration of the growth rates used with analyses of the performance of the global cosmetics market, taking into account specific features of the local markets and distribution channels in which the Group operates;
the discount rates applied to future cash flows, by comparing their inputs with external references, with the guidance of our valuation experts;
the analyses of the sensitivity of the recoverable amount to the key main assumptions used, as described by Management in Note 7.3 to the consolidated financial statements, and to our own analyses.

We verified the appropriateness of the disclosures provided in the notes to the consolidated financial statements.

Measurement of provisions for liabilities and charges (excluding provisions for product returns), non-current tax liabilities and contingent liabilities

See Note 6 – Income tax and Note 12 – Provisions for liabilities and charges – Contingent liabilities and material ongoing disputes, to the consolidated financial statements

The Group is exposed to various risks arising in the ordinary course of its business, particularly tax risks, industrial, environmental and commercial risks relating to operations (excluding provisions for product returns), employee-related cost risks and risks related to antitrust investigations.

When the amount or due date of a liability can be estimated with sufficient reliability, provisions are recorded for these risks. When this is not the case, the Group provides disclosures on contingent liabilities in the notes to the consolidated financial statements.

The contingent liabilities and material ongoing disputes reported in Note 12.2.1 include tax disputes in Brazil and India, for which the tax authorities are claiming €524 million and €202 million, respectively.

Provisions for liabilities and charges (excluding provisions for product returns) amounted to €881 million, and non-current tax liabilities to €345 million at 31 December 2021.

We deemed the determination and measurement of these items to be a key audit matter, given:

the high degree of judgement required from Management to determine which risks should be provisioned and measure with sufficient reliability the amounts of these provisions;
the potentially material impact of these provisions on the Group’s profit.

In order to identify and gain an understanding of all of the existing disputes and liabilities as well as the corresponding judgements made, we made inquiries with General Management and the Legal and Tax Departments at all levels of the organisation, in France and abroad. We corroborated the list of identified disputes with the Group’s risk mapping, as presented by the Legal Department to the Audit Committee, and the information provided by the principal law firms acting for the Group, which we interviewed on the matters.

Regarding the most significant disputes for which a provision was recorded, we assessed the quality of Management’s estimates by taking into consideration the data, assumptions and calculations used. We carried out a retrospective review by comparing the amounts paid outwith the provisions recorded in recent years.

With the guidance of our experts in the field where applicable, we carried out the following procedures:

we examined the procedural aspects and/or the legal or technical opinions prepared by the lawyers or external experts selected by Management in order to assess the merits of the decision to record a provision;
on the basis of the information provided to us, we critically assessed the estimated ranges of risk level and verified that the measurements used by Management fall within these ranges;
when appropriate, we verified the consistency of the methods used for the reassessments.

Regarding contingent liabilities, with the guidance of our experts in the field where applicable,we examined the procedural aspects and/or the legal or technical opinions prepared by the lawyers or external experts selected by Management in order to assess the merits of the decision not to record a provision.

We verified the appropriateness of the disclosures provided in the notes to the consolidated financial statements.

2021 UNIVERSAL REGISTRATION DOCUMENT

5. 2021 Consolidated financial statements