Auditors report

Who are the auditors?

Ans: The auditors for the Vidrala Group in 2017 were Ernst & Young, S.L., which provided audit
services amounting to €252,000 and other services worth €46,000.What is the scope of the auditors’
report

Did the auditors give a clean report or qualified? What is the difference

Ans: In the 2017 annual report, the auditors provided an unqualified (clean) opinion, as no material
misstatements were found in Vidrala’s financial statements. The audit was conducted in accordance
with International Financial Reporting Standards (IFRS) as adopted by the European Union (IFRS-EU).
This is a globally recognized set of accounting standards that ensure transparent and comparable
financial reporting .

Difference Between a Clean (Unqualified) and a Qualified Report:

1. Clean (Unqualified) Report:

Meaning: A clean or unqualified report means that the auditor believes the financial statements are
free from material misstatement and comply with accounting standards.

Implication: The company has properly followed the applicable financial reporting framework (e.g.,
IFRS), and the financial statements give a true and fair view of the company’s financial performance
and position.

2. Qualified Report:

Meaning: A qualified report suggests that the auditors found certain exceptions in the financial
statements, but these exceptions are not pervasive enough to affect the entirety of the financial
statements. Common reasons include non-compliance with certain accounting standards or
limitations in the scope of the audit.

Implication: While the financial statements are largely accurate, there is a specific concern that
needs to be addressed, which would be highlighted in the report.
In summary, Vidrala received a clean audit report, meaning their financial reporting adhered to
international standards, with no significant issues flagged by the auditors .

Who is responsible for formulating the financial statements?

Ans: The responsibility for formulating the financial statements lies with the directors of Vidrala.
Specifically, in the 2017 annual report, it is mentioned that the Parent’s directors are responsible for
preparing the consolidated annual accounts. The directors ensure that these financial statements
fairly present the company’s financial position and performance. Furthermore, the directors
authorized the consolidated accounts on 26 February 2018, indicating their involvement in
overseeing and approving the financial documentation.

The directors must ensure compliance with International Financial Reporting Standards (IFRS) as
adopted by the European Union (EU), which guide the preparation and presentation of the financial
statements.

Thus, the directors play a key role in ensuring the accuracy, completeness, and compliance of the
financial statements with regulatory standards.

List the key questions auditors raised in the annual report

Ans: In Vidrala's 2017 annual report, the auditors from Ernst & Young raised key areas of concern
during their audit, primarily focusing on risk management and the financial health of the company.
Some key issues were related to operational risks, supply chain risks, tax compliance, and financial
risks:

1. Operational Risk: Vidrala operates in continuous production-intensive industries, where potential

risks include manufacturing disruptions or distortions. The auditors highlighted how Vidrala manages
these risks through ongoing monitoring systems and standardized procedures.

2. Supply Chain Risk: The auditors pointed out the vulnerabilities in Vidrala's supply chain, which
could impact the company's ability to secure key materials and maintain operational continuity.
Vidrala's response involved diversifying supplier relationships and investing in long-term
partnerships.
3. Tax Risk: As Vidrala operates in multiple countries, the auditors highlighted the need for strict tax
compliance and risk mitigation strategies. Vidrala addresses this by ensuring compliance with the
local tax laws of each country it operates in, while also maintaining communication with tax
authorities to avoid disputes.

4. Credit and Liquidity Risks: Vidrala's management of credit risk was highlighted by the auditors,
specifically focusing on the company's system to monitor customer solvency. Vidrala uses a dual-
layered approach with both internal rating systems and external credit insurance policies.

These concerns were addressed in the company's risk management framework, and appropriate
measures were implemented to mitigate potential disruptions. This comprehensive approach
contributed to Vidrala maintaining a stable operational and financial outlook in 2017.

What is ‘reasonable certainty”; what is materiality

Ans: In Vidrala's 2017 annual report, reasonable certainty and materiality were crucial concepts
related to financial reporting and audits.

Reasonable Certainty:

In the context of the report, "reasonable certainty" is applied in making financial projections or
estimates such as cash flow projections, impairment testing, and future sales and margin
projections. Vidrala's directors use the discounted cash flow method to determine the recoverable
amounts of Cash-Generating Units (CGUs), based on their best available information, historical data,
and future market trends. For example, they projected a 2.8% sales increase and 0.5% gross margin
growth over a five-year period, which they considered "reasonable" based on the market conditions.

Materiality:

Materiality, on the other hand, refers to information significant enough to influence the decisions of
financial statement users. Vidrala’s auditors considered materiality when evaluating the overall
financial health of the company. They considered a deviation in sales or gross margin of +/- 2% as
immaterial, meaning such a change would not necessitate recognizing impairment for any of its
CGUs. The auditors ensured that the company’s financial statements did not contain any material
misstatements that would significantly affect stakeholder decisions.

In summary, Vidrala’s management used reasonable certainty in estimating future outcomes, while
materiality guided the audit's focus on key areas that could significantly affect decision-making. Both
terms ensure financial statements are both reliable and focused on the most impactful aspects.

What is meant by saying that the audit is on basis of going concern? How would it be different in
‘liquidation concern basis’

Ans: In the context of Vidrala’s **2017 Annual Report**, the financial statements are prepared
based on the **going concern** principle. This means that the company’s management and
auditors have made an assessment that Vidrala is financially stable and able to continue its
operations for the foreseeable future, without any intention or need to liquidate.

### **Going Concern in Vidrala’s 2017 Report:**

The report reflects several indicators that support the going concern assumption:

1. **Profitability**: Vidrala showed strong financial results in 2017, with a revenue of **€823.2
million**, up from **€773.6 million** in 2016. The company also had an EBITDA of **€195.4
million**, with an improved EBITDA margin of **23.8%** over sales【5†source】.

2. **Strategic Acquisitions**: The acquisition of **Santos Barosa** in 2017, a major glass packaging
manufacturer in Portugal, strengthened the company's position, reinforcing its growth prospects
and competitiveness in the market【5†source】. This kind of strategic expansion is typically
undertaken by companies that plan to continue and grow their operations, aligning with the going
concern assumption.

3. **Healthy Cash Flow**: Vidrala had a **free cash flow** of **€108.5 million**, which shows the
company’s ability to generate cash from its core operations【5†source】.

4. **Solid Financial Position**: The report highlights that Vidrala had **total assets** of **€1.4
billion**, and despite an increase in debt due to the acquisition, the debt-to-EBITDA ratio remained
manageable at **2.2x**, demonstrating the company's ability to service its obligations【5†source】
【5†source】.

### **How It Would Differ Under a Liquidation Basis:**

If Vidrala were to prepare its financial statements under the **liquidation concern basis**, this
would indicate that the company’s management believed it was going to wind down its operations.
Here’s how the statements would differ:
1. **Asset Valuation**:

- Instead of valuing assets based on their future utility in operations, they would be valued based
on their **net realizable value** (the amount they could fetch if sold during liquidation). For
example, **property, plant, and equipment** would not be depreciated based on years of service
but rather valued at how much they could be sold for in a short timeframe【5†source】.

2. **Liability Settlement**:

- Liabilities would be classified differently, with the focus on **paying off creditors quickly** rather
than managing them over a long-term horizon. Any potential costs related to liquidation (e.g.,
severance pay, legal fees) would also be recognized immediately.

3. **No Depreciation or Amortization**:

- Since the assets would be sold off, there would be no further need to depreciate or amortize
them. Instead, their entire remaining value would be written off or adjusted to reflect the liquidation
price.

4. **Provisions for Liquidation Costs**:

- Provisions for costs like employee severance, contract termination penalties, and other winding-
down expenses would need to be made upfront. These costs would immediately affect the
company’s profit and loss statement, resulting in likely **losses** during the liquidation period.

Thus, under the **liquidation concern basis**, Vidrala’s financials would reflect the reality of selling
off assets, paying debts, and eventually ceasing operations. Instead of highlighting growth prospects
and operational continuity, the financial statements would be focused on final asset disposals and
settlement of liabilities. In contrast, the **2017 report** clearly focuses on long-term strategies,
future investments, and operational expansion, which are indicative of a company that intends to
remain operational.

Financials

How does Vidrala classify expenses in financial statements? Can you estimate COGS?

How does the firm classify assets and liabilities? How is cash flow presented?

What is the EPS?

What is the number of ordinary shares?

How much did the company pay as dividends?

Did the company buyback any shares during 2017?

Disclosure of Notes

Explain segment reporting

Remuneration of top executives and directors

Do the financials include distribution of group personnel by gender?

Where can we find information on quarterly results?

What are the significant accounting policies for

Inventories

PPE

What is the expected useful life of the tangible assets

How does the company account for capital grants?

How does the company account for subsequent repairs and maintenance?

What are expected intangible assets? What is their expected useful life?

How does the company account for research and development?

How does the company recognize revenue?

How does it account for assets?

Understanding the annual report

What is the break-down of inventory?

What depreciation and amortization figure is for 2017

What is the carrying cost of PPE?

Did the company undertake any acquisitions (of companies) in 2017

What is the goodwill of the firm?

What is revaluation of PPE?

Briefly explain the following

EBITDA
Net Income

Owners Equity
Cash flow from operations

Cash flow from financing

What is the balance of trade receivables? How is it presented?

Is there any risk of credit concentration?