2022 Universal Registration Document

As at December 31, 2022, the net carrying amount of goodwill and indefinite-life brands amounted respectively to M€ 11,718 and M€ 2,186 (representing a total of 30% of the assets) as disclosed in Note 7 to the consolidated financial statements.

These assets are subject to an impairment test whenever an adverse event occurs, and at least once a year in order to verify that the carrying amount does not exceed their recoverable value.

The recoverable amounts of each cash-generating unit (CGU) are determined based on discounted projections of future operating cashflows over a ten-year period (the necessary period for the strategic positioning of an acquisition) and a terminal value. The assumptions taken into account in the valuation of the recoverable value are described in Note 7.3 and mainly relate to:

• the increase in revenue and margin rates;
• an infinite growth rate for calculating the terminal value, and
• discount rates based on the weighted average cost of capital, including a country risk premium if necessary.

The impairment tests carried out in 2022 led to an impairment of M€ 53.6 on goodwill and an impairment of M€ 53.5 on brands.

We considered that the valuation of these assets was a key audit matter because of their proportion in the consolidated financial statements and because the determination of their recoverable value requires significant judgment from Management in determining future cash flow projections and the key assumptions used.

We took note of Management's methodology for conducting impairment tests and sensitivity analyses.

We evaluated these, especially by linking     them to our own sensitivity analyses, in order to define the nature and scope of our work.

We appreciated the quality of the budgeting and forecasting process.

For the impairment tests of the assets considered the most sensitive, our work included assessing the reasonableness of the main estimates, and more specifically:

• Assessing the consistency of revenue and margin rate projections in relation to your Group's past performances and the economic and financial context in which your Group operates;
• Corroborating the future growth rates used with the performance analyses of the global cosmetics market, taking into account the specificities of the local markets and distribution channels in which your Group operates;
• Analyzing discount rates applied to future cash flows by comparing the parameters used with external benchmarks, long-term growth rates and royalty rates by including valuation experts in our team;
• Reviewing sensitivity analyses against Management’s key assumptions and against our own analyses.

We assessed the appropriateness of the information given in the notes to the consolidated financial statements.

Your Group's revenue is presented net of product returns and discounts, rebates and other benefits granted to distributors or consumers (such as commercial cooperation) as described in Note 3 to the consolidated financial statements.

These various deductions from the revenue are recorded simultaneously upon the recognition of sales on the basis, in particular, of contractual conditions and statistical data from past experience.

Thus, the valuation of revenue includes, at the end of the financial year, estimates related to the amounts deducted, which we considered to be (i) complex, due to the diversity of contractual agreements and commercial conditions existing in the different markets of your Group, (ii) sensitive, revenue being a key indicator in the evaluation of your Group’s performance and its management, and (iii) material in relation to their impact in the financial statements.

The evaluation of product returns, discounts, rebates and other benefits granted to customers constitutes a key audit matter.

We assessed the appropriateness of your Group's accounting principles relating to the recognition of product returns, discounts, rebates and other benefits granted to customers, in accordance with IFRS.

We took note of the internal control system put in place in the commercial entities of your Group, allowing to evaluate and record the items deducted from the revenue, especially at closing, and we tested, by sampling, the main controls of this system.

Substantial tests were also carried out to assess the reasonableness of the product returns and customer benefits estimate.

These tests specifically included:

• Analyzing the valuation methods used, in particular, by critically examining the assumptions used, checking the permanence of the methods and analyzing the anteriority and unwinding of the previous financial year provisions;
• Reconciling the statistical data from the past experience and contractual conditions with data contained in the information systems dedicated to the management of commercial conditions;
• Verifying the arithmetic accuracy of the calculation of the corresponding entries (including the residual commitment at closing), their recording in the accounts and their presentation in the consolidated financial statements.

Your Group is exposed to various business risks, including tax risks.

When the amount or maturity can be estimated with sufficient reliability, a tax liability is recognized for these risks. Otherwise, your Group discloses information on contingent liabilities in the notes to the consolidated financial statements.

Note 12.2.1 "Tax disputes" sets out, in particular, the current tax disputes in Brazil and India, for which the administration's claims amount to M€ 631 and M€ 204 respectively.

The uncertain tax positions are classified in the balance sheet on the non-current tax liabilities line for M€ 276 as at December 31, 2022.

In order to identify and obtain an understanding of all uncertain tax positions, existing liabilities and related judgments, we discussed with tax departments at different levels of the structure, in France and abroad.

We were aware of the internal control framework put in place to identify and assess these risks. We corroborated the list of identified tax disputes with the information provided by the tax departments and the main tax advisors of your Group.

For the main uncertain tax positions and tax risks for which a liability is made, we assessed the quality of Management's estimates by considering the data and assumptions used, as well as the calculations made.