Annual Report 2017

Independent Auditor‘s Report

To Daimler AG, Stuttgart

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

Opinions

We have audited the consolidated financial statements of Daimler AG, Stuttgart, and its subsidiaries (the Group), which comprise the consolidated statement of financial position as at December 31, 2017, and the consolidated statement of income, consolidated statement of comprehensive income/loss, consolidated statement of changes in equity and consolidated statement of cash flows for the financial year from January 1 to December 31, 2017, and notes to the consolidated financial statements, including a summary of significant accounting policies. In addition, we have audited the combined management report of Daimler AG for the financial year from January 1 to December 31, 2017.

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 IFRSs 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, 2017, and of its financial performance for the financial year from January 1 to December 31, 2017, and

– the accompanying combined management report as a whole provides an appropriate view of the Group’s position. In all material respects, this combined management report is consistent with the consolidated financial statements, complies with German legal requirements and appropriately presents the opportunities and risks of future development.

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 of the combined management report.

Basis for the Opinions

We conducted our audit of the consolidated financial state-ments and of the combined management report in accordance with Section 317 HGB and the EU Audit Regulation No. 537/2014 (referred to subsequently as “EU Audit Regulation”) and in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). We performed the audit of the consolidated financial statements in supplementary compliance with the International Standards on Auditing (ISAs). Our responsibilities under those requirements, principles and standards are further described in the “Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements and of the Combined Management Report” section of our auditor’s report. We are independent of the group entities 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. In addition, in accordance with Article 10 (2) point (f) of the EU Audit Regulation, we declare that we have not provided non-audit services prohibited under Article 5 (1) of the EU Audit Regulation. 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 combined management report.

Key Audit Matters in the Audit of the Consolidated Financial Statements

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the financial year from January 1 to December 31, 2017. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, we do not provide a separate opinion on these matters.

Impairment Risk on Operating Leases

Please refer with regard to the accounting policies and methods applied to the notes to the consolidated financial statements Note 1 “Significant accounting policies” and Note 2 “Accounting estimates and management judgements”. Further information on the operating leases can be found in the notes to the consolidated financial statements Note 12 “Equipment on operating leases” and in the comments in the combined management report on “Industry and business risks and opportunities”.

The Financial Statement Risk

The balance sheet caption “Equipment on operating leases” ( € 47,714 million) comprises motor vehicles on operating leases. The impairment risk with regard to these vehicles is primarily dependent on the residual value achievable at the end of the lease. These future residual values depend on the situation in the used-vehicle markets prevailing when the vehicles are returned. The future-oriented valuation is based on a number of discretionary assumptions. The risk for the financial statements is that any impairment losses will not be recognized or that the amounts recognized will be inadequate.

Our Audit Approach

We audited the recoverability of the balance sheet caption “Equipment on operating leases” based on Daimler’s internal portfolio allocation. The main focus of our risk-oriented audit approach was addressed to those vehicles with an enhanced impairment risk. We investigated and assessed the indications assumed by the group for a possible requirement for the recognition on an impairment loss. We appraised Daimler’s assessment with regard to the residual values that can be achieved at the end of the term of the leases. We also included vehicles with diesel technology in this appraisal. In this connection, we in particular critically reviewed the main influencing factors, such as the expected number of returns from leasing, the current remarketing results in order to assess the accuracy of the estimates and future vehicle model changes. For significant markets we furthermore also audited the consistency of the assumptions made by Daimler with residual value forecasts by independent expect third parties.

Our Observations

The assumptions and assessments providing the basis for the valuation of the carrying amounts of “equipment on operating leases” are appropriate.

Allowances on Receivables from Financial Services

Please refer with regard to the accounting policies and meth-ods applied to the notes to the consolidated financial state-ments Note 2 “Accounting estimates and management judge-ments”. Further information on allowances on receivables from financial services can be found in the notes to the consolidated financial statements Note 14 “Receivables from financial services and Note 32 “Management of financial risks” and in the comments in the combined management report on “Industry and business risks and opportunities”.

The Financial Statement Risk

The receivables from financial services ( € 85,787 million) resulting from the financing and leasing activities of the Group include receivables from sales financing with customers, receivables from sales financing with dealers and receivables from finance lease contracts. The allowances on these receivables amounted at the balance sheet date to € 870 million.

The calculation of the allowances is based on various value-determining factors such as the risk classification of the cus-tomers, the definition of statistical default probabilities and as-sumptions regarding future cash flows, the determination of which includes to a high degree discretionary assessments and uncertainties.

The risk for the financial statements is that the credit-worthiness of customers and future cash flows is misjudged or that the calculation of the risk provision parameter is incorrect so that allowances are not recognized or are insufficient.

Our Audit Approach

We obtained a comprehensive understanding of the develop-ment of the portfolios, the associated counterparty default risks and the processes for identifying, managing, monitoring and measuring credit risks by inspecting analyses and risk reports, and through interrogations and the review of guide-lines and working instructions.

We audited the appropriateness and effectiveness of the inter-nal control system with regard to the risk classification pro-cess and the determination of the probability of defaults, the loss rates and the allowances. To this end, we also evaluated the relevant IT systems and internal procedures. In addition to the audit by our IT specialists of the propriety of the systems affected and related interfaces to ensure the completeness and correctness of the data, the audit also included the audit of automatic controls for data entry and data processing.

The main focus of our audit was the evaluation of the methodi-cal approach in the determination of risk categories, default probabilities and loss rates that are derived from historical data. We obtained an understanding of this based on a risk-oriented selection of credit portfolios. We satisfied ourselves with regard to the appropriateness of significant risk parameters based on the results of a validation performed by Daimler Financial Services and evaluated the adjustments of the pa-rameters to the current market situation. In addition, we satis-fied ourselves in conjunction with a conscious sample of audits of individual cases that the risk classification is correct and that the amount of the calculated specific allowance is appropriate.

Our Observations

The methodical approach, the procedures and processes to calculate the allowance and the assumptions and risk parame-ters flowing into the measurement are appropriate for the timely identification of credit risks and the establishment of adequate allowances.

Measurement of the Provision for Product Warranties

Please refer with regard to the accounting policies and methods applied to the notes to the consolidated financial statements Note 2 “Accounting estimates and management judgements”. Further information on the guarantees and product warranties can be found in the notes to the consolidated financial statements Note 23 “Provisions for other risks” and in the comments in the combined management report on “Company-specific risks and opportunities – Warranty and goodwill cases”.

The Financial Statement Risk

The provision for product warranties amounts to € 6,654 million. Daimler faces various claims under product guarantees or grants various kinds of product warranties, which are entered into for the error-free functioning of a Daimler product sold or service rendered over a defined period of time. In order to confirm or reassess future guarantee, warranty and goodwill expenses, continuously updated information on the nature and volume and the remedying of faults that have occurred is recorded and analyzed at the level of the business unit, model series, damage key and sales year.

Significant uncertainty for the calculation of the provision arises with regard to the future loss event. The risk for the financial statements is that the provision is not properly measured.

Our Audit Approach

Our audit procedures included among other things the evalua-tion of the process to calculate the provision for product war-ranties and the evaluation of the relevant assumptions and their derivation for the measurement of the provisions. These include primarily assumptions on expected susceptibility to and the course of damage, and in addition the value of the damage per vehicle based on the actual warranty, guarantee and goodwill losses. We assessed the accuracy of the forecasts of past warranty, guarantee and goodwill costs on the basis of historical analyses. Furthermore, we examined wether updated assessments of future repaid costs and procedures were taken into account. We obtained an understanding for the underlying quantities of vehicles through the actual unit sales.

Our Observations

The calculation methods and the assumptions made are ap-propriate.

Accounting Treatment of legal proceedings

Please refer with regard to the accounting policies and methods applied to the notes to the consolidated financial statements Note 2 “Accounting estimates and management judgements”. Further information on the legal proceedings can be found in the notes to the consolidated financial statements Note 29 “Legal proceedings” and in the comments in the combined management report on “Risks from guarantees, legal and tax risks – legal risks”.

The Financial Statement Risk

Various legal proceedings, claims and governmental investiga-tions and inquiries (legal proceedings) are pending against Daimler on a wide range of topics, including for example vehicle safety, emissions, fuel economy, financial services, dealer, supplier and other contractual relationships, intellectual property rights, product warranties, environmental matters, antitrust matters (including actions for damages), criminal proceedings against employees and shareholder matters. Legal proceedings relating to products deal with claims on account of alleged vehicle defects. Some of these claims are asserted by way of class action suits. If the outcome of such legal proceedings is detrimental to Daimler, the Group may be required to pay substantial compensatory and punitive damages or to undertake service actions, recall campaigns, monetary penalties or other costly actions and sanctions.

Whether the recognition of a provision and, if so, in what amount it is necessary on account of legal proceedings is dependent to a high degree on estimates and assumptions by the legal representatives. In view of this and the monetary amounts involved with regard to the risks, the following legal proceedings of Daimler are in our opinion of particular importance.

a) Enquiries and investigations by the authorities on test results and the use of emission control systems

Several state and federal authorities and institutions world-wide have made inquiries and / or performed investigations. The inquiries and investigations cover test results, the emis-sion control systems used in Mercedes-Benz diesel vehicles and Daimler’s interaction with the relevant state and federal authorities as well as related legal issues and implications, including, but not limited to, under applicable environmental, securities and criminal and antitrust laws.

b) Class-action lawsuits NOx USA/Canada

Since the beginning of 2016, several consumer class-action lawsuits have been filed against Mercedes-Benz USA, LLC in federal courts in the USA, which have been combined to form a single class-action lawsuit against Daimler AG and Mercedes-Benz USA, LLC, and against Daimler AG and further group companies in Canada. The main allegation is the use of devic-es that impermissibly impair the effectiveness of emission control systems in reducing nitrogen-oxide (NOx) emissions and which cause excessive emissions from vehicles with diesel engines, and the deliberate misleading of customers in connection with advertising for Mercedes-Benz diesel vehicles.

c) Antitrust and subsequent proceedings

Following the imposition of a fine by the European Commission against Daimler and other truck manufacturers in July 2016, truck customers have raised damage claims against Daimler.

Since July 25, 2017 several class-action lawsuits have been filed in the USA and in Canada against Daimler AG and other automobile manufacturers and several of their North American subsidiaries. The plaintiffs claim to have suffered losses because the defendants have engaged since the nineteen nineties in anticompetitive behaviour with regard to motor vehicle technology, costs, suppliers, markets and other anticompetitive matters, including diesel exhaust cleansing technology. In the meantime all pending US class actions have been centralized in one proceeding.

Daimler AG already filed an application for immunity (“leniency application”) some time ago with the European Commission in this connection.

d) Toll Collect

The arbitration proceedings initiated in 2004 by the Federal Republic of Germany in connection with the establishment and operation of a toll system were filed among others against Daimler Financial Services AG and its Toll Collect GbR investment. In the course of these arbitration proceedings, damages due to lost toll revenue and contractual penalties due to violations of the contracts have been claimed.

The recognition and measurement of the provisions set up for the legal proceedings are based on discretionary assessments by the legal representatives.

The risk for the financial statements is that provisions for legal proceedings are not set up or are inadequate.

Our Audit Approach

Our audit procedures comprised on the one hand an evaluation of the process established by Daimler to ensure the recording, the estimation of the outcome of the proceedings and the reflec-tion in the balance sheet of the legal proceedings. On the other hand, we held discussions with the internal legal department and with further departments familiar with the matters under dispute and Daimler’s external advisors and attorneys, in order to obtain explanations on the developments and the reasons that had led to the respective estimations. Above that we have reviewed the underlying documents and minutes. We were provided by Daimler with the estimation of the legal representatives in the aforementioned areas in writing. External attorneys’ letters, which support the assessment of the risks by the legal representatives, were obtained at the balance sheet date.

Finally, we evaluated the appropriateness of the description in the notes to the consolidated financial statements of the aforementioned legal proceedings.

Our Observations

The assumptions are appropriate.

Other Information

Management is responsible for the other information. The other information comprises:

– the non-financial statement and the corporate governance statement, and

– the remaining parts of the annual report, with the exception of the audited consolidated financial statements and combined management report and our auditor’s report.

Our opinions on the consolidated financial statements and on the combined 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 information and, in so doing, to consider whether the other information

– is materially inconsistent with the consolidated financial statements, with the combined management report or our knowledge obtained in the audit, or

– otherwise appears to be materially misstated.

If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

As instructed, we have performed a separate business man-agement review of the separate non-financial statement. Please refer with regard to the nature, scope and results of this business management review to our audit opinion dated Februrary 9, 2018.

Responsibilities of Management and the Supervisory Board for the Consolidated Financial Statements and the Combined Management Report

Management is responsible for the preparation of the consoli-dated financial statements that comply, in all material respects, with IFRSs 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 combined 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 state-ments, complies with German legal requirements, and appro-priately presents the opportunities and risks of future devel-opment. In addition, management is responsible for such arrangements and measures (systems) as they have consid-ered necessary to enable the preparation of a combined man-agement 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 combined 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 combined management report.

Auditor‘s Responsibilities for the Audit of the Consolidated Financial Statements and of the Combined 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 combined 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 combined management report.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Sec-tion 317 HGB and the EU Audit Regulation and in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer (IDW) and supplementary compliance with the ISAs 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 combined management report.

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

– Identify and assess the risks of material misstatements of the consolidated financial statements and the combined 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 control.

– 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 combined management report in order to de-sign audit procedures that are appropriate in the circum-stances, but not for the purpose of expressing an opinion on the effectiveness of these systems.

– Evaluate the appropriateness of accounting policies used by management and the reasonableness of 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 signif-icant 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 combined 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 IFRSs 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 combined 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 combined management report with the consolidated financial statements, its con-formity 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 combined management report. On the basis of sufficient appropriate audit evi-dence, we evaluate, in particular, the significant assump-tions 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 regard-ing, 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 also provide those charged with governance with a state-ment that we have complied with the relevant independence requirements, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, the related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial state-ments of the current period and are therefore the key audit matters. We describe these matters in our auditor‘s report unless law or regulation precludes public disclosure about the matter.

Other Legal and Regulatory Requirements

Further Information pursuant to Article 10 of the EU Audit Regulation

We were elected as group auditor by the annual general meeting on March 29, 2017. We were engaged by the supervisory board on April 25, 2017. We have been the group auditor of the Daimler AG without interruption since the financial year 1998.

We declare that the opinions expressed in this auditor’s report are consistent with the additional report to the audit commit-tee pursuant to Article 11 of the EU Audit Regulation (long-form audit report).

German Public Auditor Responsible for the Engagement

The German Public Auditor responsible for the engagement is Dr. Axel Thümler.

Stuttgart, February 9, 2018

KPMG AG Wirtschaftsprüfungsgesellschaft

 

Signatur Becker

Becker
Wirtschaftsprüfer

Signatur Thuemler

Dr. Thümler
Wirtschaftsprüfer

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