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Annual Report and Accounts 2014
Area of focus
Valuation of the overall pension scheme liabilities
Refer to page 53 of the Audit Committee report.
The actuarial assumptions used to value the UK and overseas pension scheme
liabilities are judgemental and sensitive. Due to the significance of the value of
the pension obligation, a small change in assumptions may result in a material
difference to amounts reported.
How our audit work addressed the area of focus
To address this risk the following audit procedures have been undertaken:
• we understood and walked through management’s controls in respect of
the selection of key assumptions related to valuation of actuarial liabilities.
• using external data we verified the appropriateness of the key actuarial
assumptions, as detailed in section 4.5.3.2 of the consolidated financial
statements, used by management, in determining the pension obligation
under IAS19(R) to ensure their assumptions were appropriate, met the
requirements of IFRS and were in line with market practice.
• this included a comparison of life expectancy with relevant mortality
tables, benchmarking inflation and discount rates against external market
data, considering changes in historical assumptions and evaluating the
independence, qualifications and results of work performed by management’s
experts involved in the valuation process.
• we used our pension specialists to assist us with these procedures.
Area of focus
The assessment of the carrying value of goodwill and acquired
intangible assets
Refer to page 53 of the Audit Committee report.
As a consequence of the Group’s growth strategy a significant value of
goodwill and intangible assets has arisen from acquisitions. There is a risk
that cash generating units (‘CGUs’) may not achieve the anticipated business
performance to support the carrying value of these assets leading to an
impairment charge that has not been recognised by management. Significant
judgement is required in assessing the future cash flows of the CGU, together
with the rate at which they are discounted.
How our audit work addressed the area of focus
To address this risk the following audit procedures have been undertaken:
• we walked through management’s controls in respect of their assessment of
the valuation of goodwill and acquired intangible assets and ensured these are
designed and implemented effectively;
• we examined management’s methodology, as detailed in section 3.2.2 of the
consolidated financial statements, and models for assessing the valuation of
significant goodwill balances to confirm the composition of management’s
future cash flow forecasts, and the process by which they were drawn
up including timely oversight and challenge by the Directors and that the
underlying cash flows were consistent with the Board approved budgets;
• in accordance with the requirements of IAS36:
‘Impairment of Assets’,
management performed an impairment test on all CGUs that have goodwill
allocated. In respect of the CGUs identified as having impairment indicators
or low levels of head room we performed detailed testing to critically assess
and corroborate the key inputs of the forecast cash flows including:
- Corroborating the discount rate used through analysing the cost of capital
for the Group and comparable organisations;
- Validating the growth rate assumed by comparing them to economic and
industry forecasts;
- Analysing the historical accuracy of budgets to actual results ensuring
the forecast cash flows are reliable based on past experience.
• for the CGUs where indicators of impairment existed we calculated the
degree to which the key assumptions would need to move before an
impairment conclusion was triggered;
• we assessed the appropriateness of the amortisation rates and useful
economic lives of intangible assets allocated to CGUs on acquisition to ensure
the lives were consistent with their usage and future economic inflows, for
customer relationships and order books that the values corresponded with
the expected underlying economic substance of future transactions and that
the performance of CGUs with significant intangible asset values remained
consistent with the original business plans upon acquisition of the CGUs;
• we performed sensitivity analysis on management’s cash flow forecasts to
gain comfort over the level of headroom in the impairment models; and
• through completion of the above procedures we assessed the
appropriateness of the impairment charge recorded by the Group
in respect of the Remosa CGU of £26.9m.
The above risk areas are consistent with those in the prior year with the
exception of the valuation of the Scottish Limited Partnership and the
accounting treatment for the disposal of the Retail Dispense businesses which
were considered to be areas of focus for the 2013 audit. See Section 4.5
for details regarding the Scottish Limited Partnership asset. However, as the
valuation principles are now confirmed, auditing this asset no longer constitutes
a significant proportion of audit effort or audit strategy. While the gain on
disposal of the Retail Dispense businesses is realised in the 2014 Annual Report
and Accounts, the key judgements and assumptions underpinning the gain
on the disposal were audited in the prior year as disclosed in our 2013 Audit
Report. See section 2.5 for details of the disposal.
5. Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities Statement set out
on page 145, the directors are responsible for the preparation of the Group
financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the Group financial
statements in accordance with applicable law and International Standards
on Auditing (UK and Ireland). Those standards require us to comply with the
Auditing Practices Board’s Ethical Standards for Auditors.
6. Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the
financial statements sufficient to give reasonable assurance that the financial
statements are free from material misstatement, whether caused by fraud or
error. This includes an assessment of: whether the accounting policies are
appropriate to the Group’s and Parent Company’s circumstances and have
been consistently applied and adequately disclosed; the reasonableness
of significant accounting estimates made by the directors; and the overall
presentation of the financial statements. In addition, we read all the financial
and non-financial information in the Annual Report and Accounts to identify
material inconsistencies with the audited financial statements and to identify
any information that is apparently materially incorrect based on, or materially
inconsistent with, the knowledge acquired by us in the course of performing
the audit. If we become aware of any apparent material misstatements or
inconsistencies we consider the implications for our report.
7. Our application of materiality
We determined planning materiality for the Group to be £12.4 million (2013:
£16.1 million), which is 5% (2013: 5%) of adjusted profit before tax. We believe
that profit before tax, adjusted for the items described below, provides us with a
consistent year on year basis for determining materiality and is the most relevant
performance measure to the stakeholders of the entity. The reduction from
the prior year predominantly reflects the disposal of the Beverage Dispense
and Merchandising divisions which occurred on 1 January 2014. In calculating
materiality, we excluded the effects of certain non-recurring items from profit
before tax. For 2014, these related to the impairment losses of £40.8 million,
the gain on disposals of subsidiaries of £34.2 million, pension settlement gains
of £7.0 million and acquisition costs of £1.8 million as highlighted on page 84
of the financial statements. Our materiality provided a basis for determining
the nature, timing and extent of risk assessment procedures, identifying and
assessing the risk of material misstatement and determining the nature,
timing and extent of further audit procedures.
