Opinion
As statutory auditor, we have audited the accompanying consolidated financial statements of ABB Ltd and subsidiaries (the Group), which comprise the consolidated balance sheet as of December 31, 2018, and the related consolidated income statement, statements of comprehensive income, cash flows and changes in stockholders’ equity for the year ended December 31, 2018, and the related notes (pages 143 to 215). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2018, and the consolidated results of its operations and its cash flows for the year ended December 31, 2018, in accordance with U.S. generally accepted accounting principles and comply with Swiss law.
Board of Directors’ responsibility
The Board of Directors is responsible for the preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles and the requirements of Swiss law. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm and are required to be independent with respect to the Group. We conducted our audit in accordance with Swiss law, Swiss Auditing Standards and the standards of the Public Company Accounting Oversight Board (United States) (PCAOB). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement, whether due to fraud or error.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Report on key audit matters based on the circular 1/2015 of the Federal Audit Oversight Authority
Revenue recognition on long-term projects GEIS purchase price allocation
Tax contingencies related to transfer pricing
134
Planned divestment of Power Grids business
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Revenue recognition on long-term projects
Key Audit Matter Our response
The Group conducts a significant portion of its business under long-term projects, including construction-type, fixed price projects.
Revenues from long-term contracts are recognized using the percentage of completion method of accounting. The Group uses the cost-to-cost method to measure the extent of progress towards completion of each contract.
The determination of the extent of progress towards completion for long-term projects is an area of significant judgment. Management assesses total contract revenues, the scope of deliveries required to fulfill the contract, total contract cost and remaining cost to completion, all of which may deviate from original estimates, for example as a result of contract amendments or scope changes.
For the estimate of cost to complete, there is also significant judgment on the recognition and measurement of technical, commercial or legal risks.
Revenue recognition on long-term projects using the percentage of completion method may also be subject to potential manipulation by management to achieve performance targets.
As part of our audit, we initially obtained an understanding of the Group’s long-term project business. As all revenues from long-term projects originate at component level, we performed our audit procedures by involving our component audit teams based on risk-specific instructions. To confirm that component audit teams performed adequate procedures, we were involved in the planning of relevant audit procedures, and reviewed the execution of these procedures and conclusions reached by these teams.
We assessed the design and operating effectiveness of the financial reporting related internal controls by examining specific long-term projects, from the initiation of business
transactions through recognition in the financial statements.
As part of the substantive audit procedures, we evaluated management’s assumptions for a sample of contracts, selected based on their risk profile, examined the terms and conditions of the contracts, including variation orders, and obtained an understanding of the stage of completion through inquiring with the project managers on the status of projects and by participating in project review meetings. We analyzed whether revenues and corresponding cost of sales are recognized in the correct reporting period considering the extent of progress towards completion, and whether changes in cost estimates, caused for example by project delays or cost changes for services provided by
subcontractors, were appropriately considered by management.
Statutory Auditor’s Report
To the General Meeting of ABB Ltd, Zurich
Report of the Statutory Auditor on the Audit of the Consolidated Financial Statements
Opinion
As statutory auditor, we have audited the accompanying consolidated financial statements of ABB Ltd and subsidiaries (the Group), which comprise the consolidated balance sheet as of December 31, 2018, and the related consolidated income statement, statements of comprehensive income, cash flows and changes in stockholders’ equity for the year ended December 31, 2018, and the related notes (pages 143 to 215). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2018, and the consolidated results of its operations and its cash flows for the year ended December 31, 2018, in accordance with U.S. generally accepted accounting principles and comply with Swiss law.
Board of Directors’ responsibility
The Board of Directors is responsible for the preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles and the requirements of Swiss law. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm and are required to be independent with respect to the Group. We conducted our audit in accordance with Swiss law, Swiss Auditing Standards and the standards of the Public Company Accounting Oversight Board (United States) (PCAOB). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement, whether due to fraud or error.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity’s preparation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Report on key audit matters based on the circular 1/2015 of the Federal Audit Oversight Authority
Revenue recognition on long-term projects GEIS purchase price allocation
Tax contingencies related to transfer pricing
135
As a response to the risk of fraud in revenue recognition on long-term projects, we tested on a sample basis the accuracy of the sales recorded, based on inspection of externally available evidence, such as approvals of milestones and customer correspondence. We also inquired with external and internal legal counsels regarding alleged breaches of contract and asserted claims.
We assessed the consistency of the accounting information with the project information obtained.
For further information on revenue recognition on long-term projects refer to the following:
— Note 2 “Significant accounting policies”
GEIS purchase price allocation
Key Audit Matter Our response
Effective June 30, 2018, the Group has completed its acquisition of GE Industrial Solutions (GEIS) for a net consideration of $2,622 million. Taking into account the acquired net assets of $1,180 million, goodwill amounted to
$1,442 million.
The acquired identifiable assets and assumed liabilities are recognized at their fair value on the acquisition date. Management has appointed an external expert to assist them in the identification and measurement of acquired assets and liabilities. The notes to the financial statements indicate that the purchase price allocation is preliminary for up to 12 months after the acquisition date and is subject to refinement as more detailed analyses are completed and additional information about the fair values of the acquired assets and liabilities becomes available.
The identification and measurement of acquired assets is complex and based on judgment, in particular for intangible assets. Key valuation assumptions for intangible assets include, among others, forecasted sales revenues and expected margin developments of the acquired business as well as the determination of the cost of capital.
There is a risk that the fair value of the acquired assets, specifically acquired intangible assets, is incorrectly determined by management and as a result, that the goodwill related to the transaction is derived inaccurately.
We read the purchase agreement to understand the key terms and conditions of the transaction, and inquired with management of the Group and of the acquired business as well as employees of the accounting department and the M&A
department on specific matters relevant to the accounting for the acquisition.
We evaluated the competence, capabilities and objectivity of the external valuation expert assisting management in the identification and measurement of acquired assets and liabilities.
We assessed the process and the internal controls of the Group related to the purchase price allocation.
In our evaluation of the appropriateness of the material assumptions made by management, including those related to the identification and measurement of intangible assets, we involved our own valuation specialists. We considered and challenged the appropriateness of the
methodologies underlying the fair value estimation of the identified intangible assets.
Further, we challenged the underlying business plan, its derivation and respective assumptions, and compared it, where available, to relevant benchmarks.
In addition, we compared the assumptions and parameters underlying the cost of capital with our own expectations and publicly available data. We examined the valuation models used for
compliance with generally accepted valuation principles.
136
For further information on the GEIS purchase price allocation refer to the following:
— Note 2 “Significant accounting policies”
— Note 4 “Acquisitions and business divestments”
Tax contingencies related to transfer pricing
Key Audit Matter Our response
The Group operates across multiple tax jurisdictions around the world, and is thus exposed to numerous tax laws and is regularly subject to tax audits by local tax authorities. The application of local regulations on income tax, and transfer pricing is complex. The recognition and measurement of income tax liabilities related to transfer pricing require management to exercise judgment in assessing tax matters and to make estimates regarding tax contingencies.
Specifically, legal disputes attributable to the determination of earnings under local tax laws, intragroup arrangements, intragroup sales of goods and services and intragroup transfers of technology are areas of complexity monitored closely by management.
Tax contingency provisions are recorded by the Group based on management’s assessment of the technical merits of tax filings, considering applicable tax laws of the relevant jurisdictions and the facts and circumstances of each case. As such, significant management judgment is involved in the recognition and the measurement of group tax contingency provisions, specifically as they relate to intragroup arrangements and transfer pricing.
We obtained an understanding of existing transfer pricing tax risks through inquiry of the Group’s tax department and the management of group companies. We evaluated management’s process and internal controls related specifically to the assessment of transfer pricing tax risks, estimates of tax exposures and tax contingencies.
Involving our own tax specialists, we reviewed documentation in relation to tax audits as well as transfer pricing documentation and analyzed correspondence with tax authorities to verify whether tax exposures have been considered and accurately provided for where necessary. The Group’s past and current experience with tax authorities in the respective jurisdictions was used to evaluate the appropriateness of tax
contingency reserves.
Our audit approach included additional reviews performed at Group level to consider the Group’s uncertain tax positions viewed from a global perspective – in particular for transfer pricing, intragroup arrangements and intragroup business transactions where multiple jurisdictions and tax authorities are involved. We drew on our own tax expertise and knowledge gained with other international groups to conclude on
management’s estimate of the outcome on the Group’s tax contingencies.
For further information on tax contingencies refer to the following:
— Note 2 “Significant accounting policies”
— Note 16 “Income taxes”
As a response to the risk of fraud in revenue recognition on long-term projects, we tested on a sample basis the accuracy of the sales recorded, based on inspection of externally available evidence, such as approvals of milestones and customer correspondence. We also inquired with external and internal legal counsels regarding alleged breaches of contract and asserted claims.
We assessed the consistency of the accounting information with the project information obtained.
For further information on revenue recognition on long-term projects refer to the following:
— Note 2 “Significant accounting policies”
GEIS purchase price allocation
Key Audit Matter Our response
Effective June 30, 2018, the Group has completed its acquisition of GE Industrial Solutions (GEIS) for a net consideration of $2,622 million. Taking into account the acquired net assets of $1,180 million, goodwill amounted to
$1,442 million.
The acquired identifiable assets and assumed liabilities are recognized at their fair value on the acquisition date. Management has appointed an external expert to assist them in the identification and measurement of acquired assets and liabilities. The notes to the financial statements indicate that the purchase price allocation is preliminary for up to 12 months after the acquisition date and is subject to refinement as more detailed analyses are completed and additional information about the fair values of the acquired assets and liabilities becomes available.
The identification and measurement of acquired assets is complex and based on judgment, in particular for intangible assets. Key valuation assumptions for intangible assets include, among others, forecasted sales revenues and expected margin developments of the acquired business as well as the determination of the cost of capital.
There is a risk that the fair value of the acquired assets, specifically acquired intangible assets, is incorrectly determined by management and as a result, that the goodwill related to the transaction is derived inaccurately.
We read the purchase agreement to understand the key terms and conditions of the transaction, and inquired with management of the Group and of the acquired business as well as employees of the accounting department and the M&A
department on specific matters relevant to the accounting for the acquisition.
We evaluated the competence, capabilities and objectivity of the external valuation expert assisting management in the identification and measurement of acquired assets and liabilities.
We assessed the process and the internal controls of the Group related to the purchase price allocation.
In our evaluation of the appropriateness of the material assumptions made by management, including those related to the identification and measurement of intangible assets, we involved our own valuation specialists. We considered and challenged the appropriateness of the
methodologies underlying the fair value estimation of the identified intangible assets.
Further, we challenged the underlying business plan, its derivation and respective assumptions, and compared it, where available, to relevant benchmarks.
In addition, we compared the assumptions and parameters underlying the cost of capital with our own expectations and publicly available data. We examined the valuation models used for
compliance with generally accepted valuation principles.
137
Planned divestment of Power Grids business
Key Audit Matter Our response
The Group announced on December 17, 2018, that it intends to divest its Power Grids business to Hitachi Ltd.
Closing of the transaction is expected to be completed in the first half of 2020, following the receipt of customary regulatory approvals.
As a result of the planned divestiture, management has reported the Power Grids business as discontinued operations.
Due to the significance and the complexity of the planned Power Grids transaction, we consider the allocation and presentation of assets and
liabilities, as well as income and expenses, in particular of information system costs, a key audit matter.
Our audit procedures included, amongst others, testing the effectiveness of the Group’s internal controls over the appropriate accounting and assessing the appropriateness of the Group’s accounting policies in relation to discontinued operations.
We inquired with management on a regular basis to understand the status of the planned divestiture of the Power Grids business. Further, we
inspected the relevant sale and purchase agreement and other relevant documentation on the planned transaction.
Involving local component audit teams, we tested on a sample basis the allocation of assets, liabilities, income and expenses presented in discontinued operations, to assess whether they are attributable to the Power Grids business. At the Group level, we specifically assessed the allocation of expenses, in particular whether information system costs are accurately presented, including reallocations to continuing operations, where required.
For further information on the planned divestment of the Power Grids business refer to the following:
— Note 3 “Changes in presentation of financial statements”
Other Matter
The consolidated financial statements of the Group for the years ended December 31, 2017 and 2016 were audited by other auditors who expressed an unmodified opinion on those statements on
The consolidated financial statements of the Group for the years ended December 31, 2017 and 2016 were audited by other auditors who expressed an unmodified opinion on those statements on