Consolidated
Statements
Opinion
We have audited the accompanying consolidated financial statements of Fomento Económico Mexicano, S.A.B. de C.V. and its subsidiaries (collectively “the Group”), which comprised the related consolidated statement of financial position as of December 31, 2016, and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2016, and their financial performance and cash flows for the year then ended, in accordance with International Financial Reporting Standards (“IFRS”).
Basis for opinion
We conducted our audit in accordance with International Standard on Auditing (“ISAs”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (“IESBA Code”) together with the ethical requirements that are relevant to our audit of the consolidated financial statements in Mexico according with the “Codigo de Etica Profesional del Instituto Mexicano de Contadores Publicos” (“IMCP Code”), and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the year ended December 31, 2016. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the accompanying consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements.
Investment in Coca-Cola - FEMSA Philippines and subsequent consolidation in 2017
Description of the key audit matter
As disclosed in Notes 10 and 20.7 to the consolidated financial statements, up to December 31, 2016, the Group accounts using the equity method for its 51% ownership in Coca-Cola FEMSA Philippines (“CCFPI”), and holds potential voting rights in CCFPI through a call option to acquire the remaining 49% of CCFPI from The Coca-Cola Company (“TCCC”) at any time through January 2020, and also has a put option to sell its 51% ownership back to TCCC at any time from January 2018 through January 2019.
The estimation of fair value of CCFPI performed by management is a key audit matter as it impacts the significant judgment applied to evaluate whether the call option to acquire the remaining 49% is substantive, which generally occurs when the call option is in-the-money, and consequently whether the potential voting rights are probable of being executed. The results of these evaluations would impact whether the Group should consolidate CCFPI rather than to apply the equity method of accounting. Further, the fair value of CCFPI is used also to assess whether the Company’s investment in CCFPI is impaired; thus an additional key audit matter.
The complexity of this analysis and the fact that related unobservable data (specifically management projections of future cash flows of CCFPI) requires a high degree of estimation uncertainty, resulted in specific focus during our audit.
On January 25, 2017, the Company obtained control without transfer of additional consideration over CCFPI and started consolidating such subsidiary. As the acquisition occurred before the issuance of the consolidated financial statements, pursuant to the requirements of IFRS 3 the Company has disclosed the purchase price allocation in Note 28 of the consolidated financial statements.
Based on the quantitative materiality of the acquisition and the significant degree of estimates required of management in determining the purchase price allocation, we have determined this to be a key audit matter.
How our audit addressed the matter
We evaluated management assumptions related to compound annual growth rates, projected cost and expense savings among others key assumptions used in both an IFRS 13 Level 3 fair value and an IAS 36 value in use computation by 1) assessing the historical accuracy of the Group’s budgetary estimates, 2) obtaining and analyzing the Group´s business strategies supporting the future cash flow estimates, and 3) evaluating the macroeconomic environment including comparisons to the performance of market participants for which publicly available data is available. We also tested the Group's procedures around the preparation of the budget, upon which the value-in-use model is based and management’s assessment of the probability that the potential voting rights might be executed and whether they were substantive based on the aforementioned fair value estimates and the call option’s written terms by reviewing 1) management´s valuation model of the call option and analysis of whether the call option is in or out of the money, and 2) management´s assessment of the qualitative matters in regards to why the call option is not substantive in nature. We involved our internal specialists when performing these procedures. Finally, we evaluated the related disclosures made in the consolidated financial statements.
In regards to this acquisition, we assessed the identification of the acquired assets and assumed liabilities. We have compared this identification with our knowledge of the Group’s business, business plans, and management's explanations on the rationale of the acquisition. We have tested management´s fair values of assets and liabilities of these acquisitions based on commonly used valuation models with the assistance of our internal specialists. We further assessed the adequacy of the company's disclosures on these business combinations.
Impairment of distribution rights, goodwill and trade mark rights
Description of the key audit matter
As disclosed in Note 12 to the consolidated financial statements, Distribution Rights, Goodwill and Trade mark rights were Ps.143,420 million as of December 31, 2016. Given the materiality of distribution rights, goodwill and trade mark rights in relation to the consolidated financial statements and the significant judgment and estimation required by management when evaluating these accounts for impairment, we focused our auditing efforts in this area in particular for Brazil and Chile due to recent acquisitions that resulted in significant additions to these accounts and Venezuela given the general deterioration of the country’s macroeconomic environment.
How our audit addressed the matter
We evaluated management assumptions related to compound annual growth rates, projected cost and expense savings among others key assumptions used in the impairment testing by 1) assessing the historical accuracy of the Management’s budgetary estimates, 2) obtaining and analyzing Management´s business strategies supporting the future cash flow estimates, and 3) evaluating the macroeconomic environment including comparisons to the performance of market participants for which publicly available data is available.
We also assessed management’s sensitivity analyses focusing on the projected compound annual growth rates and projected cost savings, mainly. We involved our internal specialists when performing these procedures. In addition, we tested the Group's procedures around the preparation of the budget, upon which the value-in-use model is based.
Furthermore, we assessed the related disclosures made in the consolidated financial statements.
Venezuela
Description of the key audit matter
Venezuela is a challenging economic and political environment. Challenges of operating in Venezuela include, but are not limited to, the existence of multiple foreign currency exchange rates, lack of exchangeability across all exchange mechanisms, limited access to certain key raw materials, and periodic government intervention into operations including continually changing laws and regulations.
We focused on this area because of the following key judgments and sources of estimation uncertainty include:
As disclosed in Note 3.3 of the consolidated financial statements, the Group has, over the past few years, accumulated significant amounts of accumulated other comprehensive loss in an amount of Ps. 20,230 million as of December 31, 2016. To the extent that the Group losses control of its Venezuela operations such amounts would be required to be recognized in the Group’s income statement as a loss.
How our audit addressed the matter
We evaluated management´s assessment of the relevant activities attributable to the Venezuela operations under IFRS 10. This included consideration of management’s ability to control relevant activities such as budgeting, establishing sales strategies, pricing, financial decisions, cost infrastructure, among other matters and the analysis of the Group exposure to variable returns in their investment in Venezuela.
With regards to measurement of foreign liabilities in Venezuela we focused our audit efforts on assessing management’s judgment applied in selecting the most appropriate exchange rate at which such foreign liabilities should be measured, including amounts payable to those vendors for which off-shore security advances have been provided and for these vendors we have also inspected the relevant documentation and performed confirmation of balances and terms and conditions; with the assistance of our internal specialists we analyzed the legal and other regulatory implications.
We also assessed the adequacy of the related disclosures made in the consolidated financial statements.
Recoverability of the deferred tax assets
Description of the key audit matter
As disclosed on Note 24 to the consolidated financial statements, the Group had Ps.27,452 million of net operating losses carrying forwards as of December 31, 2016; such amount relates to Brazil, Colombia and Mexico. Brazilian amounts are mainly attributable to deductions of goodwill amortization generated on recent business acquisitions while the amounts generated in Mexico related to tax losses generated in recent years.
We focus on this area because the recognition of deferred tax assets relies on the significant application of judgement by management in respect of assessing the probability and sufficiency of future taxable profits and ongoing tax planning strategies, therefore, due to the size of the Group's deferred tax assets of Brazil and Mexico and the associated uncertainty surrounding recoverability, this is considered a key audit matter.
How our audit addressed the matter
Our audit procedures, among others, included the assessment of controls over the recognition and measurement of deferred tax assets and the evaluation of assumptions used in projecting the Group's future taxable profits in Mexico and Brazil. With the assistance of our internal tax specialists, we assessed the feasibility of the Group's future tax planning strategies that may enable the materialization of deferred tax asset of the Company.
When applicable, our audit procedures also focused on the review of management´s projections of future cash flows in relation to the likelihood of generating sufficient taxable profits based on forecasts of anticipated future cost savings, growth rates, discount rates, and other key assumptions. We involved our internal specialists when performing these procedures.
We also evaluated the related disclosures made in the consolidated financial statements.
Business acquisitions
Description of the key audit matter
On December 6, 2016 the Group acquired Vonpar, S.A. for a total consideration of Ps.20,992 million and completed during the year smaller acquisitions which in the aggregate amounted to Ps.5,612 million. For these acquisitions, the Company made a preliminary purchase price allocation in which the consideration transferred was allocated to the preliminary fair values of the various assets and liabilities including significant contingencies of the acquired company. This is outlined in Note 4 of the consolidated financial statements. The preliminary purchase price allocation and the analysis of the accounting, and the evaluation of the consideration transferred which in the case of Vonpar it involved embedded derivatives, are key audit matter.
How our audit addressed the matter
We audited for acquisitions in scope, the corresponding purchase agreements and analyzed the propriety of the accounting of the consideration transferred, in the case of Vonpar including the identification of the embedded derivatives. We also tested with the assistance of our risk specialists the measurement of the fair values of the various embedded derivatives including the option to convert the promissory note into equity instruments as part of the consideration transferred. In regards to these acquisitions, we audit the identification of the acquired assets and assumed liabilities. We have assessed this identification with our knowledge of the Group’s business, business plans, and management's explanations on the rationale of the acquisition, and tested management´s estimated fair values of assets and liabilities of these acquisitions. We further assessed the adequacy of the company's disclosures of these business combinations in the consolidated financial statements.
Other information included in the Group’s 2016 Annual Report
Other information comprises of the information included in the Group’s 2016 Annual Report presented to the Comisión Nacional Bancaria y de Valores (“CNBV”) other than the financial statements and our auditor’s report thereon. Management is responsible for the other information.
Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated, as issuing the declaratory on annual report requested by CNBV. If, based on the work we have performed, 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.
Responsibilities of Management and the Audit Committee for the consolidated financial statements
Management is responsible for the preparation and fair presentation of the accompanying consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is 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, management is 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 management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
The Audit Committee is responsible for overseeing the Group’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated 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 ISAs 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 consolidated financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
We communicate with the Audit Committee 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 to the Audit Committee 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 the Audit Committee, we determine those matters that were of most significance in the audit of the consolidated 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.
The engagement partner on the audit resulting in this independent auditor’s report, is who signs It.
Mancera, S.C.
A member practice of
Ernst & Young Global Limited
Américo de la Paz de la Garza
February 28, 2017
Monterrey, N.L. México
