(Notes 1.3 “Goodwill”, 6 “Depreciation, amortization and impairment loss”, 11 “Goodwill” and 12 “Intangible assets, net” to the consolidated financial statements)
Risk identified
The business development of Publicis Groupe notably involves external growth transactions. These acquisitions have resulted in the recording of significant goodwill and intangible assets in the consolidated balance sheet.
As of December 31, 2020, net goodwill amounts to €10,858 million in the consolidated balance sheet.
Publicis Groupe performs impairment tests at least once a year. An impairment loss is recognized whenever the recoverable amount is below the carrying amount, the recoverable amount being the higher of value in use and fair value less transaction costs.
As part of the launch of its country model, which became fully operational as of January 1, 2020, Publicis Groupe defined cash-generating units corresponding to the ten key markets in which the Groupe operates and to which goodwill has been reallocated. Impairment tests of these ten cash-generating units were performed prior to this reallocation and no impairment was identified at the date of reallocation.
The valuation of the recoverable amount of these assets involves the use of numerous estimates and judgments from the management, in particular the assessment of the competitive, economic and financial environment in the countries where the Groupe operates, the effects of Covid-19 economic crisis, the Groupe’s ability to generate operating cash flow as a result of strategic plans, in particular the levels of revenue and operating margin, and the determination of discount and growth rates.
The impairment tests on goodwill resulted in Publicis Groupe recognizing a loss of €15 million in 2020.
As of December 31, 2020, net intangible assets amount to €1,509 million. To be noted that the amortisation charge relating to Epsilon intangibles amounts to €196 million, including an accelerated amortisation charge of €64 million following the completion of an impairment test to align the carrying amounts with their recoverable amounts.
We consider that the valuation of goodwill and intangible assets constitutes a key audit matter, given the sensitivity of these items to the assumptions used by the management and the materiality of the amount of these in the consolidated financial statements.
Our response
We obtained an understanding of the procedure and key controls set up by the management to perform the impairment tests and notably for the determination of the cash flows used to calculate the recoverable amount.
We assessed the terms and conditions of the reallocation of goodwill carried out on 1 January 2020 and the absence of impairment to be recognised at the date of the reallocation.
In order to assess the reliability of the business plans data used to calculate the recoverable amount:
we compared the 2021 financial projections with the previous financial projections and with the actual results for the fiscal years concerned;
we conducted interviews with the independent expert engaged by Publicis Groupe for impairment tests’ purposes and with the financial and operational managers of Publicis Groupe to evaluate the main assumptions used in the five years business plans that take into account Covid-19 economic crisis effects, and compare these with the explanations obtained;
we compared the main assumptions used by the management of Publicis Groupe concerning revenue, operating margin and investments with external data when available, such as market studies or analysts’ reports;
we evaluated the sensitivity analyses performed by the independent expert and carried out our own sensitivity analyses on the key assumptions in order to assess the potential impacts of these assumptions on the conclusions of the impairment tests.
Concerning the models used to determine the recoverable amounts, we involved our valuation experts in order to:
test the mathematical reliability of the models and re-calculate the significant amounts;
evaluate the methods used to determine the discount and infinite growth rates, compare these rates with market data or external sources and re-compute these rates using our own data sources.
We also assessed the appropriateness of the information set out in note 6 to the consolidated financial statements, which discloses the main assumptions used to determine the recoverable amounts.
