Consolidated Financial Statements for the Fiscal Year 2021 ended December 31, 2021(PDF:659 MB)

Consolidated Financial Statements

DMG MORI CO., LTD.

Fiscal year ended 31 December 2021 with Independent Auditor's Report

DMG MORI CO., LTD. Consolidated Financial Statements

Fiscal year ended 31 December 2021

Contents

Consolidated Financial Statements

Independent Auditor's Report

Consolidated Statement of Financial Position ................................................................................................... 1

Consolidated Statement of Profit or Loss .......................................................................................................... 3

Consolidated Statement of Comprehensive Income .......................................................................................... 4

Consolidated Statement of Changes in Equity ................................................................................................... 5

Consolidated Statement of Cash Flows ......................................................................................................... 11

Notes to Consolidated Financial Statements .................................................................................................... 13

Independent Auditor's Report

The Board of Directors

DMG MORI CO., LTD.

Opinion

We have audited the accompanying consolidated financial statements of DMG MORI CO., LTD. (the Company) and its subsidiaries (collectively, the Group), which comprise the consolidated statement of financial position as at December 31, 2021, and the consolidated statements of profit or loss, comprehensive income, changes in equity, and cash flows for the year then ended, and notes to the consolidated financial statements.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at December 31, 2021, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs).

Basis for Opinion

We conducted our audit in accordance with auditing standards generally accepted in Japan. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Japan, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

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 the audit of the consolidated financial statements as a whole, and in forming the auditor's opinion thereon, and we do not provide a separate opinion on these matters.

Valuation of goodwill and other intangible assets with indefinite useful lives arising on business combination with DMG MORI AKTIEGESELLSCHAFT ("DMG MORI AG")
Description of Key Audit Matter	Auditor's Response
As described in Note 11, "Goodwill and Other Intangible Assets," to the consolidated financial statements, the Company recorded goodwill of ¥70,834 million and other intangible assets with indefinite useful lives of ¥33,847 million, (mainly trademark) as of December 31, 2021, ¥67,873 million and ¥33,847 million, respectively, arising on the business combination with DMG MORI AG.	The audit procedures we performed to assess the valuation of goodwill and other intangible assets with indefinite useful lives arising on the business combination with DMG MORI AG included the following, among others: ・ We assessed the design and operating effectiveness of the internal control for determining whether impairment loss should be recognized with regard to the valuation of goodwill and other intangible assets with indefinite useful lives.
The Company allocated the carrying amounts of goodwill and other intangible assets arising on the business combination with DMG MORI AG to a cash generating unit ("CGU") or group of CGUs, such as Machine Tools and Industrial Services, and performs impairment testing annually. The recoverable amount of goodwill and other intangible assets with indefinite useful lives is measured based on value in use of the CGU or group of CGUs to which they are allocated. During the year ended December 31, 2021, the Company did not recognize an impairment loss as the value in use exceeded the carrying amount. The value in use is calculated by discounting the estimated future cash flows based on the five-year business plan approved by management and the terminal value based on the growth rate for the period subsequent to the period covered by the business plan, using the pre-tax discount rate considering the corresponding pre-tax WACC for similar industries and reflecting current market assessments of the time value of money and specific risks. For the period subsequent to the period covered by the business plan, the Company calculates the terminal value by discounting estimated future cash flows to their present value using a growth rate determined in consideration of the conditions of the country and industry to which the CGU or group of CGUs belongs based on the forecasted cash flows for the final year of the business plan. The key assumptions used for the calculation of value in use are the growth rate of sales revenues and ratio of operating costs to sales revenues incorporated in the business plan, the growth rate for the period subsequent to the period covered by the business plan and pre-tax discount rate used in the calculation of present value.	・ We compared the estimated future cash flows with the business plan approved by management to evaluate the consistency. ・ We compared the Company's business plan for prior years with actual results to evaluate the effectiveness of management's estimation process. ・ With the involvement of the valuation specialists from our network firm, we assessed the reasonableness of the valuation methodologies for value in use. ・ We made inquiries with management about alternative assumptions and results to enhance our understanding of the degree of uncertainty with regard to management estimate. ・ We assessed the growth rate of sales revenues, which serves as the basis of the business plan, by making inquiries about the rational for management determination, performing a trend analysis based on past performance, and conducting a comparison analysis of the outcome with the growth rate. In addition, we conducted a comparison analysis involving the capital expenditure demand forecast in the machine tool market prepared by third parties with the growth rate. ・ We assessed the ratio of operating costs to sales revenues which serves as the basis of the business plan, by making inquiries about the rational for management determination and conducting a trend analysis based on past performance. ・ With the involvement of valuation specialists from our network firm, we assessed the growth rates for the period subsequent to the period covered by the business plan and the discount rate by evaluating the consistency of the inputs used in the calculations with publicly available data. In addition, we conducted a sensitivity analysis.

The above key assumptions used to calculate value in use of goodwill and other intangible assets with indefinite useful lives arising on the business combination with DMG MORI AG are subject to uncertainty and require significant management judgment. The estimates are highly uncertain since in particular, the growth rate of sales revenues tends to be significantly affected by any increase or decrease in capital expenditure demand in the machine tool market due to economic fluctuations, and the ratio of operating costs to sales revenues is affected by the aforementioned fluctuations in economic conditions as well as the risk of rising raw material costs.

Therefore, we determined the valuation of goodwill and other intangible assets with indefinite useful lives arising on the business combination with DMG MORI AG to be a key audit matter.

Classification of perpetual subordinated bonds as equity instruments
Description of Key Audit Matter	Auditor's Response
As described in Note 21, "Equity and Other Equity Items," to the consolidated financial statements, the Company raised funds in the amount of ¥30 billion through the Fourth Subordinated Bonds ("the perpetual subordinated bonds") in August 2021. The Company determined that these perpetual subordinated bonds are classified as equity instruments as the Company has the option to defer interest payments and has no obligation to make payments, except in the case a liquidation event as defined in the subordinated bond clause, and recorded these bonds under "Equity" in the consolidated statement of financial position. As a result, the proceeds from the perpetual subordinated bonds, after deducting issue costs in the amount of ¥29,718 million, are recorded as "Other equity instruments" under "Equity" in the consolidated statement of financial position as of December 31, 2021.	The audit procedures we performed to assess the reasonableness of the classification of perpetual subordinated bonds as equity instruments included the following, among others: ・ We read the agreements and the subordinated bond terms to evaluate all clauses including the subordination clauses that affect judgments about the classification as equity instruments. ・ We read the legal opinion given by the external legal counsel engaged by the Company and made inquiries of management in order to evaluate applicable laws and the Company's interpretation of the subordination clause. ・ With the involvement of other legal expert, we evaluated the legal opinion given by the external legal counsel engaged by the Company. In addition, we evaluated the competence, capabilities and objectivity of the external legal counsel engaged by the Company.