Independent Auditor’s Report

To: Daimler AG, Stuttgart

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

Audit 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 of December 31, 2018, and the consolidated statement of income, consolidated statement of comprehensive income/loss, consolidated statement of changes in equity and consolidated statement of cashflows for the financial year from January 1 to December 31, 2018, as well as 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, 2018.

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 paragraph 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 of December 31, 2018, and of its financial performance for the financial year from January 1 to December 31, 2018, 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 paragraph 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 statements 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 paragraph 2 letter f) of the EU Audit Regulation, we declare that we have not provided non-audit services prohibited under Article 5 paragraph 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, 2018. 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 judgments”. Further information on the operating leases can be found in the Notes to the consolidated financial statements in Note 12 “Equipment on operating leases” and in the comments in the combined management report in the section entitled Industry and business risks and opportunities.

The Risk for the Consolidated Financial Statements

The balance sheet caption “Equipment on operating leases” (€49,476 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 of an impairment loss and checked the calculation of the write-downs determined by Daimler. 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 marketing 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 assessment of the recoverability of the statement of financial position caption “equipment on operating leases” and the recorded impairment losses are appropriate.

Loss Allowances on Receivables from Financial Services

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 allowances on receivables from financial services can be found in the Notes to the consolidated financial statements in Note 1 “Significant Accounting Policies”, in Note 14 “Receivables from financial services ”, in Note 33 “Management of financial risks” and in the comments in the combined management report in the section entitled Industry and business risks and opportunities.

The Risk for the Consolidated Financial Statements

The receivables from financial services (€96,740 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 € 1,086 million.

The calculation of the loss allowances is based since the financial year 2018 on expected credit losses and therefore also includes expectations regarding the future. Recognition of the expected credit losses is carried out by means of a three-parameter procedure for the determination of loss allowances. Hereby, the following is among other things taken into account: various factors determining the value, such as the determination of statistical default probabilities and loss rates, the possible receivable amount on default, the parameter transfer criteria that are related to a significant change in the default risk of borrowers, and the calculation of future cashflows. Furthermore, macroeconomic scenarios flow into the calculation, the identification of which to a high degree includes discretionary judgments and uncertainties.

The risk for the financial statements is that the credit-worthiness of customers and future cashflows 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 development 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, interrogations, review of guidelines and working instructions, checking the defined methods and their implementation and checking and walking through the validation process and the validation reports based on samples.

We audited the appropriateness and effectiveness of the internal control system with regard to the risk classification process and risk models and the identification of the factors determining the value and the loss allowances, also by rechecking the calculations. 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 IT 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 methodical 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 parameters to the current market situation. In this connection, we furthermore audited the data supporting the validations on the basis of samples. In addition, we satisfied 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 the processes to calculate the impairment losses and the assumptions and risk parameters flowing into the measurement are appropriate to identify the credit risks in good time and to determine the recognition of adequate impairment losses.

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 in 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 in the section entitled “Company-specific risks and opportunities – Warranty and goodwill cases”.

The Risk for the Consolidated Financial Statements

The provision for product warranties amounts to €7,043 million and is included in the provisions for other risks.

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 consolidated financial statements is that the provision is not properly measured.

Our Audit Approach

Our audit procedures included among other things the evaluation of the process to calculate the provision for product warranties and the evaluation of the relevant assumptions and their derivation for the measurement of the provision. These include primarily assumptions on expected susceptibility to and the course of damage, and in addition the monetary value of the damage per vehicle based on actual warranty, guarantee and goodwill losses. Based on historical analyses, we assessed the accuracy of the forecasts of past warranty, guarantee and goodwill costs. We also checked that updated assessments of the future repair costs and procedures were taken into account. We obtained an understanding for the underlying numbers of vehicles through the actual unit sales.

Our Observations

The calculation methods and the assumptions made are appropriate.

Accounting Treatment of Legal Proceedings

Please refer with regard to the accounting policies and methods applied to the notes to the consolidated financial statements in 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 23 “Provision for other risks” and Note 30 “Legal proceedings” and in the comments in the combined management report in the section entitled Risks from guarantees and legal risks

The Risk for the Consolidated Financial Statements

Daimler is confronted by various legal proceedings, claims and governmental investigations and directives (legal proceedings) 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) 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 AG, the Company may be required to pay substantial compensatory and punitive damages or to undertake service actions, recall campaigns, monetary penalties or other costly actions.

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 discretionary 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) Diesel emission behavior – administrative proceedings

Several state and federal authorities and further institutions worldwide have made inquiries and/or have carried out investigations and/or proceedings and/or have issued directives. The inquiries and investigations cover test results, the emission control systems in Mercedes-Benz diesel vehicles and/or the interaction of the Company with the relevant state and federal authorities as well as related legal issues and implications, including, but not limited to, those under applicable environmental, securities and criminal and antitrust laws.

b) Diesel emission behavior – class action and other suits in USA and Canada

The use of devices that impermissibly impair the effectiveness of emission control systems in reducing nitrogen-oxide (NOX) emissions and which are supposed to cause excessive emissions from vehicles with diesel engines is alleged in consumer class action suits in the USA and Canada and in a suit of the State of Arizona. In addition, the plaintiffs claim that consumers were deliberately misled in connection with the advertising for Mercedes-Benz diesel vehicles. Furthermore, it is alleged in one of these class action suits that Daimler had conspired with a component supplier in order to deceive U.S. supervisory authorities and consumers.

c) Antitrust proceedings (including damage suits)

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

Since July 25, 2017, several class action suits 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 it is alleged that the defendants have engaged since the nineteen-nineties in anticompetitive behavior with regard to motor vehicle technology, costs, suppliers, markets and other anticompetitive matters, including diesel exhaust cleansing technology. On October 4, 2017, all pending U.S. class actions were centralized in one proceeding. On March 15, 2018, the plaintiffs in the U.S. class action suits expanded and consolidated their claims in two briefs, one of which was in the name of the consumers and the other in the name of the dealers.

Daimler AG already filed an application for immunity (“leniency application”) some time ago with the European Commission in this connection. In the third quarter of 2018, the European Commission instituted a formal investigation into possible collusion regarding emission reduction systems.

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

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

Our Audit Approach

Our audit procedures comprised firstly an evaluation of the process established by the Company to ensure the recording, the estimation of the outcome of the proceedings and the reflection in the annual financial statements of the legal proceedings. Secondly, we held discussions with the internal legal department and with further departments familiar with the matters under dispute and the Company’s external advisors and attorneys, in order to obtain explanations on the developments and the reasons that had led to the respective estimations. In addition, we reviewed the underlying documents and minutes. As of the reporting date, assessments were available from external attorneys, which support the assessment of the risks by the legal representatives.

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

Our Observations

The discretionary assessments and assumptions are appropriate.

Other Information

The legal representatives are responsible for the other information. The other information comprises:

  • the separate non-financial report included in the annual report 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 management 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 February 13, 2019.

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

The legal representatives are responsible for the preparation of the consolidated 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 paragraph 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, the legal representatives are 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, the legal representatives are responsible for assessing the Group’s ability to continue as a going concern. They are also responsible 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, the legal representatives are 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 statements, complies with German legal requirements, and appropriately presents the opportunities and risks of future development. In addition, the legal representatives are responsible for such arrangements and measures (systems) as they have considered necessary to enable the preparation of a combined 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 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 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 Section 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 misstatement of the consolidated financial statements and of 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 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 accounting policies used by management and the reasonableness of estimates made by management and related disclosures.
  • conclude on the appropriateness of the use by the legal representatives 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 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 paragraph 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 conformity with [German] law, and the view of the Group’s position it provides.
  • perform audit procedures on the prospective information presented by the legal representatives in the combined management report. On the basis of sufficient appropriate audit evidence, we evaluate, in particular, the significant assumptions used by the legal representatives 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 also provide those charged with governance with a statement 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 statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless laws or other legal regulations preclude public disclosure of 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 April 5, 2018. We were engaged by the supervisory board on April 26, 2018. 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 committee 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 13, 2019

KPMG AG Wirtschaftsprüfungsgesellschaft

 

 

Becker
Wirtschaftsprüfer

 

Dr. Thümler
Wirtschaftsprüfer

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