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2020 Annual Report

150 Years of Continental

2020 Annual Report

 

Independent Auditor’s Report

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To Continental Aktiengesellschaft, Hanover

Report on the Audit of the Consolidated Financial Statements and the Consolidated Management Report

Opinions
We have audited the consolidated financial statements of Continental Aktiengesellschaft, Hanover, and its subsidiaries (the Group), which comprise the consolidated statement of financial position as at December 31, 2020, the consolidated statement of comprehensive income, consolidated statement of profit or loss, consolidated statement of changes in equity and consolidated statement of cash flows for the financial year from January 1 to December 31, 2020, and the notes to the consolidated financial statements, including a summary of significant accounting policies. In addition, we have audited the management report on the Company and the Group (hereinafter: the “group management report”) of Continental Aktiengesellschaft for the financial year from January 1 to December 31, 2020.

In accordance with German statutory provisions, we did not audit the content of the elements of the group management report set out in the “Other information” section of our auditor’s report.

In our opinion, on the basis of the knowledge obtained in the audit,

  • the accompanying consolidated financial statements comply, in all material respects, with the IFRS as adopted by the EU and the additional requirements of German commercial law pursuant to Section 315e(1) HGB (Handelsgesetzbuch: German Commercial Code) and, in compliance with these requirements, give a true and fair view of the assets, liabilities, and financial position of the Group as at December 31, 2020, and of its financial performance for the financial year from January 1 to December 31, 2020, and
  • the accompanying group management report as a whole provides an appropriate view of the Group’s position. In all material respects, this group management report is consistent with the consolidated financial statements, complies with German legal requirements and appropriately presents the opportunities and risks of future development. Our opinion on the group management report does not cover the content of the elements of the group management report specified in the “Other information” section.

Pursuant to Section 322(3) sentence 1 HGB, we declare that our audit has not led to any reservations relating to the legal compliance of the consolidated financial statements and the group management report.

Basis for the opinions
We conducted our audit of the consolidated financial statements and the group management report in accordance with Section 317 HGB and the EU Audit Regulation (No. 537/2014; hereinafter the “EU-AR”), taking into account the generally accepted standards for the audit of financial statements promulgated by the German Institute of Public Auditors (IDW). Our responsibilities under those requirements and principles are further described in the “Auditor’s responsibilities for the audit of the consolidated financial statements and of the group management report” section of our auditor’s report. We are independent of the consolidated companies in accordance with the requirements of European law and German commercial and professional law, and we have fulfilled our other German professional responsibilities in accordance with these requirements. Furthermore, we declare pursuant to Article 10(2) f) EU-AR that we have not carried out any prohibited non-audit services referred to in Article 5(1) EU-AR. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinions on the consolidated financial statements and on the group management report.

Key audit matters in the audit of the consolidated financial statements
Key audit matters are such matters that, in our professional judgement, were the most significant in our audit of the consolidated financial statements for the financial year from January 1 to December 31, 2020. These matters were taken into account in connection with our audit of the consolidated financial statements as a whole and in forming our audit opinion; we do not provide a separate audit opinion on these matters.

Recoverability of the carrying amount of goodwill
Please refer to Section 2 in the notes to the consolidated financial statements for information on the accounting policies applied and the assumptions used. Information on the amount of the goodwill can be found in Section 14 in the notes to the consolidated financial statements.

RISK FOR THE FINANCIAL STATEMENTS
The goodwill amounts to €4,362 million as at December 31, 2020, and, at 11% of the total assets, constitutes a significant proportion of the assets.

Goodwill is tested annually at the level of the cash-generating units, without this requiring a specific reason. If impairment triggers arise in the course of the year, an ad hoc impairment test is additionally performed during the year. For this purpose, the carrying amount is compared with the recoverable amount of the relevant cash-generating unit. If the carrying amount exceeds the recoverable amount, an impairment loss has to be recognized. The recoverable amount is the higher of the fair value less costs to sell and the value in use of the cash-generating unit. The reporting date for the mandatory impairment test which has to be carried out every year is November 30, 2020. Ad hoc impairment tests are additionally carried out by Continental AG.

The goodwill impairment test is complex and based on a number of discretionary assumptions. These include the expected business and earnings development of the cash-generating units segment for the next five and nine years, the long-term growth rates that are assumed and the discount rate that is used.

In the course of the annual planning process, the Company did not expect global production of passenger cars and light commercial vehicles to increase significantly in the next five years up to 2025 in comparison with pre-crisis levels. The expected effects of restructuring measures were additionally taken into account in this planning process. The reduction in the expected future cash inflows led in the course of the ad hoc impairment test as at September 30, 2020, to impairments of the goodwill totaling €649 million (€655 million as at December 31, 2020, due to currency effects).

No additional impairment loss was identified during the annual impairment test as at November 30, 2020. The results of the sensitivity analyses conducted by the Company showed that a reasonably possible change both in the discount rate, the sustainable growth rate in the perpetual annuity and in sales does not require any additional impairments. There is a risk for the consolidated financial statements that the impairment recognized in the financial statements has not been recognized in the appropriate amount.

There is also a risk that the disclosures in the notes to the financial statements relating to the subsequent measurement of the goodwill are not appropriate and complete.

OUR AUDIT APPROACH
With the support of our valuation specialists, we assessed, among other things, the appropriateness of the key assumptions as well as of the Company’s valuation model. To this end, we discussed the expected business and earnings development as well as the assumed long-term growth rates with those responsible for the planning. Furthermore, we checked the plausibility of the annual planning and the long-term planning drawn up by the Executive Board and approved by and taken note of by the Supervisory Board. We additionally assessed the consistency of the assumptions with external market forecasts.

We furthermore satisfied ourselves of the Company’s planning accuracy by comparing plans from earlier financial years with the results actually realized and analyzing any deviations. As even minor changes to the discount rate can have a significant impact on the results of the impairment test, we compared the assumptions and data underlying the discount rate, the risk-free rate, the market risk premium and the beta coefficient, with our own assumptions and publicly available data.

In order to ensure that the valuation model used was mathematically accurate, we verified the Company’s calculations on the basis of elements selected from a risk perspective.

In order to take the existing forecast uncertainty and the early reporting date for the impairment test into account, we investigated the impact of possible changes in the revenue, the discount rate and the EBIT margin on the recoverable amount (sensitivity analysis) by calculating alternative scenarios and comparing them with the values stated by the Company. The risk-based focus of our analyses here was the five cash-generating units for which we carried out detailed analyses.

Finally, we assessed whether the disclosures in the notes regarding the impairment of goodwill were appropriate and complete.

OUR CONCLUSIONS
The valuation model underlying the impairment test of the goodwill is appropriate and consistent with the applicable measurement principles.

The Company’s assumptions and data underlying the measurement are within acceptable ranges and are balanced on the whole.

The related disclosures in the notes are appropriate and complete.

Recoverability of the carrying amount of deferred tax assets
Please refer to Sections 2 and 20 in the notes to the consolidated financial statements for information on the accounting policies applied and the assumptions used.

RISK FOR THE FINANCIAL STATEMENTS
Deferred tax assets of €2,751 million, of which €580 million result from loss and interest carryforwards, are reported in the consolidated financial statements of Continental AG as at December 31, 2020.

For the recognition of the deferred tax assets, Continental estimates to what extent the existing deferred tax assets can be used in the subsequent reporting periods. A requirement for realizing these claims is that sufficient taxable income is generated in the future. If there are reasonable doubts about whether the deferred tax assets that have been identified can be used in the future, deferred tax assets are not recognized and deferred tax assets that have already been created are impaired.

The measurement of the deferred tax assets depends to a large extent on management’s assessment and assumptions relating to the operational performance of the country units and the Group’s tax planning and is therefore subject to significant uncertainty. Furthermore, any realization depends on the respective tax environment.

In the course of the annual planning process, Continental did not expect global production of passenger cars and light commercial vehicles to increase significantly in the next five years up to 2025 in comparison with pre-crisis levels. This has a negative impact on the future business and earning prospects. Based on Continental’s assessment, it can be assumed that the existing deferred tax assets can be used despite the way in which the market has developed, with the result that it remains possible to capitalize the deferred tax assets.

There is a risk for the consolidated financial statements that Continental AG’s assessment is not reasonable and that the deferred tax assets that are recognized cannot be recovered.

OUR AUDIT APPROACH
We obtained the support of our tax specialists in the audit in order to assess the tax issues. To begin with, we subjected the temporary differences between the IFRS carrying amounts and the carrying amounts of the respective tax accounts for the Group companies in question to a critical analysis. Furthermore, we reconciled the loss carryforwards with the tax assessment notices and the tax calculations for the current financial year for Group companies and groups of companies consolidated for tax purposes selected on a risk-oriented basis, and we also assessed off-balance sheet corrections.

We evaluated the impairment of the deferred tax assets on the basis of the internal company forecasts of future taxable income drawn up for the Group companies and subjected the underlying assumptions to a critical assessment. In this connection, we reconciled in particular the planning of the future taxable income with the planning drawn up by management and reviewed the consistency of the underlying data. We furthermore satisfied ourselves of the Group companies’ planning accuracy by comparing plans from earlier financial years with the results that were actually realized later and analyzing any deviations.

We had Continental AG’s assessment of the financial performance of Group companies with an existing history of losses explained to us. If deferred tax assets are recognized at these companies, we satisfied ourselves that the measures to improve results have been implemented and also analyzed the causes of the improvement in earnings and evaluated the sustainability of the taxable profits.

OUR CONCLUSIONS
The assumptions underlying the measurement of the deferred tax assets are appropriate overall.

Recognition and measurement of the restructuring provisions
Please refer to Sections 2 and 29 in the notes to the consolidated financial statements for information on the accounting policies applied and the assumptions used.

RISK FOR THE FINANCIAL STATEMENTS
Restructuring provisions totaling €1,351 million are recognized in the consolidated financial statements of Continental AG as at December 31, 2020.

If the general and specific recognition criteria of the relevant provisions are met, appropriate provisions must be created for restructuring measures. The measurement of the restructuring provisions, the amounts of which are significant, depends to a large extent on the assessments and assumptions made by the Company’s management especially with regard to the design of the redundancy plans, the amount of the severance payments, the laying off of employees and costs for abandoning sites.

The risks for the consolidated financial statements are that the criteria for the recognition of restructuring provisions are not met or that these provisions are not measured correctly.

OUR AUDIT APPROACH
To begin with, we assessed in the course of our audit whether each of the recognition criteria was fulfilled as at December 31, 2020. In this connection, we assessed in particular whether there was a detailed, formal restructuring plan, whether the essential elements of the restructuring measures had been communicated to the employees affected and whether the implementation of the restructuring measures had begun.

We subsequently had the assumptions used as the basis for the measurement of the restructuring provisions explained to us. We assessed the consistency of the assumptions with the detailed, formal restructuring plans. We furthermore compared the assumptions with restructuring measures conducted in the past and subjected contracts and agreements already entered into by the reporting date to a critical analysis.

OUR CONCLUSIONS
Management’s assumptions are appropriate.

Other information
The management and the Supervisory Board are responsible for the other information. The other information includes the following elements of the management report, the content of which has not been audited:

  • the combined non-financial Group statement that is contained in the “Sustainability and Combined Non-Financial Statement” section in the management report; and
  • the group corporate governance statement, which is referred to in the same section of the group management report.

The other information additionally includes the other parts of the annual report. The other information does not include the consolidated financial statements, the group management report information audited for content or our auditor’s report thereon.

Our opinions on the consolidated financial statements and on the group management report do not cover the other information, and consequently we do not express an opinion or any other form of assurance conclusion thereon.

In connection with our audit, our responsibility is to read the other above-mentioned information and, in so doing, to consider whether the other information

  • is materially inconsistent with the consolidated financial statements, with the group management report information audited for content or our knowledge obtained in the audit, or
  • otherwise appears to be materially misstated.

In accordance with our engagement, we conducted a separate business audit of the combined non-financial Group statement. In relation to the nature, scope and results of this business audit, please refer to our unqualified audit opinion of March 2, 2021.

Responsibilities of management and the Supervisory Board for the consolidated financial statements and the group management report
The management is responsible for the preparation of the consolidated financial statements that comply, in all material respects, with the IFRS as adopted by the EU and the additional requirements of German commercial law pursuant to Section 315e(1) HGB and that the consolidated financial statements, in compliance with these requirements, give a true and fair view of the assets, liabilities, financial position, and financial performance of the Group. In addition, management is responsible for such internal control as they have determined necessary to enable the preparation of 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 Group’s ability to continue as a going concern. They also have the responsibility for disclosing, as applicable, matters related to going concern. In addition, they are responsible for financial reporting based on the going concern basis of accounting unless there is an intention to liquidate the Group or to cease operations, or there is no realistic alternative but to do so.

Furthermore, management is responsible for the preparation of the group management report that, as a whole, provides an appropriate view of the Group’s position and is, in all material respects, consistent with the consolidated financial statements, complies with German legal requirements, and appropriately presents the opportunities and risks of future development. In addition, management is responsible for such arrangements and measures (systems) as they have considered necessary to enable the preparation of a group management report that is in accordance with the applicable German legal requirements, and to be able to provide sufficient appropriate evidence for the assertions in the group management report.

The Supervisory Board is responsible for overseeing the Group’s financial reporting process for the preparation of the consolidated financial statements and of the group management report.

Auditor’s responsibilities for the audit of the consolidated financial statements and of the group management report
Our objectives are 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 whether the group management report as a whole provides an appropriate view of the Group’s position and, in all material respects, is consistent with the consolidated financial statements and the knowledge obtained in the audit, complies with the German legal requirements and appropriately presents the opportunities and risks of future development, as well as to issue an auditor’s report that includes our opinions on the consolidated financial statements and on the group management report.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Section 317 HGB and the EU-AR and in compliance with the German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (IDW) will always detect a material misstatement. 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 and this group management report.

We exercise professional judgement and maintain professional skepticism throughout the audit. We also:

  • Identify and assess the risks of material misstatement of the consolidated financial statements and of the group management report, 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 opinions. 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 the override of internal controls.
  • Obtain an understanding of internal control relevant to the audit of the consolidated financial statements and of arrangements and measures (systems) relevant to the audit of the group management report 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 these systems.
  • Evaluate the appropriateness of the accounting policies used by management and the reasonableness of the estimates made by management and related disclosures.
  • 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 Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in the auditor’s report to the related disclosures in the consolidated financial statements and in the group management report or, if such disclosures are inadequate, to modify our respective opinions. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to be able 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 present the underlying transactions and events in a manner that the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and financial performance of the Group in compliance with the IFRS as adopted by the EU and the additional requirements of German commercial law pursuant to Section 315e(1) HGB.
  • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express opinions on the consolidated financial statements and on the group management report. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our opinions.
  • Evaluate the consistency of the group management report with the consolidated financial statements, its conformity with (German) law, and the view of the Group’s position it provides.
  • Perform audit procedures on the prospective information presented by management in the group management report. On the basis of sufficient appropriate audit evidence we evaluate, in particular, the significant assumptions used by management as a basis for the prospective information, and evaluate the proper derivation of the prospective information from these assumptions. We do not express a separate opinion on the prospective information and on the assumptions used as a basis. There is a substantial unavoidable risk that future events will differ materially from the prospective information.

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 issue a statement to those responsible for monitoring to the effect that we have complied with the relevant independence requirements and discuss with them all relationships and other matters that can reasonably be assumed to affect our independence and the safeguards put in place to protect against this.

From the matters that we have discussed with those responsible for monitoring, we determine which matters were most important during the audit of the consolidated financial statements for the current reporting period and are therefore the key audit matters. We describe these matters in the independent auditor’s report, unless laws or other legal provisions preclude their public disclosure.

Other Statutory and Legal Requirements

Report on the audit of the electronic reproduction of the consolidated financial statements and of the group management report created for disclosure purposes in accordance with Section 317(3b) HGB
In accordance with Section 317(3b) HGB, we conducted an audit to obtain reasonable assurance on whether the electronic reproductions of the consolidated financial statements and of the group management report contained in the file “continental_187287.zip” (SHA256-Hashvalue: ff1d6b6632b3219cdb263c093d69c9246 504a461f8e06b2b9535e54af227f97c) that are created for disclosure purposes (also referred to hereinafter as the “ESEF documents”), and which can be retrieved from the protected client portal for the issuers, satisfy the requirements of Section 328(1) HGB relating to the electronic reporting format (“ESEF format”) in all material respects. In compliance with the German legal requirements, this audit covers only the conversion of the information in the consolidated financial statements and the group management report into the ESEF format and therefore neither the information contained in these reproductions nor other information contained in the above-mentioned file.

In our opinion, the reproductions of the consolidated financial statements and of the group management report contained in the above-mentioned file and created for disclosure purposes meet the requirements of Section 328(1) HGB relating to the electronic reporting format in all material respects. Beyond this opinion and our opinions on the accompanying consolidated financial statements and the accompanying group management report for the financial year from January 1 to December 31, 2020, contained in the preceding “Report on the audit of the consolidated financial statements and the group management report,” we do not issue any opinion whatsoever on the information contained in these reproductions or on the other information contained in the above-mentioned file.

We conducted our audit of the reproductions of the consolidated financial statements and of the group management report contained in the above-mentioned file in accordance with Section 317(3b) HGB and the draft IDW auditing standard: Audit of the electronic reproductions of annual financial statements and management reports created for disclosure purposes in accordance with Section 317(3b) HGB (IDW EPS 410). Our responsibility based on this standard is described in more detail below. Our audit practice has applied the requirements for quality assurance systems set out in the IDW quality assurance standard: Requirements for quality assurance in auditing practice (IDW QS 1).

The management of the Company is responsible for drawing up the ESEF documents with the electronic reproductions of the consolidated financial statements and of the group management report pursuant to Section 328(1) sentence 4 no. 1 HGB and for marking up the consolidated financial statements pursuant to Section 328(1) sentence 4 no. 2 HGB.

In addition, management of the Company is responsible for such internal control as they have determined necessary to enable the creation of the ESEF documents that are free from material violations, whether due to fraud or error, of the requirements of Section 328(1) HGB relating to the electronic reporting format.

The management of the Company is furthermore responsible for submitting to the operator of the German Federal Gazette the ESEF documents together with the auditor’s report and the accompanying audited consolidated financial statements and the audited group management report as well as other documents to be disclosed.

The Supervisory Board is responsible for overseeing the creation of the ESEF documents as part of the financial reporting process.

Our objective is to obtain reasonable assurance about whether the ESEF documents are free from material violations, whether due to fraud or error, of the requirements of Section 328(1) HGB. We exercise professional judgement and maintain professional skepticism throughout the audit. We also:

  • identify and assess the risks of material breaches of the requirements of Section 328(1) HGB, 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;
  • obtain an understanding of internal control relevant to the audit of the ESEF documents 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 these controls;
  • assess the technical validity of the ESEF documents, i.e. whether the file containing the ESEF documents meets the requirements of Delegated Regulation (EU) 2019/815, as amended as at the balance sheet date, relating to the technical specification for this file;
  • assess whether the ESEF documents enable the audited consolidated financial statements and the audited group management report to be reproduced in XHTML with the same contents;
  • assess whether the mark-up of the ESEF documents with Inline XBRL technology (iXBRL) enables an appropriate and complete machine-readable XBRL copy of the XHTML reproduction to be made.

Other disclosures in accordance with Article 10 EU-AR
We were elected as the auditor of the consolidated financial statements by the Annual General Meeting on July 14, 2020. We were engaged by the Audit Committee on November 8, 2020. We have been the auditor of the consolidated financial statements of Continental Aktiengesellschaft without interruption for more than 30 years.

We declare that the audit opinions expressed in this auditor’s report are consistent with the additional report to the Audit Committee pursuant to Article 11 EU-AR (audit report).

In addition to auditing the financial statements for the Company and the companies it controls, we performed the following services, which have not been included in the consolidated financial statements or in the group management report:

In addition to the audit of the consolidated and annual financial statements as well as the review of the interim financial statements of Continental Aktiengesellschaft, we audited various consolidated and annual financial statements and conducted reviews of interim financial statements at subsidiaries. Project-related IT audits, audits of various IT systems and IT processes as well as migration tests were performed. Furthermore, we performed other assurance services, such as issuing a comfort letter, conducting legal or contractual audits, including the audits pursuant to the Erneuerbare-Energien-Gesetz (EEG – German Renewable Energy Sources Act), EMIR audits pursuant to Section 20 of the Wertpapierhandelsgesetz (WpHG – German Securities Trading Act), the audit of the combined non-financial group statement, the audit of transfer prices as well as audits of the use of funds. We have issued assurances on compliance with terms and conditions of contract. Furthermore, workshops on tax issues have been held. Tax advisory services that we have performed additionally include support services in the preparation of tax returns and during tax audits as well as advice on individual items for income tax and value added tax purposes as well as project-related support in the implementation of a tax compliance management system.

Responsible auditor
The auditor responsible for the audit is Andreas Modder.

Hanover, March 2, 2021

KPMG AG Wirtschaftsprüfungsgesellschaft

Dr. Tonne
Wirtschaftsprüfer
(German Public Auditor)

Modder
Wirtschaftsprüfer
(German Public Auditor)