To the Stockholders and board members of El Puerto de Liverpool, S. A. B. de C. V.:

Opinion
We have audited the consolidated financial statements of El Puerto de Liverpool, S. A. B. de C. V. and its subsidiaries (the Company) which comprise the consolidated statement of financial position as of December 31, 2017, and the related consolidated statements of comprehensive income, of changes in equity and of cash flows for the year then ended and the notes to the consolidated financial statements, which include a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017, and its financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS).

Basis of opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). 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 Company in accordance with the Ethics Standards of Mexican Institute of Public Accountants together with other requirements applicable to our audit in Mexico. We have fulfilled our other ethical responsibilities in accordance with those requirements and standards. 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 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.

Key audit matter

Recognition of the acquisition of a business

As mentioned in Note 1 to the consolidated financial statements, on April 4, 2017, the Company acquired control of Suburbia, S. de R.L. de C.V. (Suburbia) whose main activity is the design and marketing of clothing and accessories, through a chain of department stores located in Mexico. The total consideration amounted to $18,205 million, and the fair value of the assets acquired, liabilities assumed and goodwill, determined and recognized at the acquisition date amounted to $15,431, $4,708 and $7,482 million, respectively.

During our audit, we focused on this acquisition due to the importance of the fair value of the assets acquired and liabilities assumed, as well as the resulting goodwill, since the determination of fair values requires the application of significant judgments based on complex variables.

In particular, we focused our audit efforts on the most relevant assets identified, whose fair value required the use of significant judgments that were; i) own brands operated by Suburbia for $ 3,668 million; ii) the intangible derived from the knowledge of the business and operating process acquired for $2,109 million; and iii) the real estate and properties acquired for $ 5,319 million. Assumptions, premises or most relevant variables in these areas were: cash flows, discount rate, betas, royalty rates, benefits for tax amortization (TAB), demerit factors and determination of the useful life. Also the determination of fair value of the consideration required the use of significant judgments, specifically to project the different possible scenarios.

How our audit addressed the key audit matter

Our audit procedures included the following:

Due to the significant judgments used by the Administration in the valuation models to determinate the consideration of the fair values of assets acquired and liabilities assumed, particularly in the case of trademarks, intangible assets and real estate and properties, we involved our valuation experts to selectively evaluate the premises and criteria used by the Administration and its independent expert in those models. Specifically:

We evaluated the ability and objectivity of the independent expert.

With the support of our valuation experts, we checked the models used by the Administration to determinate of fair values were those used and recognized to value assets with similar characteristics in the industry. Likewise, we verified that equally recognized methods were used for the calculation of the terminal value, if any (value of acquired business), which is based on a normalized flow.

We challenged the financial projections of the Administration, including the terminal value determined by the Administration, comparing it with the performance and historical trends of the Company’s businesses, and where appropriate obtaining from the Administration the corresponding explanations.

We corroborated the Administration’s projections were consistent with the budgets approved by the Company’s Board of Directors.

We compared the budgeted figures with the real results to identify if some assumptions in the projections could be considered very optimistic.

We compared the most relevant valuation assumptions (discount rate, betas, royalty rates, benefits for tax amortization (TAB), demerit factors, as well as the determination of the useful life of the assets), with independent sources of market that contain those commonly used and accepted for assets of these characteristics for the industry in which each entity comprising the Company develops.

We compared on a selective bases, the replacement values of fixed assets determined by independent experts with information available in the market.

Key audit matter

Provision for impairment of loan portfolio

As described in Notes 3.3.2 and 8 to the financial statements, the loan portfolio for an amount of $ 38,145 million pesos, originates from the goods and services acquired on credit by the cardholders of the Company and consists of the balances of two credit cards: 1) “Liverpool” and 2) “Liverpool Premium Card”, the portfolio’s recoverability is evaluated periodically recognizing the provisions for impairment corresponding to each group of credits, in accordance with IFRS.

The provision for the impairment of loan portfolio for an amount of $3,086 million pesos it is based on an incurred loss model, whose calculation methodology mainly considers: 1) exposure to default, 2) probability of default of payment and 3) estimated loss given default.

During our audit we focused on this area mainly because of the importance of the value of loan portfolio and the provision for impairment of the portfolio, and because the process to determine the provision is complex involving different variables described in the preceding paragraph.

In particular, we focused our audit efforts on the assumptions used by the Administration such as, the classification of portfolio balances by aging segment, the probability that the accounts default and are unrecoverable.

How our audit addressed the key audit matter

As part of our audit, we performed the following procedures:

With the support of our valuation experts, we analyzed the methodology used by the Administration to determine the provision for impairment of the loan portfolio.

Due to the relevance of the portfolio’s aging report for the calculation and evaluation of the impairment provision, the controls on the information system that generate it, in particular, for a sample of clients, their classification was reprocessed at the end of the year to consider the appropriate classification of the accounts according to their aging.

We reprocessed through selective tests the determination of the calculations generated by the system considering exposure to default, probability of default and estimated loss given default, comparing them against the calculation methodology.

We evaluated on a selective basis the assumptions used by the Administration considering the indicators of the historical behavior of the portfolio and the actual write-offs occurred twelve months after the year end.

Additional Information

Management is responsible for the other information. The other information comprises the annual report presented to the National Banking and Securities Commission (CNBV) and the annual information presented to shareholders (but does not include the consolidated financial statements and our auditor’s report thereon), which are expected to be made available to us after the date of this report.

Our opinion on the consolidated financial statements does not cover the other information and we will not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

When we read the other information not yet received, we will issue the report required by the CNBV and if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance and, if required, describe the issue in our report.

Responsibilities of the Administration and those Responsible for the Governance of the Company in relation to the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS and for such internal control as Management determines is necessary to enable the preparation of consolidated financial statements that are free of material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, Management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative to do so.

Those charged with governance are responsible for overseeing the Company´s financial reporting process.

Responsibilities of the Auditors in relation to the Audit of the Consolidated Financial Statements

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 to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. 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.

As part of an audit in accordance with ISAs, 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, 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 opinion. 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 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 the Company’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by Management.
• 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 significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. 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 Company to cease 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 represent the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the audit of the consolidated financial statements. We remain solely responsible for our audit opinion.

We communicated 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 provided those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicated them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determined 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 described these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determined that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditor’s report is stated below.

PricewaterhouseCoopers, S. C.

José Luis Guzmán
Audit Partner
Mexico City, March 14, 2018