To ProSiebenSat.1 Media SE, Unterföhring
Report on the Audit of the Consolidated Financial Statements and of the Combined Management Report
Opinions
We have audited the Consolidated Financial Statements of ProSiebenSat.1 Media SE, Unterföhring, and its subsidiaries (the “Group”) consisting of the consisting of the Statement of Financial Position as of December 31, 2018, the Income Statement, Statement of Comprehensive Income, Statement of Changes in Equity and the Statement of Cash Flow for the financial year January 1, 2018 until December 31, 2018, as well as the Notes to the Consolidated Financial Statements, including a summary of key accounting policies. We have furthermore audited the Combined Management Report of the Company and the Group for the financial year from January 1, 2018 to December 31, 2018. In accordance with the German statutory requirements, we did not audit the contents of the non-financial statement, which is included in Section Sustainability under “Our Group: Basic Principles” of the Combined Management Report.
In our opinion, on the basis of the knowledge obtained in the audit,
- the attached Consolidated Financial Statements comply in all material respects with the IFRS as adopted by the EU and the additional requirements of German law pursuant to Section 315e (1) of the Handelsgesetzbuch (HGB — German Commercial Code) and give a true and fair view of the net assets and financial position of the Group as of December 31, 2018 and its results of operations for the financial year from January 1, 2018 to December 31, 2018 in accordance with these requirements, and
- the attached Combined Management Report as a whole provides a suitable view of the Group’s position. This Combined Management Report is consistent with the Consolidated Financial Statements, complies with the requirements of German law, and suitably presents the opportunities and risks of future development in all material respects. Our audit opinion on the Combined Management Report does not extend to the contents of the above-mentioned non-financial statement.
Pursuant to Section 322 (3) sentence 1 HGB, we state that our audit has not led to any reservations concerning the accuracy of the Consolidated Financial Statements and of the Combined Management Report.
Basis for the Opinions
We conducted our audit of the Consolidated Financial Statements and of the Combined Management Report of the Company in accordance with Section 317 HGB, Regulation (EU) No 537/2014 on specific requirements regarding statutory audit of public-interest entities (hereinafter the “EU statutory auditor regulation”) and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW — German Institute of Public Auditors). Our responsibility in accordance with these regulations and standards is described in more detail in the Section “Responsibility of the Statutory Auditor for the Audit of the Consolidated Financial Statements and of the Combined Management Report” of our auditor’s report. We are independent of the Group companies in accordance with the requirements of European law, German commercial law, and German law governing the professions, and we have fulfilled the other German obligations of our profession in accordance with these requirements. Furthermore we declare in accordance with 10 (2) (f) of the EU statutory auditor regulation that we have not performed any prohibited non-audit services referred to in Article 5 (1) of the regulation. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions on the Consolidated Financial Statements and on the Combined Management Report.
Key audit matters in the audit of the Consolidated Financial Statements
Key audit matters are matters that in our professional judgment were most significant in our audit of the Consolidated Financial Statements for the financial year from January 1, 2018 to December 31, 2018. These matters have been taken into account in connection with our audit of Consolidated Financial Statements as a whole and in the formation of our audit opinion on this; we do not provide a separate audit opinion on these matters.
Valuation of the existing programming assets and onerous contracts from the acquisition of programming assets.
For the accounting and valuation principles applied, please refer to the summary of the key accounting policies in the notes. The assumptions and estimates used as the basis for the valuation as well as the information on the performance of the programming assets and on onerous contracts from the acquisition of programming assets are described in notes 6, 21 and 27. For the explanation of the strategic realignment and its financial effects we refer to the section ‘group earnings’ in the combined management report.
The Financial Statement Risk
Programming assets totalling EUR 1,114 million are reported in the Consolidated Financial Statements of ProSiebenSat.1 Media SE as of December 31, 2018, which corresponds to an 17.2 per cent share of total assets. Provisions for onerous contracts for the acquisition of programming assets amount to EUR 186 million in the Consolidated Financial Statements.
The programming assets are examined in the course of the impairment test to see whether there are indications that the costs of the relevant program title can probably not be covered by future revenues, especially advertising revenues.
Indicators can include for example the expiry of licenses prior to the planned broadcast, the discontinuation of commissioned productions, or restrictions under media law. Indicators of this kind are additionally present if it is no longer probable that a program title or a group of program titles will be broadcast on account of a lack of marketability or a strategic realignment of the program content.
Furthermore, cash-generating units are formed using genre-based program groups in order to further assess impairments in the programming assets, and a recoverable amount is calculated for each cash-generating unit based on expected cash inflows from advertising revenues. If the recoverable amount is less than the carrying amount, an impairment is carried out. The Executive Board made significant discretionary assumptions about the exploitation of the programming assets in the various media and the development of the advertising revenues in the future in order to calculate these impairments.
If contractual obligations for the acquisition of programming assets are entered into, but have not yet been fulfilled, provisions for onerous contracts have to be created if it is likely that the future cash inflows from the advertising revenues or from another utilization, e.g. sub-licensing, will not be sufficient to cover the expected acquisition costs.
In the 4th quarter 2018 the Executive Board decided to force the program strategy initiated in 2017. On the basis of this decision, program assets have been identified which will be sub-licensed to the joint venture 7TV GmbH or no longer used in the future. The impairment on programming assets totaling EUR 178 million, thereof EUR 122 million are caused by the sub-licensing contract to 7TV from the fourth quarter, and additions to provisions for onerous contracts totaling EUR 176 million.
In the financial year 2018, the company recorded impairments for programming assets in the amount of EUR 272 million in the cost of sales and a net addition to the provisions for onerous contracts from contractual obligations for programming assets in the amount of EUR 186 million.
There is a risk for the Consolidated Financial Statements that impairments of the programming assets and provisions for onerous contracts arising from contractual obligations for programming assets are not appropriately recorded.
Our Methodology in the Audit
Our audit procedures in the area of the impairment test include an assessment of the estimates made by the management to see whether there are indications for specific program titles that a future economic benefit can no longer be expected. In this connection, we examine whether the assignment of program content to the program planning is in line with the existing time slots. Furthermore we assessed the estimates made by the management by comparing the estimates made in the past with the actual performance and analyzing any deviations. To this end, we examined in particular whether program titles that have been impaired in the past were used again in subsequent periods.
In order to assess the appropriateness of the level of the provisions for onerous contracts that have been created, we inspected key contracts for broadcasts to be capitalized in the future, evaluated the estimate of the underlying revenue potential, and compared this with the expected acquisition costs.
In order to audit the impairments performed and provisions created for onerous contracts as a result of the strategic realignment, we discussed with key management the reasons for and consequences arising from the strategic realignment. We checked for selected programming asset titles that the relevant impaired programming asset contents and anticipated losses were selected and appropriately impaired using the parameters for the strategic realignment, defined by the Executive Board. For the programming assets that have been sold as well as the payment obligations arising from the purchase of future programming assets which are sub-licensed to 7TV we inspected the underlying contracts. We evaluated the appropriateness of the purchase price by means of a report from an independent expert consultant and got assurance about his competence, skills and objectivity.
Our Conclusions
The assumptions underlying the assessment of the impairment of the existing programming assets and the provisions for onerous contracts from the acquisition of programming assets are appropriate on the whole.
Recoverability of the goodwill of the segment Content Production & Global Sales.
For the accounting and valuation principles applied, please refer to the summary of the key accounting policies in the Notes. The key assumptions and other information on the impairment of the goodwill are presented in Note 16. For the business performance in the Content Production & Global Sales segment, please refer to the Combined Management Report in the chapter Business Performance of the Segments.
The Financial Statement Risk
The goodwill in the Content Production & Global Sales segment amounts to EUR 355 million as of December 31, 2018.
Goodwill in the Content Production & Global Sales segment was tested for impairment at the level of the operating segment in accordance with IAS 36 as of December 31, 2018.
For the Content Production & Global Sales segment, the carrying amount was thereby compared with the recoverable amount of the operating segment. If the carrying amount exceeds the recoverable amount, an impairment is recorded. The recoverable amount is the higher of the fair value less costs to sell and the value in use of the operating segment. To carry out the impairment test in the Content Production & Global Sales segment, the Company determined the recoverable amount on the basis of the value in use.
The goodwill impairment test is complex and based on a number of judgmental assumptions. These include the expected business and earnings development of the segment for the upcoming five years, the assumed long-term growth rates, and the discount rate used. The premises can exert a considerable influence on the relevant values and ultimately on the level of any possible impairment of goodwill.
On the basis of the impairment test carried out, the Company has not identified the need for the recording of an impairment of the goodwill in the Content Production & Global Sales segment. The sensitivity analysis of the Company has however shown that reasonably possible changes in the EBITDA margin after the end of the projection period and the discount rate would result in an impairment of the goodwill in the segment.
There is the risk for the Consolidated Financial Statements that the required impairments in the Content Production & Global Sales segment were not sufficiently recorded There is furthermore the risk that the disclosures in the notes associated herewith are not appropriate.
Our Methodology in the Audit
With the support of our valuation specialists, we assessed, among other things, the appropriateness of the significant assumptions as well as the Company’s valuation model. This included a discussion of the expected development of the business and results as well as of the assumed underlying long-term growth rates with those responsible for the planning process. In addition, reconciliations were made with other internally available forecasts e.g. the corporate planning drawn up by the Executive Board. Furthermore, we assessed the consistency of the assumptions with external market assessments.
We also assessed the Company’s planning accuracy by comparing projections for previous financial years with the actual results realized and analyzed deviations. As small changes in the discount rate can have a substantial impact on the results of the impairment test in the Content Production & Global Sales segment, we have compared the assumptions and parameters underlying the discount rate — in particular the risk-free rate, the market risk premium and the beta factor — with own assumptions and publicly available information.
To provide for the mathematical accuracy of the valuation model utilized, we recalculated the Company’s calculations on the basis of elements selected in a risk-orientated manner.
To reflect the existing uncertainty with respect to forecasts, we have assessed reasonably possible changes of the discount rate and the EBITDA margin after the end of the projection period on the recoverable amount in the Content Production & Global Sales segment by calculating alternative scenarios and comparing these with the Company’s valuation results.
Finally, we assessed whether the disclosures in the notes with respect to the recoverability of the carrying amount of the goodwill in the Content Production & Global Sales segment are appropriate. This also included an assessment as to the appropriateness of the disclosures in the notes pursuant to IAS 36.134(f) with respect to sensitivities resulting from reasonably possible changes of key assumptions underlying the valuation.
Our Conclusions
The underlying valuation model used in the impairment test of goodwill in the Content Production & Global Sales segment is appropriate and consistent with the applicable accounting principles. The Company’s assumptions and parameters underlying the valuation are within an acceptable bandwidth and are, on the whole, balanced. The disclosures in the notes associated herewith are appropriate.
Other information
The Executive Board is responsible for the other information. The other information includes:
- the non-financial statement; and
- the other parts of the Annual Report, with the exception of the audited Consolidated Financial Statements and Combined Management Report as well as our auditor’s report.
Our audit opinions on the Consolidated Financial Statements and on the Combined Management Report do not extend to the other information, and accordingly we do not issue either an audit opinion or any other form of audit conclusion on this information.
We have the responsibility in connection with our audit to read the other information and to assess in this process whether the other information
- contains material discrepancies with the Consolidated Financial Statements, the Combined Management Report, or the findings we made during the audit, or
- otherwise appears to be materially false.
In accordance with our engagement, we conducted a separate audit of the non-financial statement. For the nature, scope, and results of this business audit, please refer to our audit report of February 22, 2019.
Responsibility of the Executive Board and of the Supervisory Board for the Consolidated Financial Statements and the Combined Management Report
The Executive Board is responsible for preparing the Consolidated Financial Statements, which comply in all material respects with the IFRS as adopted by the EU and the additional requirements of German law pursuant to Section 315e (1) of the Handelsgesetzbuch (HGB — German Commercial Code), and for ensuring that the Consolidated Financial Statements give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. The Executive Board is furthermore responsible for the internal controls that it has determined are necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the Consolidated Financial Statements, the Executive Board is responsible for assessing the ability of the Group to continue as a going concern. It furthermore has the responsibility for indicating circumstances in connection with the continuation as a going concern insofar as they are relevant. Moreover, it is responsible for confirming the continuation as a going concern on the basis of the accounting policy, unless there is an intention to liquidate the Group or to suspend the business operations or there is no realistic alternative to this.
Furthermore, the Executive Board is responsible for preparing the Combined Management Report, which as a whole provides a suitable view of the Group’s position and is also consistent with the Consolidated Financial Statements and the audit findings, complies with the requirements of German law, and suitably presents the opportunities and risks of future development. Moreover, the Executive Board is responsible for the precautions and measures (systems) that it has deemed necessary to enable the preparation of a combined management report in accordance with the requirements of German law and to enable sufficient suitable documentary proof verifying the statements in the Combined Management Report to be furnished.
The Supervisory Board is responsible for monitoring the Group’s financial reporting process used to prepare the Consolidated Financial Statements and the Combined Management Report.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements and of the Combined Management Report
Our objective is to obtain reasonable assurance on whether the Consolidated Financial Statements are free from material misstatement, whether due to fraud or error, as a whole and whether the Combined Management Report as a whole provides a suitable view of the Group’s position and is consistent in all material respects with the Consolidated Financial Statements as well as with the audit findings, complies with the requirements of German law, and suitably presents the opportunities and risks of future development, as well as to issue an auditor’s report that contains our audit opinions on the Consolidated Financial Statements and on the Combined Management Report.
Reasonable assurance means a degree of assurance, but not a guarantee that an audit conducted in accordance with Section 317 HGB, the EU Statutory Auditor Regulation, and the generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW — German Institute of Public Auditors) always uncovers a material misstatement. Misstatements can result from breaches of regulations or inaccuracies and are regarded as material if it could reasonably be expected that they will influence individually or as a whole the economic decisions taken on the basis of these Consolidated Financial Statements and Combined Management Report by their users.
We exercise professional judgment and maintain a critical attitude during the audit. Furthermore,
- we identify and assess the risks of material misstatements, whether due to fraud or error, in the Consolidated Financial Statements and in the Combined Management Report, plan and perform audit procedures in response to these risks, and obtain audit evidence that is sufficient and appropriate to serve as a basis for our audit opinions. The risk that material misstatements will not be uncovered is higher in the case of breaches of regulations than in the case of inaccuracies, as breaches can involve fraudulent coordination, forgeries, deliberate omissions, misleading presentations, and the bypassing of internal controls.
- we gain an understanding of the internal control system relevant for the audit of the Consolidated Financial Statements and the precautions and measures relevant for the audit of the Combined Management Report in order to plan audit procedures that are appropriate in the given circumstances, not, however, with the objective of issuing an audit opinion on the effectiveness of these systems.
- we assess whether the accounting methods adopted by the Executive Board are appropriate and also whether the estimated values and related information presented by the Executive Board are justifiable.
- we draw conclusions on whether the accounting principle adopted by the management that the Group can continue as a going concern is appropriate and, on the basis of the audit evidence obtained, whether there is a material uncertainty in connection with events or conditions that may cast significant doubt on the ability of the Group to continue as a going concern. If we come to the conclusion that there is a material uncertainty, we are required to point out in the auditor’s report the relevant information in the Consolidated Financial Statements and in the Combined Management Report or, if this information is not appropriate, to modify our audit opinion in question. We draw Our Conclusions on the basis of the audit evidence obtained up to the date of our auditor’s report. Future events or circumstances can, however, result in the Group no longer being able to continue as a going concern.
- we assess the overall presentation, the structure, and the contents of the Consolidated Financial Statements, including the data, and whether the Consolidated Financial Statements present the underlying business transactions and events in such a way that the Consolidated Financial Statements give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with the IFRS as adopted by the EU and the additional requirements of German law pursuant to Section 315e (1) of the German Commercial Code (HGB).
- we obtain sufficient suitable audit evidence for the accounting information of the companies or business activities within the Group in order to issue audit opinions on the Consolidated Financial Statements and the Combined Management Report. We are responsible for directing, monitoring, and performing the audit of the Consolidated Financial Statements. We bear sole responsibility for our audit opinions.
- we assess the conformity of the Combined Management Report with the Consolidated Financial Statements, its compliance with the law and the view of the Group’s position that it provides.
- we perform audit procedures on the forward-looking disclosures presented by the Executive Board in the Combined Management Report. In particular, we reproduce the key assumptions underlying the forward-looking disclosures of the Executive Board on the basis of sufficient suitable audit evidence in this process and assess whether the forward-looking disclosures have been appropriately derived from these assumptions. We do not issue an independent audit opinion on the forward-looking disclosures or on the underlying assumptions. There is a significant unavoidable risk that future events will deviate materially from the forward-looking disclosures.
We discuss with the officers responsible for monitoring the planned scope and timing of the audit as well as significant audit findings, including any defects in the internal control system that we identify during our audit, among other things.
We issue a declaration to the officers responsible for monitoring that we have complied with the relevant requirements concerning independence, and we discuss with them all relations and other matters which can reasonably be assumed to have an impact on our independence as well as the safeguards taken in this regard.
Of the matters that we have discussed with the officers responsible for monitoring, we determine which ones were most significant for the current reporting period in the audit of the Consolidated Financial Statements and therefore represent especially important audit matters. We describe these matters in the auditor’s report, unless laws or other legal regulations preclude the public disclosure of the matters.
Other Statutory and Legal Requirements
Further Information pursuant to Article 10 of the EU Audit Regulation
We were elected as the auditor of the Consolidated Financial Statements by the Annual General Meeting on May 16, 2018. We were engaged by the Supervisory Board on June 22, 2018. We have worked as the auditors of the Consolidated Financial Statements of ProSiebenSat.1 Media SE without interruption since the company’s IPO in the financial year 2000.
We declare that the audit opinions contained in this auditor’s report are consistent with the additional report to the Audit and Finance Committee pursuant to Article 11 of the EU Statutory Auditor Regulation (audit report).
We performed the following services, which were not stated in the Consolidated Financial Statements or in the Combined Management Report, in addition to the audit of the financial statements of the audited group company and its subsidiaries:
In addition to the Consolidated financial statements we have audited the separate financial statements of the ProSiebenSat.1 Media SE as well as various separate financial statements of its subsidiaries including statutory engagement extensions. Integrated into the audit, we performed reviews of interim financial statements, project audits of IT-systems as well as audit related implementation of new accounting standards. We conducted other statutory and contractual audits, such as auditing the compliance of contractual clauses, EMIR-audits according to Section 20 WpHG, audit services relating to corporate governance matters and other contractually agreed assurance services.
Furthermore we have rendered supporting services during tax audits, during the preparation of Tax-Compliance-System at subsidiaries as well as value-added and income tax advisory services. Further services rendered relate to advisory services during the preparation of new IT-systems and the internal control system.
German Public Auditor Responsible for the Engagement
The German Public Auditor responsible for the engagement is Haiko Schmidt.
Munich, February 25, 2019
KPMG AG
Wirtschaftsprüfungsgesellschaft
[Original German version signed by:]
Sailer
Wirtschaftsprüfer
[German Public Auditor]
Schmidt
Wirtschaftsprüfer
[German Public Auditor]