Valuation of goodwill and intangible assets
(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 development of the Group’s activities includes external growth operations. These acquisitions resulted in the recording of goodwill and significant intangible assets on the consolidated balance sheet.
As at December 31, 2022, net goodwill amounts to M€ 12,546 in the consolidated balance sheet and net intangible assets amount to M€ 1,247. Intangible assets are subject to impairment tests if there are any indicators that they may have been impaired. Goodwill is subject to impairment tests at least on an annual basis. An impairment loss is recognized whenever the recoverable amount is lower than the carrying amount, the recoverable amount being the higher of the value in use and fair value less costs to sell.
The valuation of the recoverable amount of these assets involves the use of many estimates and judgment from Management, in particular the assessment of the competitive, economic and financial environment in the countries where the Group operates, the Group’s ability to generate operating cash flows as a result of strategic plans, in particular the levels of revenue and operating margin, and the determination of discount and growth rates. Impairment tests on goodwill resulted in the recognition of an impairment loss of M€ 28 for the 2022 financial year.
We considered the valuation of goodwill and intangible assets to be a key audit matter, given their sensitivity to Management’s assumptions and their materiality in the consolidated financial statements.
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| Our response |
- We obtained an understanding of the procedure and key controls put in place by Management for conducting impairment tests, including determining the cash flows used in calculating recoverable amounts.
- In order to assess the reliability of the business plans data used to calculate the recoverable amounts, we:
- compared the 2023 financial projections with the previous financial projections and with the actual results of the years concerned;
- conducted interviews with the independent expert engaged by Publicis Groupe SA for impairment tests’ purpose and with the financial and operational managers of Publicis Groupe SA to analyze the main assumptions used in the five-year financial projections and compared them with the explanations obtained;
- compared the main assumptions used by Publicis Groupe SA’s Management on revenue, operating margin and investments with external data when available, such as market studies or analysts’ reports;
- examined the consistency of future cash flow estimates with the main assumptions made in the five-year financial projections (2023-2027), the year 2023 being directly derived from the annual budget approved by Management;
- examined 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.
- We involved our valuation experts in order to:
- analyze the methods used to determine the discount and terminal growth rates, compare these rates with market data or external sources and re-calculate these rates using our own data sources;
- test the mathematical accuracy of the models and re-calculate the significant amounts.
- We examined the appropriateness of the information relating to the valuation of goodwill disclosed in Note 6 to the consolidated financial statements, which includes the key assumptions used to determine the recoverable amounts.
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