HERMES_REGISTRATION_DOCUMENT_2017

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CONSOLIDATED FINANCIAL STATEMENTS

STATUTORY AUDITORS’ REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS

The Group determines the amount of the impairment required to reduce the inventory value to its probable sale value if this value is lower. This impairment is calculated in accordance with:

s the condition of the inventories and their obsolescence (notably finished seasons or collections); and

s an estimation of the prospects for distributing the inventories on the Group’s different markets. We considered this to be a key audit matter due to the nature of the inventories and the fact that the above prospects and the potential impairment resulting from them are by nature dependent on the assumptions, estimates and assessments made by the management. Furthermore, inventories are present in a large number of subsidiaries, elimination of the internal margins in the consolidated financial statements is of particular importance because of their impact on the gross value of the inventories and the level of impairment to be recorded. How our audit addressed this risk During our work we:

s examined the procedures for the valuation and impairment of inventories;

s carried out a critical review of the methodology used by the management to impair inventories given the distribution history of the said inventories and our knowledge of the Group’s business sectors;

s compared the durations and life-cycles adopted by the management with historical performances; and

s assessed the level of impairment compared to the prospects for sale and the age of the inventories. Our work also involved taking samples to check the consistency of the levels of cancelled internal margins in the consolidated financial statements by examining the margin made with the distribution subsidiaries.

Recognition of foreign exchange hedges – Note 1.9.1-F and 22 of the notes to the consolidated financial statements

Description of risk Almost all of the Group’s production occurs in the Eurozone although the majority of its sales are made in foreign currency (American dollar, Japanese yen, other Asian currencies, etc.). The group hedges this exposure in order to minimise the impact of currency fluctuations on the Group’s profits. We considered this to be a key audit matter due to the impacts of exchange rate fluctuations on the Group’s operating margin, which is the benchmark the Group uses in its financial communication. How our audit addressed this risk As part of our work, assisted by our experts, we:

s checked the existence, completeness and accuracy of the Group’s financial instrument portfolio by making confirmation requests to banks;

s recalculated the fair value of a representative sample of instruments in order to assess their value; and

s reviewed commercial transaction hedges for a selection of hedging operations, as well as the associated documentation and the effectiveness tests in order to assess their eligibility for hedge accounting.

Provisions for contingencies – Note 1.16 and 23 of the notes to the consolidated financial statements

Description of risk The Group does business in many countries where the legislative and legal environments may change, and which can create risks of tax, legal or labour disputes or litigation. As at 31 December 2017, provisions for risks and expenses total €159 million. We considered this to be a key audit matter due to the amounts of claims which could be made, and the high degree of judgement required by the management to assess risks and estimate the provisions to be recognised in sometimes complex legislative contexts. How our audit addressed this risk Our work involved: s discussions with the Group’s management, Legal Department and Tax Department in order to understand all the existing disputes; s considering the Group’s analysis of the risks, the corresponding documentation and any written opinions from external advisers; s collecting the relevant evidence to assess the management’s judgements to evaluate the probability of the main risks occurring and assessing the assumptions to determine the amount of the provisions. s examining the procedures set up by the Group to identify risks;

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2017 REGISTRATION DOCUMENT HERMÈS INTERNATIONAL