Opinion
We have audited the accompanying consolidated financial statements of Grupo Lamosa, S. A. B. de C. V. and Subsidiaries (the Company), which comprise the consolidated statements of financial position as of December 31, 2018 and 2017, and the related consolidated statements of income, consolidated statements of other comprehensive income, consolidated statements of changes in stockholders’ equity and consolidated statements of cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all the material respects, the financial position of the Company as of December 31, 2018 and 2017, and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards (“IFRS”), issued by the International Accounting Standards Board (“IASB”).
Basis for Opinion
We conducted our audits in accordance with International Standards on Auditing (“ISA”). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of Consolidated Financial Statements section of our report. We are independent of the Company in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for professional Accountants (IESBA Code) and with the Ethics Code issued by the Mexican Institute of Public Accountants (“IMCP Code”), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code and IMCP Code.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were more important in our audit of the consolidated financial statements of the current period. These matters have been addressed in the context of our audit of the consolidated financial statements as a whole and in the disclosure of our opinion thereon, and we did not express a separate opinion on those audit matters. We have determined that the matters described below are the key audit matters to be disclosed in our report:
- Bank debt
As mentioned in Note 18 i), the Company evaluates their level of leverage and their capital structure in order to maintain an adequate management of it, which is necessary to ensure the compliance with their obligations. Therefore, the bank debt (note 15) is relevant for the analysis of the consolidated financial statements
Our audit procedures included, among others:
- We evaluated the Company’s debt level, verifying the compliance with restrictions and do-not obligations set forth in debt agreements.
- We obtained the confirmation from the financial institution to validate the principal balances, and their correct valuation in Mexican pesos, and the amount and valuation in Mexican pesos of accrued and outstanding interest.
- We reviewed the calculation of the amortized cost as defined in the IFRS, including the determination of the effective interest rate used in this calculation.
Regarding the aforementioned audit procedures, the results were reasonable.
- Unamortized intangible assets
Given the significance of unamortized intangible assets (note 12), it is important to make sure that unamortized intangible assets impairment is made each year in compliance with the IFRS, under an adequate methodology to identify potential impairment, where necessary.
Determining whether the carrying amount of unamortized intangible assets is recoverable requires the Company’s management to make significant estimates related to cash flows, discount rates and their growth, based on the point of view of management about future business prospects.
Our audit procedures primarily were:
- We reviewed the identification of relevant Cash Generating Units (CGU) of the group.
- We documented the understanding of the process followed by the Company to determine fair value and relevant control estimates in order to assess the risk of significant errors related to fair value estimates, and to develop an appropriate audit approach.
- We assessed whether the valuation techniques are appropriate in the actual business circumstances, and whether the techniques used to determine the fair value are applied in conformity with prior years.
- We assessed the reasonableness of the valuation assumptions used in the fair value analysis, and whether the valuation assumptions are consistent with what a market participant would use to determine the price of the recoverable value for the cash generating units.
- We carried out a sensitivity analysis to compare the Company’s recoverable value estimate.
- We verified the completeness and accuracy of the information used to project the cash flows used in the calculation, and compared key assumptions to external information of the industry.
The results of our audit tests were reasonable and we agree with the assumptions used, including the discount rate and the impairment amount of the recoverable value for the unamortized intangible assets.
- Assessment of the recoverability of deferred income tax assets derived from tax losses
The Company recognizes deferred income tax assets derived from tax losses. Management performed an assessment of the probability of recovering the tax losses carryforward to support the deferred tax assets recognized on its consolidated financial statements.
Due to the significance of the deferred income tax asset derived from tax losses, included in Note 21 of the consolidated financial statements, and the significant judgments and estimates to determine future projections of the Company’s taxable income, we focused on this line item, among others, and performed the following procedures:
- We verified the reasonableness of the projections used to determine future taxable income.
- We challenged the projections used by comparing them to the business performance and historical trends, verifying the explanations of the variations with management.
- With the support of tax experts, we assessed the processes used to determine the projected taxable income, and the assumptions used by management in preparing tax projections and we discussed with management the sensitivity of the projections.
The results of our audit procedures were satisfactory. The Company’s accounting policy for the recording of deferred taxes, as well as the detail of their disclosure are included in Notes 3t. and 21, respectively, to the accompanying consolidated financial statements.
Other Matters
The Company’s management is responsible for the other information. The other information will include the other information that will be incorporated in the Annual Report that the Company must prepare pursuant to Article 33, Section I, Subsection b) of the Fourth Title, First Chapter of the General Provisions Applicable to Issuers and other Participants in the Mexican Stock Exchange and the Instructions attached to these provisions (the Provisions). The Annual Report will be available for our reading after the date of this audit report.
Our opinion of the consolidated financial statements will not cover the other information and we will not express any form of assurance about it.
In connection with our audit of the consolidated financial statements, our responsibility will be to read the Annual Report, when available, and when we do so, to consider whether the other information contained therein is materially inconsistent with the consolidated financial statements or with our knowledge obtained during the audit, or it appears to contain a material error. When we read the Annual Report, we will issue the legend on the reading of the annual report required by Article 33, Section I, Subsection b), number 1.2 of the Provisions.
The accompanying consolidated financial statements have been translated into English for the convenience of readers.
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the accompanying consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Company´s ability to continue as a going concern, disclosing, as applicable, matters, related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company´s financial reporting process.
Auditors’ Responsibilities for the Audit of the Financial Statements
The objective of our audit is to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISA will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with ISA, we exercise professional judgement and maintain professional skepticism throughout the audit. We also:
- Identify and asses the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or override of internal control.
- Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.
- Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
- Conclude on the appropriateness of management´s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors´ report. However, future events or conditions may cause the Company to cease to continue as a going concern.
- Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
- We obtained adequate and sufficient related to the financial information of the entities or the business activities in the Company to express and opinion on the consolidated financial statements. We are responsible of the direction, supervision and realization of the Company’s audit. We are the only responsible of our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We will also provide those responsible for the Company’s government with a statement on our fulfillment of relevant ethical requirements regarding independence, and will communicate any relationship and other matters that might be thought to affect our independence and, when applicable, the related safeguards.
Among the matters that have been subject to communications with those responsible for the Company’s government, we determined that those of most significance in the audit of the consolidated financial statements, are the key audit matters. We described these matters in this audit report, except for those legal or regulatory provisions that prohibit the public disclosure of the matter or, in extremely infrequent circumstances, we determine that a matter should not be disclosed in our report, because it is reasonable to expect that the adverse consequences of doing so would overcome the public benefits thereof.
Galaz, Yamazaki, Ruiz Urquiza, S. C.
Member of Deloitte Touche Tohmatsu Limited
Carlos Iván Pólito Ruiz
February 12, 2019