HERMÈS - 2018 Registration document

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Consolidated financial statements

Statutory auditors’ report on the consolidated financial statements

We considered this to be a key audit matter due to the nature of the inventories and the fact that the above prospects and the potential impairment resulting from them are by nature dependent on the assumptions, estimates and assessments made by the management. Furthermore, inventories are present in a large number of subsidiaries, elimination of the internal margins in the consolidated financial statements is of particular importance because of their impact on the gross value of the inventories and the level of impairment to be recorded. How our audit addressed this risk During our work we: s s examined the procedures for the valuation and impairment of inventories; s s carried out a critical review of the methodology used by the management to impair inventories given the distribution history of the said inventories and our knowledge of the Group’s business sectors; s s compared the durations and life-cycles adopted by the management with historical performances; and s s assessed the level of impairment compared to the prospects for sale and the age of the inventories. Our work also involved taking samples to check the consistency of the levels of cancelled internal margins in the consolidated financial statements by examining the margin made with the distribution subsidiaries. Description of risk Hermès International is naturally exposed to foreign exchange risk because the bulk of its production is located in the eurozone, but receives the majority of its sales revenue in foreign currencies (American dollar, Japanese yen and other Asian currencies, etc.). The manufacturing subsidiaries invoice the distribution subsidiaries in their local currency, which apply an annual exchange rate on the scales established in euros; To hedge this risk and minimise the impact of currency fluctuations on its earnings, Hermès International uses firm or optional foreign exchange hedges, with the objective of hedging its net internal exposure on an annual basis. At 31 December 2018, the hedging of internal transactions in currencies for the next following year is close to 100%. We considered this to be a key audit matter due to: s s the impacts of exchange rate fluctuations on the Group’s operating margin, which is the benchmark the Group uses in its financial communication; s s of the first-time application of IFRS 9 Financial instruments . How our audit addressed this risk As part of our work, assisted by our financial instrument experts, we: s s checked the existence, completeness and accuracy of the Group’s financial instrument portfolio by making confirmation requests to banks; s s recalculated the fair value of a representative sample of instruments in order to assess the accuracy of their value; s s verified the relationship between the hedges and commercial transactions for a selection of hedging operations, obtained and carried out a critical review of the documentation of associated effectiveness tests in order to assess their eligibility for hedge accounting within themeaning of IFRS 9; s s verified that the provisions of the new standard IFRS 9 were properly applied, including the impact of the first-time application of this standard on the net worth at the beginning of the period; Description of risk The Hermès International Group’s entities operate in many countries where tax legislation is different, may change and is sometimes complex. This situation, which generates large cross-border flows, can create risks and uncertain tax positions. As at 1 January 2018, Hermès International brought forward the application of IFRIC 23 Uncertainty over Income Tax Treatments , which resulted in tax payables being presented under tax liabilities and no longer provisions. At each closing period, the management of Hermès International estimates the liabilities to be recognised in the light of ongoing reassessments and its defence arguments supported by its tax advisors. We considered this to be a key audit matter given the high degree of judgement required by the management to assess risks and the amounts of tax payables to be recognised in sometimes complex situations, in accordance with the provisions of IFRIC 23 Uncertainty over Income Tax Treatments . Income tax – Notes 1.1.2, 1.19 and 9 to the consolidated financial statements Recognition of foreign exchange hedges – Notes 1.1.1 , 1.9.1 and 23 to the consolidated financial statements

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2018 REGISTRATION DOCUMENT HERMÈS INTERNATIONAL