Independent Auditor’s Report

Updating our understanding of shell’s business and its environment

Our global audit team has deep industry experience through working for many years on the audits of large integrated international energy companies and commodity trading organisations. Our audit planning starts with updating our view on external market factors, for example geopolitical risk, the potential impact of climate change and the energy transition, commodity price risk and major trends in the industry.

In 2021, the macro-economic environment stabilised, when compared to 2020. However, climate change and the energy transition continue to heighten estimation uncertainty and to elevate the risk of material misstatement of Shell’s asset carrying values and liabilities recorded. These factors had a pervasive impact on Shell’s financial statements and increased the risk around key areas of accounting judgement.

As part of our risk assessment, we also updated our understanding of Shell’s business environment. The factors that impacted our 2021 risk assessment included:

• Shell’s “Powering Progress” strategy;
• Shell’s announcement of an absolute emissions reduction target of 50% by 2030, compared to 2016 levels on a net basis, for all scope 1 and 2 emissions under Shell’s operational control;
• the impact of the organisational review announced in 2020 (Project Reshape);
• heightened counterparty risks; and
• the operating environment within Nigeria.

Our updated understanding of Shell’s business and the environment in which it operates informed our risk assessment procedures.

Assessing materiality (Section 6)

We continued to believe that it was appropriate to base materiality on normalised Adjusted Earnings on a pre-tax basis. This approach removed both the effects of changes in oil price on inventory carrying amounts and non- recurring gains and charges disclosed as identified items that can significantly distort Shell’s results in any one particular year. By applying a normalised Adjusted Earnings approach, we concluded that it was appropriate to maintain planning materiality at $1 billion, which is the same level as in the 2020 audit. Performance materiality for the 2021 audit was set at 75% of our overall materiality, which was set at 50% in 2020.

In summary, we adopted the following materiality measures in our 2021 audit:

We kept our assessment of materiality under review throughout the year.

Determining the scope of our audit (Section 7)

Our scope was tailored to the circumstances of our audit of Shell and is influenced by our determination of materiality and our assessed risks of material misstatement. In comparison to the prior year, during the course of the 2021 audit, we did not make any substantial changes to our assessment of the components where we performed full or specific scope audit procedures, nor the number of IT applications to test; however, what did change was the nature and emphasis of our testing in response to our significant audit risks and areas of audit focus. By following this approach, our audit effort focused on higher risk areas, such as management judgements.

Identifying key audit matters (Section 8)

We identified the following key audit matters that, in our professional judgement, had the greatest effect on our overall audit strategy, the allocation of resources in the audit and in directing the global audit team’s efforts:

• impact of climate change and the energy transition on the financial statements;
• estimation of oil and gas reserves;
• impairment assessment of property plant and equipment (PP&E) and joint ventures and associates (JVAs);
• exploration and evaluation (E&E) assets;
• decommissioning and restoration (D&R) provisions;
• recognition and measurement of deferred tax assets; and
• revenue recognition: the measurement of unrealised trading gains and losses.

Overall materiality

What we mean

We define materiality as the magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our procedures.

Level set

Group materiality

We set our preliminary overall materiality for Shell’s Consolidated Financial Statements at $1 billion (2020: $1 billion). We kept this under review throughout the year and reassessed the appropriateness of our original assessment in the light of Shell’s results and external market conditions. We did not find it necessary to revise our level of overall materiality.

Parent Company materiality

We determined materiality for the Parent Company to be $1 billion (2020: $1 billion), which is 0.4% of equity (2020: 0.4%). We concluded that equity remains an appropriate basis to determine materiality for an investment holding company. The range we normally apply when determining materiality on an equity measurement basis is 1- 2%. We applied a lower percentage to align the materiality of the parent company with that of the group.

Our basis of determining materiality

Our assessment of overall materiality that we applied throughout the year was $1 billion. This was derived from an average of Shell’s earnings, including an estimated result for 2021, on an Adjusted Earnings basis and that we have adjusted for an average effective tax rate. At the end of the year, we reassessed materiality based on the actual results for 2021. As disclosed within non-GAAP measures reconciliations, the “Adjusted Earnings” measure aims to facilitate a comparative understanding of Shell’s financial performance from period to period by removing the effects of oil price changes on inventory carrying amounts and removing the effects of identified items are discussed in section "Non-GAAP measures reconciliations".

Our key criterion in determining materiality remains our perception of the needs of Shell’s stakeholders. We consider which earnings, activity or capital-based measure aligns best with their expectations. In so doing, we apply a ‘reasonable investor perspective’, which reflects our understanding of the common financial information needs of the members of Shell as a group.

We continue to believe that these needs are best met by basing materiality on normalised Adjusted Earnings on a pre-tax basis. This approach removes both the effects of changes in oil price on inventory carrying amounts (current cost of supplies adjustment as defined in section "Non-GAAP measures reconciliations") and non-recurring gains and charges disclosed as identified items in section "Non-GAAP measures reconciliations" that can significantly distort Shell’s results in any one particular year. Through applying a normalised earnings approach, large year-on-year swings in materiality are minimised. These swings would be driven primarily by price fluctuations rather than specific structural changes to Shell’s business.

We have considered alternative benchmarks to Adjusted Earnings, including revenue, EBITDA, total assets and equity. These indicate a range of $1.0 billion to $1.9 billion, with the capital-based benchmarks being at the top end of this range.

We believe that a normalised Adjusted Earnings approach remains appropriate on the basis that:

• segment earnings are presented on an Adjusted Earnings basis, which is the earnings measure used by CEO for the purposes of making decisions about allocating resources and assessing performance;
• Adjusted Earnings exclude the effect of changes in the oil price on inventory carrying amounts, allowing investors to understand how management has performed despite the commodity price environment, as opposed to because of it;
• analyst forecasts predominately feature Adjusted Earnings, which exclude identified items, as the basis for earnings. The analyst consensus data supports our judgement that Adjusted Earnings remains the key indicator of performance from a reasonable investor perspective; and
• although this is an unprecedented time for Shell and the industry and there is uncertainty around the future price environment, views of economists and market participants was that demand would return during 2021 and that the supply/demand balance will be re-addressed over time.

By applying a normalised Adjusted Earnings approach, we have concluded that it is appropriate to maintain materiality at $1 billion, which is the same level as in the 2020 audit.

The Adjusted Earnings were as follows:

Performance materiality

What we mean

Having established overall materiality, we determined ‘performance materiality’, which represents our tolerance for misstatement in an individual account. It is calculated as a percentage of overall materiality in order to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality of $1 billion for Shell’s financial statements as a whole. We assigned performance materiality to our various in-scope operating units. The performance materiality allocation is dependent on the size of the operating unit, measured by its contribution of earnings to Shell, or other appropriate metric, and the risk associated with the operating unit.

Level set

Our 2020 performance materiality was set at 50% of planning materiality, which was based on the potential impacts of remote working through the year-end close, heightened estimation uncertainty as a result of oil and gas price levels, together with significant increased uncertainty around future demand and supply, the potential impact on the control environment of Project Reshape and the level of anticipated audit errors. In our assessment for 2021, we considered the nature, number and impact of the audit differences identified in 2020 and the more stable price environment in 2021. We also noted the way in which management navigated the financial statement close throughout 2020, and the fact that we did not experience any notable increase in control deficiencies in the prior year audit, despite the remote working environment. Based on our assessment of these factors, our judgement was that performance materiality for the 2021 audit should be 75% of our overall materiality or $0.75 billion (2020: $0.5 billion).

The planning and performance materiality was kept under ongoing review, but the conclusion remained unchanged at our year-end re-assessment of materiality. The range of performance materiality allocated to operating units was $113 million to $488 million (2020: $75 million to $325 million).

Audit difference reporting threshold

What we mean

This is the amount below which identified misstatements are clearly trivial. The threshold is the level above which we collate and report audit differences to the Audit Committee. We also report differences below that threshold that, in our view, warrant reporting on qualitative grounds. We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in the light of other relevant qualitative considerations in forming our opinion.

Level set

We agreed with the Audit Committee that we would report to the Committee all audit differences more than $50 million (2020: $50 million), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.

What we mean

We are required to establish an overall audit strategy that sets the scope, timing and direction of our audit. Audit scope comprises the physical locations, operating units, activities and processes to be audited that, in aggregate, are expected to provide sufficient coverage of the financial statements for us to express an audit opinion.

Criteria for determining our audit scope and selection of in-scope operating units

Our assessment of audit risk and our evaluation of materiality and our allocation of performance materiality determined our audit scope for each operating unit within Shell which, when taken together, enabled us to form an opinion on the financial statements. Our audit effort was focused towards higher risk areas, such as management judgements, and on operating units that we considered significant based upon size, complexity or risk.

We assessed our 2021 audit scope following the completion of our 2020 audit. We identified those Areas of Operation (AoOs or operating units) that were significant by virtue of their contribution to Shell’s results or significant by virtue of their associated risk or complexity. In doing this we considered the history or expectation of unusual or complex transactions, potential for or history of material misstatements, the previous effectiveness of controls, our forensic assessment in relation to fraud, bribery or corruption, and internal audit findings. We then considered the adequacy of account coverage and remaining audit risk of AoOs not directly covered by audit procedures. Finally, we sense checked our scope to the prior year and also ensured that there was appropriate unpredictability in our scope and made the necessary changes where appropriate. We applied our Risk Scan analytics techniques, which consolidate internal and external data to inform us on higher risk components to be included in scope. This allowed us to risk rate the group’s operating units. We identified 244 operating units where we believed that it was appropriate to carry out targeted testing.

By following this approach, our audit effort focused on higher risk areas, such as management judgements. Our group wide procedures enabled us to obtain audit evidence over the AoOs that were not full, specific or specified procedure scope.

We did not make any substantial changes to our 2020 assessment of the components where we performed full or specific scope audit procedures. Also, there were no significant changes to the number of IT applications we tested. However, what did change was the nature and emphasis of our testing in response to our significant audit risks and areas of audit focus.

We kept our audit scope under review throughout the year to reflect changes in Shell’s underlying business and risks; however, no significant changes were required.

The table below illustrates the scope of work performed by our audit teams:

Coverage

Our coverage by full, specific, specified and group procedures is illustrated below. The summary is by Total Assets, Adjusted Earnings and Revenue. Overall, our full, specific and specified procedures accounted for 61% of Shell’s absolute Adjusted Earnings reported by Shell in its quarterly results announcements and adjusted for an effective tax rate. The remaining Adjusted Earnings were covered by Group wide procedures.

The Parent Company is located in the United Kingdom and audited directly by the Group engagement team

Allocation of performance materiality to the in-scope operating units

The level of materiality that we applied in undertaking our audit work at the operating unit level, for the purpose of obtaining coverage over significant financial statements accounts, was determined by applying a percentage of our total performance materiality. This percentage is based on the significance of the operating unit relative to Shell as a whole and our assessment of the risk of material misstatement at that operating unit. In 2021 the range of materiality applied at the operating unit level was $113 million to $488 million (2020: $75 million to $325 million). The operating units selected, together with the ranges of materiality applied, were:

Group evaluation, review and oversight of component teams

The group engagement partner and Senior Statutory Auditor, Gary Donald, has overall responsibility for the direction, supervision and performance of the Shell audit engagement in compliance with professional standards and applicable legal and regulatory requirements. He is supported by 15 segment and function partners and associate partners, who are based in the Netherlands and the UK, and who together with related staff comprise the integrated group engagement team. This group engagement team established the overall group audit strategy, communicated with component auditors, performed work on the consolidation process, and evaluated the conclusions drawn from the audit evidence as the basis for forming EY’s opinion on the group financial statements.

The group engagement team is responsible for directing, supervising, evaluating and reviewing the work of EY global network firms operating under their instruction (local EY teams) to assess whether:

• the local EY audit team had the appropriate level of experience;
• the work was performed and documented to a sufficiently high standard;
• the local EY audit team demonstrated that they had challenged management sufficiently and had executed their audit procedures with an appropriate level of scepticism; and
• there is sufficient appropriate audit evidence to support the conclusions reached.

The group engagement team provided detailed instructions to our component teams to drive the audit strategy and execution in a coordinated manner. Under normal circumstances, Gary Donald and other group audit partners and directors would visit all in-scope operating units and Shell’s BSCs. Travel restrictions presented challenges to us exercising direction, supervision, oversight and review of our overseas EY audit teams; however, we were satisfied that we have had adequate involvement in their work and that we exercised sufficient and appropriate direction to the component teams.

In the absence of group team members being able to travel to visit local EY teams at component locations the process of oversight of component teams included maintaining a continuous and open dialogue with our global component teams, as well as holding formal closing meetings quarterly, to ensure that we were fully aware of their progress and results of their procedures. Between quarters, and during critical periods of the audit, we increased the use of online collaboration tools to facilitate team meetings, information sharing and the evaluation, review and oversight of component teams. We requested more detailed deliverables from component teams, and we utilised fully the interactive capability of EY Canvas, our global audit workflow tool, to review remotely the relevant underlying work performed.

Also, as this was Gary Donald’s first year as the Senior Statutory Auditor, he met virtually with the engagement partners on the component teams where we carried out either full or specific scope procedures. In addition, Gary attended the component closing meetings with Australia (Integrated Gas), Brazil (Upstream), the Netherlands (Tax) and the US (Trading and supply). During the year, Gary joined the Upstream and Integrated Gas segment partners in meetings with the Executive Committee members for Upstream and Integrated Gas. From September to November 2021, with the easing of travel restrictions, Gary was based at Shell’s offices in the Hague and in January 2022 in Shell’s headquarters in London. These activities allowed Gary to build his knowledge of Shell’s business and operations in order to identify the risks of material misstatement within Shell’s financial statements and to determine the scope of the audit.

Involvement with local EY teams

Shell has centralised processes and controls over key areas within its BSCs. Members of the group engagement team provide direct oversight, review, and coordination of our BSC audit teams. Our BSC teams performed centralised testing in the BSCs for certain accounts, including revenue, cash and payroll. In establishing our overall approach to the group audit, we determined the type of work that needed to be undertaken at each of the operating units or BSCs by the group engagement team or by auditors from other local EY teams.

The group engagement team performed procedures directly on 122 of the in-scope operating units. For the operating units where the work was performed by local EY auditors, we determined the appropriate level of involvement of the group engagement team to enable us to conclude that sufficient appropriate audit evidence had been obtained, as a basis for our opinion on the Group as a whole.

During the 2021 audit, the group team were able to carry out two physical site visits at Shell’s US Upstream operations and Shell’s US Trading and supply function. In addition, we performed virtual site visits in Brazil, Nigeria, Qatar, UK, USA, India, Malaysia, Philippines and Poland. These visits were carried out multiple times during the audit and were attended by either the Senior Statutory Auditor or other group audit partners or associate partners on the group engagement team. We also joined all the Audit Committee virtual site visits and deep-dives that are discussed in the Audit Committee report.

Climate change

There has been increasing interest from stakeholders as to how climate change will impact Shell and to the steps that investors expect auditors to perform. Our audit efforts in considering climate change are described in Section 8, key audit matters, which includes details of our procedures and the key observations communicated to the Shell Audit Committee. We also challenged the Directors’ considerations of climate change in their assessment of going concern (see section 4) and viability and associated disclosures (see section 9).

The impact of climate change and the energy transition on the financial statements

Description of the key audit matter

The financial statement and audit risks related to climate change and the energy transition remain an area of audit focus and the risk is elevated compared to 2020. This is due to the increased uncertainty surrounding the impact of climate change, and because climate change risks have a pervasive impact on many areas of accounting judgement and estimate and, therefore, our audit.

Climate related issues impact Shell in many ways, as set out in Climate change and energy transition, within the Strategic report, which forms part of the “Other information” rather than the audited financial statements. Within this section, Shell have described how climate-related issues are considered when reviewing and guiding strategy, major plans of action and risk management policies, annual budgets, and business plans.

As stated in Note 4 to the financial statements, in 2021 Shell launched their Powering Progress strategy to accelerate the transition of their business to net-zero emissions, including targets to reduce the carbon intensity of energy products they sell (scope 1, 2 and 3 emissions) by 6-8% by 2023, 20% by 2030, 45% by 2035 and 100% by 2050. Further in October 2021, Shell announced their target to reduce absolute scope 1 and scope 2 emissions by 50% by 2030, compared to 2016 levels. Also, in Note 4, Shell describe how they consider climate related impacts in key areas of the Consolidated Financial Statements and how this translates into the valuation of assets and measurement of liabilities.

Shell has identified climate-related risks and opportunities, which are set out within the Climate change and energy transition section of the Strategic Report and in risk factors, which form part of the “Other information,” rather than the audited financial statements.

The related audit risks that we have considered in our audit are as follows:

• the alignment of Shell’s financial statements and their Strategic Report around material climate change with the Powering Progress strategy, which is described in section "Strategic Report";
• the reflection of Shell’s emissions reduction targets within their operating plan (see "Note 4 Climate change and energy transition"), which is forecasted for a 10-year period and updated every year, which would impact forecast cash flows, thereby impacting future income and estimated recoverable amounts of assets and measurement of liabilities;
• whether material climate change risks are appropriately reflected in critical accounting estimates and judgements; and
• whether the financial statements, including note disclosures, appropriately reflect known climate change-related litigation.

The critical accounting judgements and estimates that are impacted by climate change and the energy transition include the following:

• the estimation of oil and gas reserves and resources "see separate KAM below";
• the useful economic lives of PP&E and the estimation of depreciation, depletion, and amortisation (DD&A);
• impairment assessments for PP&E and JVAs, including E&E assets. These assets may no longer be considered economic due to the impact of climate change and the energy transition on oil and gas prices, production volumes and increased cost exposure from increased adoption of carbon pricing in key markets (see separate KAMs on impairment of PP&E and E&E assets in section “Impairment of property plant and equipment (PP&E) and joint ventures and associates (JVA)” and “Exploration and evaluation (E&E) assets”). There is a risk that material impairments could have a direct impact on Shell’s ability to pay dividends;
• the recognition and measurement of decommissioning and restoration (D&R) provisions, including operations that historically have been assumed to have indefinite lives (see separate KAM in section "Recognition and measurement of deferred tax assets");
• the recognition and measurement of Deferred Tax Assets (see separate KAM in section "Revenue recognition: the measurement of unrealised trading gains and losses");
• climate change-related litigation brought against Shell that may lead to an outflow of resources or otherwise impact Shell’s business;
• the disclosure of information about the assumptions Shell makes that could, in the future, have a significant risk of material adjustments to the carrying amounts of assets and measurement of liabilities, including sensitivity disclosures; and
• going concern and viability assessments and disclosures as increased stakeholder concern on climate change from Shell’s investors and current and potential future providers of finance may pose a risk to Shell’s ability to raise finance (see section 4 and section 9 of our opinion).

Our response to the risk

Overall response

In order to respond to the impact of climate change and the energy transition, we ensured that we had the appropriate skills and experience on the audit team. Our primary audit engagement team included professionals with significant experience in climate change, climate change litigation and energy valuations. Most of the audit procedures were performed by the primary audit engagement team. Where work was carried out by component teams, this was under the direction of team members with significant experience in climate change.

In addition, during the planning phase of our audit, the primary audit engagement team, including climate change and sustainability specialists, held a series of climate change risk workshops. In these workshops, the team focused on industry and regulatory developments on climate change and how these developments apply to Shell’s business. The team also assessed the physical and transition climate risks facing Shell’s business, the audit risks associated with climate change and our planned audit response. An output from the workshops was a specific audit plan to address climate change risk in the 2021 audit, the key aspects of which are set out below.

In designing our audit procedures, we also considered the content of the document entitled “Investor Expectations for Paris-aligned Accounts”, published on 5 November 2020 by the Institutional Investors Group on Climate Change (IIGCC), which was reiterated in a letter that EY received from Sarasin and Partners on 1 November 2021 on Investor expectations: net zero-aligned accounts.

The procedures we carried out included the following:

Alignment of statements made in Strategic Report with the financial statements

• in connection with our audit of the financial statements, we read the Other information in the Annual Report and Accounts and, in doing so, considered whether the Other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appeared to be materially misstated;
• we evaluated whether the effects of material climate risks, as disclosed in the Annual Report and Accounts in the section "Risk factors" and in the section "Climate change and energy transition", had been appropriately reflected in asset values and associated financial statement disclosures, and the timing, nature and measurement of liabilities recognised in accordance with IFRS, which is discussed further below;
• assessed the consistency of the assumptions used in preparing the financial statements with the Other information in the Annual Report and Accounts relating to energy transition and climate change;

Incorporation of emissions reduction assumptions within Shell’s operating plan

• held discussions with Group Planning, Group Reporting and Shell’s Carbon Strategy group to understand how transition and physical risks of climate change were being factored into Shell’s 2021 operating plan;
• tested management’s internal controls over the accounting for and disclosure of the potential impacts associated with energy transition and climate change;
• we performed procedures to understand how management intend to achieve their planned Scope 1 and 2 and Net Carbon Footprint reductions and whether these actions have been reflected in the operating plan and, ultimately, the areas where they impact Shell’s financial statements and note disclosures, specifically in assessing impairment of PP&E and JVAs, E&E assets, D&R provisions, recognition and measurement of DTAs and the assessments of going concern and viability. This involved obtaining an understanding of Shell’s processes to develop, challenge and approve the operating plan and the design and operating effectiveness of the controls over this process. The team carrying out this work included auditors with expertise in climate change risk in the energy industry;
• assessed the appropriateness of the operating and capital expenditure assumptions that were assumed necessary to achieve the emission reductions. This also involved assessing the credibility of assumptions on acquisitions, divestments, investments in Carbon Capture Solutions (CCS) technologies and Nature Based Solutions (NBS), including whether such assumption is appropriately reflected in impairment assessments;
• engaged our climate change and sustainability specialists to consider the appropriateness of the methodology adopted and the reasonableness of the carbon prices applied in 25 countries, including the 10 highest forecast carbon emitters. As part of this we independently determined our view of a range of acceptable carbon price assumptions. Where countries were outside of our benchmarking ranges, we performed sensitivity analysis to ensure the impact of these different assumptions was not material;
• tested the carbon pricing included in cash flows and performed sensitivity analysis by using a range of carbon prices, such as those disclosed in the IEA Net Zero Emissions by 2050 scenario;

Reflection of material climate change risks within the critical accounting estimates, judgements and financial statement disclosures

• read Shell’s disclosure in the financial statements of information about the assumptions Shell makes that could, in the future, have a significant risk of material adjustments to the carrying amounts of assets and measurement of liabilities, including sensitivity disclosures in Note 4 in the financial statements;
• considered specifically the extent to which management’s mid-price outlook and production assumptions incorporated the potential impact of climate change and the energy transition;
• evaluated the reasonableness of Shell’s refining margin assumptions, by comparing Shell’s assumptions to external benchmarks, in light of the expected impact on demand for oil products in a transition to a net zero economy. Refining margin assumptions underpin the recoverable amount of refineries;
• read and challenged management’s disclosures in Note 4. We audited the sensitivity disclosures in Note 4 of the carrying value of Shell’s Upstream and Integrated Gas PP&E assets to a range of future oil and gas price assumptions, reflecting reduced demand scenarios due to climate change and the energy transition, including the IEA Net Zero Emissions by 2050 scenario. This included considering whether the downside sensitivities could have reduced the level of Shell’s distributable profits such that their 2021 dividend would not have been in compliance with the Companies Act;
• in order to identify assets that are carbon intensive, where there may be a higher risk of the reserves not ultimately being produced (stranded assets), we analysed those assets that are currently forecast to be producing beyond 2030 and estimated the carbon intensity of the most significant fields that are expected to be producing after 2030. We estimated the net book value of assets currently recognised that will not have been fully depreciated by 2030 in order to assess the risk of material stranded assets;
• we analysed further the carbon intensity per barrel of those fields. For the assets where forecast emissions were highest, we evaluated whether Shell’s operating plan assumptions included planned actions and associated expenditures to reduce the carbon emissions of these projects;

Climate change related legal claims

• involving EY lawyers that specialise in climate change risk in the energy industry, we gained an understanding of how Shell are defending the various climate change claims and allegations, considered legal advice and contra evidence. We assessed whether the various climate change litigations represented obligations where the likelihood of a cash outflow was probable and therefore requiring provision. Also, we considered the appropriateness of the disclosures within Note 26, Legal proceedings and other contingencies, by comparing the disclosures to our understanding of the claims and allegations.

The audit procedures were performed principally by the group engagement team. Our audit response relating to oil and gas reserves, the impairment assessment of PP&E and JVAs, E&E assets, D&R provisions and DTAs is included in the KAMs on pages 218-223.

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Key observations communicated to the Shell Audit Committee

We reported to the Audit Committee the key procedures that we had performed and the results of those procedures, which are set out below:

Alignment of statements made in Strategic Report with the financial statements

• We reported that we had not identified any material inconsistencies between Shell’s disclosures in Note 4 on the material impacts of climate-related matters, included within the Other information, and the financial statements.

Incorporation of Shell’s emissions reduction targets within Shell’s operating plan

• We reported that Shell’s operating plan reflected the expected financial impact of management’s current planned actions to address these risks. This included confirming that the operating and capital expenditure estimates to deliver the emissions reductions are included in the operating plan, including assumptions on acquisitions, divestments, investments in CCS technologies and NBS, and that it is appropriate to include these assumptions in impairment assessments performed in accordance with applicable accounting standards.
• With support from our climate change and sustainability specialists, we concluded an appropriate methodology had been adopted to forecast carbon prices and, through our independent testing verified that Shell’s forecast carbon prices were within a reasonable range, or where the assumptions applied were outside of this range, they did not have a material impact on Shell’s forecast cash flows.

Reflection of material climate change risks within the critical accounting estimates, judgements and financial statement disclosures

• We reported that management’s controls over the accounting for, and disclosure of, the potential financial statement impacts associated with climate change and energy transition were designed and operating effectively.
• We confirmed that the material climate risks that impact Shell’s critical accounting estimates, judgements and financial statement disclosures have been appropriately reflected by Shell in the preparation of their financial statements.
• We audited Shell’s long-term oil and gas price assumptions and concluded they are reasonable and represent management’s current best estimate of the range of economic conditions that will exists in the foreseeable future. We have included our observations on Shell’s price assumptions, including refining margins, within the impairment of PP&E key audit matter.
• With regards to the sensitivity analysis provided by Shell in Note 4 to the financial statements, we were satisfied that the description of the sensitivity reflected the sensitivity performed. Also, the prices applied by Shell in their calculations were agreed to the scenarios as described. We reperformed the sensitivities and were satisfied that the ranges disclosed by Shell in Note 4 were materially correct, including the illustrative disclosures on the impact of prices averaged from four two-Celsius or less external climate scenarios.
• We reported to the Audit Committee that it is reasonable to assume that the proved reserves recognised beyond 2030 will be recoverable and that they should be included in management’s best estimates. This was based on the likelihood of extracting reserves beyond 2030 being supported by macro factors, including demand from emerging markets and the speed and scale of government and regulatory changes globally.
• Our estimate of the net book value of assets currently recognised that will not have been fully depreciated by 2030 was around $20 billion of the Upstream and IG PP&E as at 31 December 2021, which is based on 29% of SEC reserves being left by 2030. We reported that, for the assets we regarded as having the highest estimated carbon intensity, there was sufficient evidence to indicate that these proved reserves will be produced. Given we estimated that over 80% of Shell’s current Upstream and Integrated Gas PP&E will be fully depreciated by 2030, and the evidence that the remaining reserves will be recoverable, we reported that, based on evidence that exists today, the risk that there will be material stranded assets is low.
• We reported to the Audit Committee that we had considered Shell’s dividend resilience statement in Note 4. Had Shell applied the averaged from four two-Celsius or less external climate scenarios commodity prices, and had this impairment directly reduced the carrying value of investments within Shell plc, this would not have impacted the distributable reserves available to Shell from which to pay dividends in 2021. This is on the basis that the Shell parent company had a merger reserve of $234 billion and any impairments would first be charged to the income statement and then transferred to the merger reserve, as opposed to impacting distributable reserves.
• Our audit observations relating to oil and gas reserves, impairment assessment of PP&E and JVAs, E&E assets, deferred tax assets and D&R provisions are included in the KAMs on pages 218-223.

Climate change related legal claims

• We reported that, given the relatively early maturity of climate change litigation, we were satisfied that there was not a higher risk of a material provision being omitted and that we were satisfied that the various climate change litigations did not represent obligations where the likelihood of a cash outflow is probable. We also reported that, based on our understanding of the claims and allegations, we were satisfied with the disclosures within Note 26, Legal proceedings and other contingencies.

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Cross-reference: See the Audit Committee Report for details on how the Audit Committee reviewed climate change and energy transition. See the Strategic Report for details on energy transition strategy. Also, see Notes 2, 4, 9. 10 and 26 to the Consolidated Financial Statements.

The estimation of oil and gas reserves

Description of the key audit matter

This is a forecast-based estimate. Oil and gas reserves estimates are used in the calculation of depreciation, depletion and amortisation (DD&A), impairment testing and in the estimation of decommissioning and restoration (D&R) provisions. The risk is the inappropriate recognition of proved reserves that impacts these accounting estimates. Given the current environment, there may be a heightened risk of proved reserves with a high carbon intensity not ultimately being produced (also see climate change and energy transition key audit matter).

As described in Note 9 to the Consolidated Financial Statements, at December 31, 2021, production assets amounted to $118.4 billion and had an associated DD&A charge of $15.8 billion. Also, as described in Note 9, exploration and evaluation assets amounted to $7.1 billion at December 31, 2021. As further described in Note 9, impairment charges of $1.5 billion of production and E&E assets and impairment reversals of $0.2 billion of E&E were recorded during the year. As described in Note 19 to the Consolidated Financial Statements, D&R provisions amounted to $22.1 billion.

If proved reserves are recognised that are not ultimately produced, depreciation will be understated, and the recoverable amount of assets may be overstated. In-year reserve movements are driven by revisions of previous estimates resulting from reclassifications, changes to recovery assumptions, extensions and discoveries and purchases and sales of reserves in place. Revisions generally arise from new information, for example additional drilling results, changes in production patterns and changes to development plans, which are an input to the cash flows used in the measurement of production assets and D&R provisions.

Auditing the estimation of oil and gas reserves is complex, as there is significant estimation uncertainty in assessing the quantities of reserves and resources in place. The estimates are based on the Company’s central group of experts’ assessments of petroleum initially in place, production curves and certain other inputs, including forecast production volumes, future capital and operating cost assumptions and life of field assumptions, all of which are inputs used by reservoir engineers to estimate oil and gas reserves. Estimation uncertainty is further elevated given the transition to a low-carbon economy, which could impact life-of-field assumptions and increase the risk of underutilised or stranded oil and gas assets. Also, given the estimation of oil and gas reserves is complex, there is a risk that inappropriate management bias influences the estimate.

Our response to the risk

We obtained an understanding of the controls over Shell’s oil and gas reserves’ estimation process. We then evaluated the design of these controls and tested their operating effectiveness. For example, we tested management’s controls over review of changes to year-on-year estimated oil and gas reserves volumes.

We involved professionals with substantial oil and gas reserves audit experience, including a partner with relevant qualifications in energy economics, to assist us in evaluating the key assumptions and methodologies applied by management.

Our procedures included, amongst others:

• testing that significant additions or reductions in reserves had been made in the period in which the new information became available by understanding the change in circumstance that drove the change;
• verifying that they were in compliance with Shell’s reserves and resources guidance;
• evaluating the professional qualifications and objectivity of management’s experts (internal reservoir engineers) who performed the detailed preparation of the reserve estimates and those who are primarily responsible for providing independent review and challenge, and ultimately endorsement of, the reserve estimates;
• evaluating management’s estimation of the point at which the operating cash flow from a project becomes negative (the economic limit), as this impacts DD&A and impairment. Where relevant, we assessed whether the economic limit test incorporated Shell’s estimate of future carbon costs to reflect the potential impact of climate change and the energy transition;
• evaluating the completeness and accuracy of the inputs used by management in estimating the oil and gas reserves by agreeing the inputs to source documentation;
• performing backtesting of historical data to identify indications of estimation bias over time; and
• evaluating management’s development plan for compliance with SEC rules that undrilled locations must be scheduled to be drilled within five years, unless specific circumstances justify a longer period. This evaluation was made by assessing the consistency of the development projections with Shell’s development plans and capital allocation framework. Also, where reserves are recognised beyond current licence terms, we obtained evidence to support the assumption that the licence would be renewed.

Our procedures were led by the group engagement team, with input from our teams in Australia, Brazil, Canada, Kazakhstan, Norway, Nigeria, Qatar, Russia and the USA.

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Key observations communicated to the Shell Audit Committee

We reported to the Audit Committee in January 2022 that we did not identify any significant errors in the oil and gas reserves and concluded that the inputs and assumptions used to estimate reserves and resources were reasonable. We reported that we had verified that significant additions to or reductions in reserves had been recorded in the appropriate period, and that they were in compliance with Shell’s reserves and resources guidance.

Also, we have not identified any impairment triggers as a result of any of the movements in reserves during the year. Please see key audit matter on the impact of climate change and the energy transition on the financial statements for details of our considerations on the carbon intensity associated with reserves expected to be produced beyond 2030.

In our view, Shell follows a robust process for recognising oil and gas reserves. We saw no evidence that the recognition of the reserve volumes expected to be lifted beyond 2030 results in the overstatement of Shell’s balance sheet by overstating the recoverable amounts of Shell’s assets or understatement of D&R liabilities.

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Cross-reference: See the Audit Committee Report for details on how the Audit Committee reviewed assurances for oil and gas reserves. Also, see Notes 2, 4, 9 and 19 to the Consolidated Financial Statements, and Supplementary information – oil and gas (unaudited).

Impairment of property plant and equipment (PP&E) and joint ventures and associates (JVA)

Description of the key audit matter

This is a forecast-based estimate. The risk is that potential impairments are not identified on a timely basis, including whether the impacts of climate change and the energy transition have been considered in Shell’s impairment trigger assessments (also see climate change and energy transition key audit matter).

As described in Notes 9 and 10 to the Consolidated Financial Statements, at December 31, Shell recognised $118.4 billion of production assets, $49.1 billion of manufacturing, supply and distribution assets (refineries) and $23.4 billion of joint ventures and associates (JVAs). As disclosed in Note 9, Shell recognised $0.3 billion impairment charges and $0.2 billion impairment reversals relating to production assets and $2.3 billion impairment charges relating to manufacturing, supply and distribution assets. As discussed in Note 10, Shell recognised no impairment charges relating to JVAs.

As Shell recorded pre-tax impairment charges of $26.7 billion of PP&E and JVAs in 2020, the carrying values are sensitive to smaller changes in key assumptions, which increases the risk of indicators of impairment or impairment reversal not being identified. Our audit effort has therefore focused on the completeness and timely identification of indicators of impairment charges or impairment reversals.

Auditing the impairment of PP&E and JVAs is subjective due to the significant amount of judgement involved in determining whether indicators of impairment or impairment reversal exist, particularly for longer term assets. Indicators should reflect significant upward or downward revisions in assumptions impacting the future potential long-term value of an asset, rather than drivers of short-term fluctuations in value.

Key judgements in determining whether indicators of impairment or impairment reversal exist include changes in forecast commodity price and refining margin assumptions, movements in oil and gas reserves, changes in asset performance and future development plans and, the expected useful lives of assets. In performing our audit, we are mindful of the risk of management override in the assessment of whether or not impairment indicators exist.

As described in Note 2, the most complex of these judgements relate to management’s view on the long-term oil and gas price outlook. Forecasting future prices is inherently difficult, as it requires forecasts that reflect developments in demand such as global economic growth, technology efficiency, policy measures and, on the supply side, consideration of investment and resource potential, cost of development of new supply and behaviour of major resource holders. These judgements are particularly difficult because of increased demand uncertainty and pace of decarbonisation due to climate change and the energy transition.

Our response to the risk

We obtained an understanding of the controls over Shell’s asset impairment process. We then evaluated the design of these controls and tested their operating effectiveness. For example, we tested the controls over management’s identification of indicators of impairment and reversals of impairment and the approval of oil and gas prices and refining margins.

Indicators of impairment or impairment reversal

We evaluated Shell’s assessment of impairment and impairment reversal triggers, including changes in the forecast commodity price assumptions, movements in oil and gas reserves (see oil and gas reserves key audit matter), changes in asset performance, changes in Shell’s operating plan assumptions, including those relating to Shell’s carbon emissions reductions targets, and whether these are indicators of impairment or impairment reversal.

Separately from management, for material assets, we also assessed independently whether or not indicators of impairment or reversal triggers exist, considered the existence of other contradictory evidence that could indicate a significant increase or decrease in the recoverable amount of any of Shell’s assets.

Our procedures included, amongst others:

Oil and gas price and refining margin assumptions

• assessing the reasonableness of future short and long-term oil and gas price assumptions by comparing these to an independently developed reasonable range of forecasts based on consensus analysts’ forecasts and those adopted by other international oil companies;
• comparing Shell’s oil and gas price scenarios to the IEA’s Net Zero Emissions 2050 (NZE) and to the IEA’s Announced Pledges Scenario (APS) price assumptions as potential contradictory evidence for best estimates of future oil and gas prices. The APS assumes that all climate commitments made by governments around the world, including Nationally Determined Contributions (NDCs) and longer-term net zero targets, will be met in full and on time;
• evaluating the reasonableness of Shell’s refining margin assumptions by comparing these to independent market and consultant forecasts. We also involved our oil and gas valuations specialists to assess the reasonableness of Shell’s refining margin estimation methodology and assumptions;
• given the continued improvement in commodity prices and short-term refining margins, assessing whether or not these higher price markers represented a trigger for impairment reversal;
• performing benchmarking to determine whether Shell’s oil and gas company peers reflected changes in oil and gas price and refining margin assumptions as indicators of impairment or impairment reversal;

Carbon intensity

• in order to determine whether there is any risk that reserves recognised will not be produced, we estimated the carbon intensity of Shell’s Upstream and Integrated Gas fields, focussing on the most carbon intensive assets. We assessed Shell’s plans to reduce the carbon intensity of these assets, therefore reducing the risk of potential impairment of the current carrying value, and verified that the costs associated with these activities were reflected in Shell’s operating plans;

Operating plan outcomes

• evaluating the assumptions used in the preparation of the 2021 operating plan at a group, segment and asset level and compared the actual performance of assets to the forecasts made in the prior year;
• considered the existence of other contradictory evidence, such as the results of any comparable market transactions that could indicate a significant increase or decrease in the recoverable amount of any of Shell’s assets, public comments or commitments made by Shell in relation to the Powering Progress strategy and whether these could impact the future potential value of any assets; and

Unplanned shutdowns

• assessing potential operational changes that have or are expected to have a significant adverse effect on an asset and whether such unplanned shutdowns should be considered as impairment triggers.

The audit procedures were performed primarily by our group engagement team as well as our local audit teams in Australia, Brazil, Malaysia, Nigeria, Qatar, the UK and the USA.

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Key observations communicated to the Shell Audit Committee

In January 2022, we reported to the Audit Committee that management’s review to determine whether or not any indicators of impairment were present had considered all relevant information available at the end of each reporting period. Also, that based on our independent assessment, we had not identified impairment triggers as a result of changes in commodity price or refining margin assumptions, any of the movements in reserves during the year, changes in the discount rate for D&R provisions, carbon intensity considerations, operating plan outcomes or unplanned shutdowns.

For the assets where management’s impairment assessment resulted in an impairment charge, the charges were within an acceptable range. Also, we were satisfied that the impairment charges were recorded in the appropriate period.

In respect of our independent assessment of the existence of indicators of impairment, we reported in January 2022 the following:

Oil and gas price assumptions

• We obtained external evidence, including published price forecasts by banks, brokers, consultants and also our peer group analysis, to support the reasonableness of Shell’s price assumptions. Overall, Shell’s assumptions for Brent sat within the benchmarks that we had identified. Shell’s Henry Hub, TTF and JKM gas price assumptions are at the bottom end of our benchmarks.
• We were satisfied that the short-term improvements in commodity prices do not represent potential impairment reversals triggers as Shell’s long term commodity prices remain unchanged and the assets are of long term nature, thereby reducing the impact of short term fluctuations on asset values.
• Shell’s oil and gas price assumptions are higher than the IEA Net Zero Emissions scenario; however, Shell’s assumptions are more consistent with the IEA Announced Pledges Scenario (APS), being around 7% higher than the APS assumptions. The APS scenario assumes that all climate commitments made by governments around the world will be met in full and on time. Given governmental, societal and regulatory responses to climate change risks are still developing, and are interdependent upon each other, it is highly uncertain as to whether future prices will reflect the IEA Net Zero Emissions 2050 scenario. Nevertheless, management estimated the impact on the recoverable amount of Upstream and Integrated assets recognised as at 31 December 2021 of applying different price outlooks using prices from external climate change scenarios. We have recalculated the sensitivities included in Note 4 and these sensitivity ranges disclosed are reasonable.

Refining margins

• Given short term refining margin assumptions have improved in Shell’s 2021 operating plan, compared to the 2020 operating plan, we challenged management as to whether this represented a trigger for impairment reversal. However, as the only asset in 2020 where an impairment charge was based on its value in use, rather than disposal proceeds, was a 50+ year refinery, we were satisfied that short term fluctuations in refining margins should not be viewed as an impairment reversal trigger.

Carbon intensity

We did not identify any assets where the current or forecast carbon emissions intensity indicate that the assets are impaired.

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Cross-reference: See the Audit Committee Report for details on how the Audit Committee considered impairments. Also, see Notes 2, 4, 9 and 10 to the Consolidated Financial Statements.

Exploration and evaluation (E&E) assets

Description of the key audit matter

This is an estimation based on uncertain outcomes. E&E activity carries inherent risk that projects do not progress to development, requiring the write-off or impairment of the related capitalised costs when the relevant IFRS criteria are met. Risk is elevated compared to 2020 because of energy transition (also see climate change and energy transition key audit matter).

As described in Note 9 to the Consolidated Financial Statements, at December, 31, 2021, Shell recognised $7.1 billion of E&E assets.

The risk is whether it is appropriate to continue carrying capitalised E&E costs. Auditing impairment assessments of E&E assets is inherently judgemental given the exploration for and evaluation of the resources has not always reached a stage at which information sufficient to estimate future cash flows is available. Given the current environment, and the capital allocation and emissions reductions decisions that Shell intend to take through the energy transition, there is a heightened risk that projects will no longer proceed, in which case they may need to be written off.

As a result of these factors, there is significant judgement relating to the risk that certain E&E costs are not written off in the appropriate reporting period, which also represents a risk of potential management bias. During the year, management recorded $1.8 billion of E&E write offs and impairments (2020: $4.0 billion).

Our response to the risk

We obtained an understanding of the controls over Shell’s E&E impairment assessment process. We then evaluated the design of these controls and tested their operating effectiveness.

To test the completeness and appropriateness of the E&E asset write off and impairment charges recorded, our procedures included, amongst others:

• performing a licence-by-licence risk assessment of Shell’s E&E assets to identify assets with a significant risk of impairment and assessing each significant licence area against the impairment criteria within IFRS 6 with a particular focus on those assets that were expected to be developed over the medium and long term, those assets where the dominant commodity that will be produced is oil, or highly carbon intensive projects;
• through this analysis, independently identifying the assets that we considered most at risk of not being developed by Shell or being divested as a consequence of Shell’s emissions reductions strategies. We have challenged management on the likelihood of progressing the E&E assets, including the strategic fit of the assets, carbon intensity of the developments, planned capex and project economics and the expectation that sufficient cash resources will be available to fund the expected development of assets;
• corroborating key internal and external evidence relevant to the judgements made in respect of the group’s E&E portfolio, including analysing evidence of further activity being included in Shell’s operating plan and any contra evidence that suggests government or regulatory approvals will not be provided;
• in respect of E&E write offs and impairments recorded during the year, considering whether evidence about current project activity, forecast future expenditure and operational plans was consistent with the decisions taken by management to write off or impair these assets; and
• considering the disclosure of E&E asset write offs and impairments.

The audit procedures were performed principally by the group engagement team and our component teams in Australia, Brazil, Trinidad and Tobago, the UK and USA.

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Key observations communicated to the Shell Audit Committee

In January 2022, we reported to the Audit Committee that we had challenged management’s assessment of the existence of indicators of impairment for Shell’s E&E asset portfolio and identified the E&E assets that we believed were most at risk of not being developed by Shell or being divested, and therefore potentially being written off or impaired. Whilst the E&E impairment assessment involves significant judgement about future actions of management and other stakeholders, we satisfied ourselves that sufficient evidence existed at the balance sheet date to support the carrying value of the E&E assets based on planned capex in Shell’s operating plan, expected final investment decision dates, first production estimates and expected break-even prices.

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Cross-reference: See the Audit Committee Report for details on how the Audit Committee considered impairments. Also, see Notes 2, 4 and 9 to the Consolidated Financial Statements.

Decommissioning and restoration (D&R) provisions

Description of the key audit matter

This is an estimation based on uncertain outcomes. The risk is the expected timing of decommissioning activity and the estimated cost of activities that are expected to occur in the future.

As described in Note 19 to the Consolidated Financial Statements, at December 31, 2021, Shell recognised $22.1 billion in D&R provisions.

Auditing D&R provisions is complex because management’s estimation of future cash outflows involves significant judgement. As explained in Note 2 to the Consolidated Financial Statements, the estimate is based on current legal and constructive obligations, technology and price levels. However, the extent and timing of the actual outflows incurred in the future may differ due to changes in laws, regulations, public expectations, technology, prices and conditions at the time of decommissioning, and can take place many years in the future. There is a risk of management bias in the determination of both the timing of activity and estimation of the costs that will be incurred.

The timing of estimated future decommissioning activity is also a key judgement with the energy transition increasing the risk that oil and gas fields will be decommissioned earlier than anticipated (also see climate change and energy transition key audit matter). The key factor in determining the timing will be the life of field assumptions, which is discussed in our oil and gas reserves key audit matter.

In respect of Oil Products and Chemicals operations, the key judgement is management’s views on the expected useful lives of manufacturing and production assets and, where an asset’s life is expected to extend far into the future, that it is not possible to make an estimate of the obligation that is sufficiently reliable to use in recognising a D&R provision. Contingent liabilities are disclosed by Shell in respect of refineries where decommissioning would generally be more than 50 years away and the amount of the obligation cannot be measured with sufficient reliability. These refineries are integrated with chemicals facilities and are expected to out-perform refineries that are not. This is driven by the expectation that chemicals demand will continue to grow, and as demand for oil products decreases, more advanced refineries are expected to continue much longer into the energy transition. Shell has D&R provisions in respect of six production and manufacturing facilities, with contingent liabilities disclosed for the remaining six energy parks within the Oil Products and Chemicals portfolio.

Our response to the risk

We obtained an understanding of the controls over Shell’s process for the estimation of decommissioning and restoration provisions. We then evaluated the design of, and tested the operating effectiveness of, controls over the estimation of the D&R provision. For example, we tested controls over the review of the estimation and completeness of cost estimates.

Our audit procedures included, amongst others:

• assessing changes in D&R cost estimates, and whether they reflected the latest regulatory requirements and technical developments;
• auditing cost assumptions relating to labour rates, rig type and rates, number of wells, well durations, and any contingencies applied by inspecting contracts. Also, evaluating whether the nature of the costs expected to be incurred were in accordance with the requirements of IAS 37;
• evaluating the expected timing of decommissioning by comparing these factors to the estimated life-of-field assumptions and considering the impact of energy transition and climate change. We also evaluated the estimated carbon intensity of the post 2030 production of Shell’s assets, in order to identify assets where there may be a higher risk of the reserves not ultimately being produced (see oil and gas reserves key audit matter) as this may impact the estimated cessation of production date for these assets;
• testing the D&R accounting models and assumptions therein, including discount rates, and inflation rates. We validated the assumptions to external data sources and reconciled the assumptions with those used in other areas of measurement, such as impairment assessment;
• evaluating the timing of recognition of D&R liabilities related to contingent liabilities and D&R liabilities arising from assets previously disposed of, including assessing the counterparty risk associated with those disposals;
• evaluating management’s assessment of the useful lives of manufacturing assets in the Oil Products and Chemicals portfolio in light of the changed supply and demand economics due to the energy transition. In particular, we evaluated whether D&R provisions were required for certain refineries and petrochemical facilities based on Shell’s plans to rationalise their manufacturing portfolio and to convert or dismantle existing units. This included assessing management’s ability to repurpose the units to increase production capabilities of refined products with lower carbon intensity; and
• assessing the disclosure of D&R provisions and contingent liabilities in the financial statements. We also evaluated management’s re-assessment of the need for contingent liability disclosures in respect of certain manufacturing assets.

The audit procedures were performed principally by the group engagement team and our component teams in Australia, Brazil, Trinidad and Tobago, the UK and USA.

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Key observations communicated to the Shell Audit Committee

In January 2022, we reported that the D&R provisions recorded at December 31, 2021 were fairly stated and that changes in D&R provisions during the year, had been reflected appropriately in the financial statements. Also, we saw no evidence that the recognition of the reserve volumes expected to be lifted beyond 2030 results in the understatement of D&R liabilities for Shell’s oil and gas assets.

In respect of Oil Products and Chemicals assets, we remain satisfied that the accounting treatment adopted appropriately reflects the expected useful lives of the Group’s refineries and chemicals parks. In reaching this conclusion, where an asset’s life is expected to extend far into the future, it is not possible to make an estimate of the obligation that is sufficiently reliable to use in recognising a D&R provision and therefore a contingent liability is disclosed. This is on the basis that the settlement dates are indeterminate and other inputs, such as extremely long-term discount rates for which there is no observable measure, are not reliable.

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Cross-reference: See the Audit Committee Report on how the Audit Committee reviewed D&R provisions. Also see Notes 19 and 26 to the Consolidated Financial Statements.

Recognition and measurement of deferred tax assets

Description of the key audit matter

This is an estimation based on uncertain outcomes. The risk is that forecast taxable profits that support certain deferred tax assets do not materialise.

As described in Note 17 to the Consolidated Financial Statements, at December 31, 2021 Shell recognised gross DTAs of $29.4 billion, which are recognised on the balance sheet as either DTAs or as an offset against deferred tax liabilities (DTLs), depending on the overall tax position in a particular jurisdiction.

Auditing the recognition and measurement of DTA balances is subjective because the estimation requires significant judgement, including the timing of reversals of DTLs and the availability of future profits against which tax deductions represented by the DTA can be offset. In addition, auditing the recognition of DTA balances that are supported by the expectation of future taxable profits arising beyond Shell’s regular forecast planning horizon required significant audit judgement, which is heightened in complexity given the future demand and price uncertainty due to climate change and the energy transition (also see climate change and energy transition key audit matter).

A key judgement applied by management in assessing whether it is appropriate to recognise certain DTAs includes the expectation of probable taxable profits arising beyond Shell’s 10-year planning horizon. There is greater uncertainty regarding future taxable profits that exist outside the 10-year planning period and where future taxable profits relate to new and emerging businesses with less history and therefore greater forecasting uncertainty. There is a risk of management bias relating to the use of inappropriate assumptions regarding the future profitability of businesses.

Our response to the risk

We obtained an understanding of the controls over Shell’s processes for the recognition and measurement of DTAs. We then evaluated the design of these controls and tested their operating effectiveness. For example, we tested controls over projections of future taxable income and the deferred tax calculations that support the recognition of DTAs.

Our audit procedures included, amongst others:

• assessing management’s determination of the expected timing of utilisation of the DTAs, including the application of relevant tax laws that apply to the utilisation of tax losses;
• testing management’s forecasted timing of the reversal of taxable temporary differences by evaluating the projected sources of taxable income and considering the nature of the temporary differences and the relevant tax law.
• performing sensitivity analyses over Shell’s risk-weighted future taxable profits by jurisdiction, which take into account potential costs of decarbonisation, and reconciled the forecast to that used in other areas of analysis, such as impairment;
• evaluating management’s negative stress test to assess the tolerance of the estimation uncertainty to further risking. This included specific risking of profits forecast to be generated through new and growing business activities, including biofuels and electric vehicle (EV) charging in jurisdictions; and
• involving EY auditors with expertise in renewable businesses, including EV charging, in challenging management’s assumptions and the outcome of the stress testing performed.

Our audit procedures over the recognition and valuation of DTAs were performed by our tax specialist teams in Australia, Brazil, Canada, the Netherlands, Nigeria, Qatar, Singapore, the UK and USA. We also performed specified procedures over the recognition and valuation of DTAs in Albania, China, Egypt, France, Germany, Indonesia, Kazakhstan, Malaysia, Mexico, Norway, Oman, Switzerland, Trinidad & Tobago and Tunisia.

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Key observations communicated to the Shell Audit Committee

In January 2022, we reported to the AC that the majority of the DTAs are either offset against DTLs or are expected to be recovered from forecast profits within the operating planning horizon. In aggregate, these factors supported 95% of the recognised DTAs. Our audit effort focussed on $0.8 billion of DTAs that are supported by forecast Oil Products and Chemicals taxable profits beyond Shell’s planning horizon, as these are significantly more judgemental than setting the DTAs against DTLs or using forecast taxable profits from Shell’s operating plan to utilise the DTAs. Whilst the application of risking is judgemental, we satisfied ourselves that management’s risking of forecast profit was appropriate to reflect the uncertainty throughout the forecast period.

We have concluded that there is sufficient evidence to support Shell’s recognition of DTAs, although there is a greater degree of judgement required in respect of the $0.8 billion of DTAs where profits beyond Shell’s operating plan planning horizon are necessary to support the asset recognition.

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Cross-reference: See the Audit Committee Report for details on how the Audit Committee reviewed certain tax matters, in particular the recoverability of deferred tax assets. Also see Notes 2, 4 and 17 to the Consolidated Financial Statements.

Revenue recognition: the measurement of unrealised trading gains and losses

Description of the key audit matter

This is an estimation based on complex and uncertain valuations. There is a risk of error in revenue due to the complexity of Shell’s trading and supply function and the volume and complexity of trades that are executed. There is an inherently higher risk of error, of unauthorised trading activity or of deliberate misstatement of the group’s overall trading position.

As described in Note 5 of the Consolidated Financial Statements, at December 31, 2021 Shell recognised $262 billion of revenue. As described in Note 20, Shell recognised derivative financial instrument assets of $12.2 billion and derivative financial instrument liabilities of $17.2 billion.

Shell’s trading and supply function is integrated within the Oil Products, Chemicals, Integrated Gas and Upstream segments and is spread across multiple regions. Auditing unrealised trading gains and losses is complex because of the significant judgement used in determining the key assumptions used in valuing the trades, the risk of error, of unauthorised trading activity or of deliberate misstatement of Shell’s trading positions. Trading is not always carried out in active markets where prices are readily available, increasing subjectivity used in determining the pricing curve and volatility assumptions, which are key inputs to valuing the trades.

Identifying unrealised trading gains and losses is also complex due to the significant volume of transactions entered into by Shell and the lack of market transparency of executed deals.

The deliberate misstatement of Shell’s trading positions or mismarking of positions could result in understated trading losses, overstated trading profits and/or individual bonuses being manipulated through inappropriate inter-period profit/loss allocations.

Our response to the risk

We obtained an understanding of the controls over Shell’s process for the recognition of revenue relating to unrealised trading gains and losses, including controls over management’s processes around complex deal valuations. We then evaluated the design of these controls and tested their operating effectiveness. For example, we tested controls around the review of pricing curve and volatility assumptions applied in the valuation models.

We involved professionals with significant experience auditing both large commodity trading organisations and financial institutions. Our audit procedures in respect of the measurement of trading positions included, amongst others:

• assessing Shell’s valuation methodology against market practice, analysing whether a consistent framework was applied across the business and assessing the consistency of inputs used in deal valuations and other assumptions;
• testing the pricing curve and volatility assumptions in management’s valuation models, including by comparing these to external broker quotes, market consensus providers, and our independent assessments;
• involving EY valuation specialists to assist us in performing independent testing of the valuation models of Level 3 contracts, including the valuation of long-dated offtake contracts and those with illiquid tenor or price components. Our valuations were established using independently sourced inputs, where available;
• evaluating contract terms and key assumptions against independent market information, including assessing complex deals for the existence of non-standard contractual terms or features; and
• gaining an understanding of the commercial rationale of complex deals by analyzing transaction documentation and agreements, and through discussions with management.

In addressing the existence and completeness of open trading positions, we focused specifically on over the counter (OTC) physical and financial transactions. Our audit procedures included, amongst others:

• obtaining external confirmation of a sample of open trading positions with brokers and counterparties and, where necessary, testing the existence of the position by agreement to signed contracts;
• performing additional confirmation testing by obtaining confirmations from key counterparties who had open positions in the prior trading year, but no reported trading positions in the current year; and
• performing procedures to identify unrecorded liabilities by comparing sales to trade receivables and purchases to trade payables that occurred near the end of the financial year to evaluate whether or not the transactions had been recorded appropriately and in the correct period. We assessed the Level 3 financial statement disclosures.

The audit procedures were performed principally by the group engagement team and the UK and US component teams.

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Key observations communicated to the Shell Audit Committee

In January 2022, we reported to the Audit Committee that:

• the valuation of derivative contracts as at December 31, 2021 was appropriate;
• the unrealised gains and losses had been recorded appropriately;
• our completeness testing did not identify any unrecorded liabilities or significant cut-off issues; and
• our testing did not identify any indications of unauthorised trading activity or deliberate misstatement of Shell’s trading positions.

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Cross-reference: See the Audit Committee Report for details on how the Audit Committee reviewed the Trading and Supply’s control framework. Also see Note 5 to the Consolidated Financial Statements.

Other information

Our responsibility

In connection with our audit of the financial statements, our responsibility is to read the Other information and, in doing so, consider whether the Other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements or a material misstatement of the Other information. If, based on the work we have performed, we conclude that there is a material misstatement of the Other information, we are required to report that fact.

Our reporting

We have nothing to report in this regard.

Strategic report and the directors’ report

Our responsibility

We are required to report whether, based on the work undertaken in the course of the audit:

• the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
• the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.

We are required to report by exception whether, in the light of the knowledge and understanding of the Group and the Parent Company and its environment obtained in the course of the audit, we have identified material misstatements in the strategic report or the directors’ report.

Our reporting

In our opinion, based on the work undertaken in the course of the audit, the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements and they have been prepared in accordance with applicable legal requirements.

We have nothing to report by exception.

Directors’ remuneration report

Our responsibility

We are required to report whether the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.

Under the Companies Act 2006, we are also required to report by exception whether certain disclosures of directors’ remuneration specified by law are not made.

Our reporting

In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.

We have nothing to report by exception.

Corporate governance statement

Our responsibility

We have reviewed the directors’ statement in relation to going concern, longer-term viability and that part of the Corporate Governance Statement relating to the Group and Parent Company’s compliance with the provisions of the UK Corporate Governance Code specified for our review by the Listing Rules.

Based on the work undertaken as part of our audit, we are required to consider whether each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements or our knowledge obtained during the audit:

• Directors’ statement with regards to the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified set out in Other regulatory and statutory information;
• Directors’ explanation as to its assessment of the company’s prospects, the period this assessment covers and why the period is appropriate set out in Other regulatory and statutory information;
• Director’s statement on whether it has a reasonable expectation that the group will be able to continue in operation and meets its liabilities set out in Other regulatory and statutory information;
• Directors’ statement on fair, balanced and understandable set out in Other regulatory and statutory information;
• Board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out in Risk factors;
• The section of the annual report that describes the review of effectiveness of risk management and internal control systems set out in Other regulatory and statutory information; and;
• The section describing the work of the Audit Committee set out in Audit Committee Report.

Our reporting

Based on the work undertaken as part of our audit, we have concluded that each of these elements of the Corporate Governance Statement is materially consistent with the financial statements or our knowledge obtained during the audit.

Other reporting

Our responsibility

Under the Companies Act 2006, we are required to report to you by exception if, in our opinion:

• adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or
• the Parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or
• we have not received all the information and explanations we require for our audit.

Our reporting

We have nothing to report by exception.