Auditor's report (Translation from the Finnish Original)
To the Annual General Meeting of Tieto Oyj
REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS
In our opinion,
- the consolidated financial statements give a true and fair view of the financial position, financial performance, and cash flows of the group in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU
- the financial statements give a true and fair view of both the consolidated and 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.
What we have audited
We have audited the financial statements of Tieto Oyj (business identity code 0101138-5) for the year ended 31 December, 2016. The financial statements comprise:
- the consolidated statement of financial position, income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows, and notes to the consolidated financial statements; and
- the parent company’s balance sheet, income statement, cash flow statement and notes to the financial statements
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.
We are independent of the parent company and of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in Finland, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
Our audit approach
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 6 million|
|How we determined it||5% of profit before taxes|
|Rationale for the materiality benchmark applied||We chose profit before tax as the benchmark because, in our view, it is the benchmark against which the performance of the Group is most commonly measured by users, and it is a generally accepted benchmark. We chose 5% which is within the range of acceptable quantitative materiality thresholds in auditing standards.|
We designed our audit by determining materiality and assessing 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.
We tailored the scope of our audit, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the group operates. The group audit scope was tailored to take into account the structure of the Group and the size, complexity and risk of individual subsidiaries. Using this criteria we selected companies and accounts into our audit scope and at the same time ensured that we get sufficient coverage to our audit, in order to issue an audit opinion for the Group.
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||How our audit addressed the Key audit matter|
Refer to accounting policies for the consolidated financial statements and note 2.
We identified two specific risks of error and fraud in respect of improper revenue recognition given the nature of the Group’s products and services, as follows:
- Inappropriate revenue cut-off in products and services sales;
- Inappropriate accounting for major projects, which due to their size and complexity require specific attention both from the accounting and the auditing perspective. These projects are usually long-term and meet the definition of a construction contract (IAS11).
|We evaluated the IT systems used in the determination of revenue recognition by testing access and change management controls. We also evaluated process level controls by performing walkthroughs of each significant class of revenue transactions, assessed the design effectiveness of key controls and tested the operating effectiveness of those controls;
Our substantive audit procedures to address the identified risk relating to revenue cut-off in products and services sales consisted the following:
- Testing individual transactions occurring within proximity of the financial year-end; and
- Performing transactional testing procedures to validate the recognition of revenue throughout the year as well as year-end.
Our substantive audit procedures to address the risk of inappropriate accounting for major projects were focused around judgements used by management in creating project estimates. We selected a sample of contracts and performed the following:
- Ensured that the revenue recognition method applied was appropriate based on the terms of the arrangement;
- Agreed project revenue estimate against the sales agreement, including contract amendments;
- Tested the accuracy of the cost estimate by taking a sample of cost components and traced those to supporting documentation; and
- Recalculated the revenue based on stage of completion of the project. Assessed the appropriateness of the stage of completion by comparing actual costs per the company’s accounting records to the estimated total costs of the project.
|Valuation of PDS goodwill
Refer to accounting policies for the consolidated financial statements and notes 14 and 30.
We focused on this area due to the sensitivity for impairment of the PDS goodwill, which amounts to EUR 59.8 million. The determination of whether an impairment charge is required involves significant management judgement, including estimating the future performance of the business and the discount rate applied to these future cash flows.
|Our audit focused on assessing the appropriateness of management’s judgments and estimates used in the goodwill impairment analysis through the following procedures:
- We tested the methodology applied in the Value In Use calculation as compared to the requirements of IAS 36, Impairment of Assets, and the mathematical accuracy of management’s model;
- We evaluated the process by which the future cash flow forecasts were drawn up, including comparing them to the latest Board approved budgets and long term plans;
- We tested the key underlying assumptions for the cash flow forecasts, including sales and profitability forecasts, discount rate used and the implied growth rates beyond the forecasted period;
- We compared the current year actual results included in the prior year impairment model to consider whether forecasts included assumptions that, with hindsight, had been optimistic;
- We considered whether the sensitivity analysis performed by the management around key assumptions of the cash flow forecast was appropriate by considering the likelihood of the movements of these key assumptions; and
- We assessed the appropriateness of the discount rates and long term growth rates applied within the model, including comparison to economic and industry forecasts as appropriate.
We considered the appropriateness of the related disclosures provided in notes 14 and 30 in the Group financial statements.
Refer to accounting policies for the consolidated financial statements and note 29.
During 2016 Tieto acquired the Swedish company Emric Partners AB for a total consideration of EUR 37.7 million. The acquisition is accounted for as a business combination (IFRS 3) and includes a number of significant and complex judgments in the determination of the fair value of the assets and liabilities acquired.
The primary element of the valuation and purchase price allocation exercise was to assess the fair value of intangible assets (EUR 14.5 million) in the form of technology, customer relationships. Resulting goodwill amounted to EUR 26.2 million. The allocation also considered other assets and liabilities.
|For the intangible assets, we assessed the methodology adopted by management for calculating the fair value of technology and customer relationship assets. We also audited the key assumptions in the valuation model, particularly in respect of the:
- cash flow forecasts used in the valuation process;
- royalty rates assumed for the technology;
- assumed useful lives of the technology and customer relationships; and
- discount rate applicable to the transaction.
We considered the appropriateness of the related disclosures provided in note 29 in the Group financial statements.
|There are no key audit matters related to the parent company financial statements that should be communicated in our auditor’s report.|
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, as well as for the preparation of financial statements that give a true and fair view in accordance with the laws and regulations governing the preparation of the 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 Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group or to cease operations, or have 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 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 in a manner that achieves fair presentation.
- 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
The Board of Directors and the Managing Director are responsible for the other information. The other information comprises information included in the report of the Board of Directors and in the annual report, but does not include the financial statements and our auditor’s report thereon.
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 Board of Directors has been prepared in accordance with the applicable legal requirements.
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 legal requirements.
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 1 February 2017
Authorised Public Accountants
Authorised Public Accountant