10 Nestlé Holdings, Inc. and Subsidiaries – Annual Financial Report 2021
The risk of sales being misstated, through error,
misinterpretation or misapplication of accounting
standards and policies or intentional manipulation,
may result from the pressure that management
may feel to achieve performance targets. The
nature of the misstatements may include bias in
estimates, unrecorded accruals, or the
misclassification of trade spend in the consolidated
income statement.
We deemed the measurement of trade spend to
be a key audit matter due to the materiality and
complexity in estimating the amount of trade
spend that is ultimately claimed. Management
estimates the level of trade spend using judgments
based on historical experience and the specific
terms of the agreements with the customers. The
estimates require the use of assumptions that are
complex, given the diversity of trade spend
arrangements and the uncertainty related to
future outcomes. There is a risk that discounts,
allowances, and promotional rebates to
consumers are not properly measured or
classified at the reporting date, resulting in a
misstatement of sales.
For a sample of trade spend arrangements, we
reconciled key inputs and assumptions used in the
estimates with internal and external sources of
information, such as the contracts with the relevant
customers or other third-party support. We
recalculated the accrual and consolidated income
statement amounts to test mathematical accuracy.
We considered the aging of trade spend accruals
based on our understanding of the average lead
time for settlement. We reviewed the NHI Group’s
lookback analysis over the prior year end accrual
balance and assessed the accuracy at which the
NHI Group determined their accruals. We tested
payments made to customers after the reporting
date to assess the completeness of accruals and
assessed whether recorded in the correct period.
We assessed the adequacy of the disclosures
provided in Note 3 of the financial statements in
relation to the relevant accounting standards.
Carrying value of goodwill and indefinite life intangible assets
As described in Note 9 of the financial statements,
the NHI Group has $15.1 billion of goodwill
and$4.2 billion of indefinite life intangibles assets.
For all cash generating units (CGUs), goodwill
and indefinite life intangibles are tested for
impairment at least annually and when there is an
indication of impairment. The impairment test is
performed by comparing the carrying value of the
assets of these CGUs with their recoverable
amount.
The NHI Group recognized an impairment charge
of $494 million in the year ended December 31,
2021 related to the goodwill of the Freshly CGU.
There were no other goodwill or indefinite life
intangible impairment charges recognized in the
year ended December 31, 2021 based on the NHI
Group’s recoverability assessment.
The recoverability of goodwill and indefinite life
intangible assets is assessed using forecasted
financial information within a discounted cash
flow model. The assumptions used in the
impairment tests, including projected cash flows,
discount rates, and terminal growth rates, as well
as allocation of assets to CGUs, are subject to
management judgment.
We assessed whether the determination of CGUs,
and whether the allocation of assets to CGUs, was
appropriate. We obtained an understanding of the
current macro-economic environment, the impact
of COVID-19 on forecasted financial information
and the outlook for a sample of CGUs through
external market data and discussions with selected
stakeholders within the NHI Group. We compared
the forecasted cash flows with historical data.
Where the forecasted cash flows differed from our
expectations given the current environment and
historical data, we obtained supporting
explanations. We assessed assumptions in
comparison to external market data. We performed
sensitivity analyses around the key assumptions
such as projected cash flows, discount rates, and
terminal growth rates.
With the assistance of our valuation specialists we
assessed the appropriateness of key assumptions,
including discount rates and terminal growth rates,
including independently deriving a range of
discount rates and terminal growth rates, and we
recalculated the recoverable amount and
impairment, where applicable, determined by
management. Further, we assessed the
appropriateness of the methodology used and the
consistent application thereof to the CGUs tested.
We assessed the adequacy of the disclosure
provided in Note 9 of the financial statements in
relation to the relevant accounting standards.