2021 UNIVERSAL REGISTRATION DOCUMENT

6. Parent company financial statements

 Description of risk How our audit addressed this risk
Measurement of investments and intangible assets (excluding software and intangible assets in progress)
See Accounting principles Notes 1.5 - Intangible assets and 1.7.1 - Investments, Note 11 – Intangible assets, Note 14 – Financial assets and Note 30 –Table of subsidiaries and holdings, to the parent company financial statements

At 31 December 2021, the net carrying amount of investments and intangible assets (excluding software and intangible assets in progress) recognised in the balance sheet amounted to €10.3 billion and €4.2 billion, respectively, representing 55% of total assets. Investments and intangible assets are recognised at purchase cost.

An impairment loss is recognised if the value in use of a given item falls below its net carrying amount.

  • As described in Notes 1.5 and 1.7 to the financial statements, the value of these items is assessed annually by reference to their value in use, which is based on:
    • for investments: the current and forecast profitability of the subsidiary concerned and the share of equity owned;
    • for intangible assets: discounted future cash flows.

In order to estimate the value in use of these items, Management must use judgement to project future cash flows and determine the main assumptions to be used.

Given the materiality of investments and intangible assets in the balance sheet and the inherent uncertainty of certain components of the calculations, including the forecasts used to calculate value in use, we deemed the measurement of these items to be a key audit matter, carrying a risk of material misstatement.

At 31 December 2021, the net carrying amount of investments and intangible assets (excluding software and intangible assets in progress) recognised in the balance sheet amounted to €10.3 billion and €4.2 billion, respectively, representing 55% of total assets. Investments and intangible assets are recognised at purchase cost.

An impairment loss is recognised if the value in use of a given item falls below its net carrying amount.

  • As described in Notes 1.5 and 1.7 to the financial statements, the value of these items is assessed annually by reference to their value in use, which is based on:
    • for investments: the current and forecast profitability of the subsidiary concerned and the share of equity owned;
    • for intangible assets: discounted future cash flows.

In order to estimate the value in use of these items, Management must use judgement to project future cash flows and determine the main assumptions to be used.

Given the materiality of investments and intangible assets in the balance sheet and the inherent uncertainty of certain components of the calculations, including the forecasts used to calculate value in use, we deemed the measurement of these items to be a key audit matter, carrying a risk of material misstatement.

How our audit addressed this risk

We examined the methodology employed by Management to estimate the value in use of investments and intangible assets (excluding software and intangible assets in progress).

Our audit work consisted primarily in verifying, on the basis of the information provided to us, that the estimated values determined by Management were based on an appropriate measurement method, and in assessing the quality of these estimates by taking into consideration the data, assumptions and calculations used.

We primarily focused our audit work on the investments and intangible assets with a value in use close to their net carrying amount.

We assessed the reasonableness of the main estimates and, more specifically:

  • the consistency of projected sales and margin rates with past performance and the economic and financial context;
  • 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.
Measurement of provisions for liabilities and charges and contingent liabilities
See Accounting principles Note 1.11 – Provisions for liabilities and charges, Note 18 – Provisions for liabilities and charges (excluding subsidiaries and holdings) and Note 24.3 – Contingent liabilities, to the parent company financial statements

L’Oréal is subject to legal proceedings and tax, customs and administrative audits arising in the ordinary course of its business.

Provisions are recorded so that L’Oréal can meet its likely payment obligations to third parties with no corresponding consideration for the Company in return. They mainly relate to business and financial risks and disputes, as well as risks with authorities and staff-related risks. These provisions are estimated by taking into account the most likely assumptions or by using statistical methods based on their nature.

Material provisions mainly concern the dispute with the antitrust authority and the risks with the authorities mentioned in Note 18.

Provisions for liabilities and charges amounted to €878 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;

L’Oréal is subject to legal proceedings and tax, customs and administrative audits arising in the ordinary course of its business.

Provisions are recorded so that L’Oréal can meet its likely payment obligations to third parties with no corresponding consideration for the Company in return. They mainly relate to business and financial risks and disputes, as well as risks with authorities and staff-related risks. These provisions are estimated by taking into account the most likely assumptions or by using statistical methods based on their nature.

Material provisions mainly concern the dispute with the antitrust authority and the risks with the authorities mentioned in Note 18.

Provisions for liabilities and charges amounted to €878 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;

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. 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 L’Oréal SA, 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 out with 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 these assessments.

Regarding contingent liabIilities, with the guidance of our experts in the field where applicable, we assessed the merits of the decision not to record a provision.