Significant judgements related to the
financial statements
Accounting for businesses disposed of
As discussed on page 4, the Group disposed of the Retail
Dispense businesses on 1 January 2014, the Eley business
on 4 October 2014 and AFP on 23 October 2014. Each
disposal resulted in a gain, which the Committee reviewed
and were comfortable with management’s calculation.
Exceptional restructuring costs
Following guidance issued by the Financial Reporting
Council, the Committee challenged management on the
appropriateness of the classification of certain items as
exceptional, notably restructuring costs. The Committee and
management agreed that for the 2014 results, only individually
significant restructuring projects would be disclosed as
exceptional. As a result, only the costs associated with the
closure of IMI Components and IMI Norgren UK’s factory move
are disclosed as exceptional. The Committee also debated the
appropriateness of the other items disclosed as exceptional in
the 2014 results and agreed with management’s assessment.
Impairment of goodwill and intangibles arising
from acquisitions
The Committee reviewed the assumptions and calculations
used in the assessment of any impairment of goodwill and
intangibles assets and was comfortable with them. In particular,
the Committee reviewed the carrying value of goodwill and
other intangibles relating to IMI Remosa. The Committee
agreed with management’s assessment that the projected
future cash flows for IMI Remosa did not support the carrying
value of the goodwill, that the full carrying value would be
unlikely to be realised on the open market and therefore an
impairment charge of £27m was appropriate.
Revenue recognition
The Committee discussed the timing of revenue recognition on
some of the Group’s larger contracts. In addition, this is an area
of audit focus and accordingly Ernst & Young reported on this
matter to the Committee.
Provisioning for taxation
The Group pays taxes in various countries which requires
the interpretation of complex tax laws in these jurisdictions.
Accordingly, both the amounts expected to be payable and the
period in which settlement is likely to be made are reassessed
from time to time. The Committee received reports from
management outlining the rationale for the provisions held
for taxation. In addition, this is an area where Ernst & Young
engage their tax experts to review the appropriateness of these
provisions, and provides reports to the Committee.
Pensions accounting
As detailed on page 125, during the year the Group split its
existing UK Pension Fund into two newly formed pension
schemes. The Committee reviewed reports from management
to determine the appropriateness of the accounting that
arose as a result of this arrangement and confirmation that
this arrangement and the appropriateness of the actuarial
assumptions used and agreed with management’s assessment.
Inventory valuation
The Committee reviewed the judgments applied to standard
costing valuations and provisions against excess and obsolete
inventory and concurred with management’s assessment.
External audit independence and performance review
The Committee approved the proposed external audit
approach and its scope based on the size and level of risk
of the entities concerned. The Committee also approved the
internal audit programme. The Committee takes a risk based
approach to audit and other assurance activity.
The Committee considered the independence and objectivity
of the external auditor. In assessing auditor independence the
Committee had regard to best practice guidance for Audit
Committees and required the auditor to confirm that its ethics
and independence policies complied with the requirements of
the Institute of Chartered Accountants in England and Wales.
The policy on the use of the auditor for non-audit work is
established and monitored by the Committee and requires
approval by the Chairman of the Committee for any non-
audit engagement where fees exceed £150,000. The policy
does not allow work to be placed with the auditor if it could
compromise auditor independence, such as, functioning in
the role of management or auditing its own work. Non-audit
fees paid to the auditor were £0.3m (2013: £0.2m), which
represents 11% of the audit fee and demonstrated the tight
control which is maintained in this area. We are of the view that
the level and nature of non-audit work does not compromise
the independence of the external auditor.
Benchmarking of the audit fees was conducted to ensure that
these are appropriate and competitive and the Committee
approved the proposed audit fees payable to Ernst & Young.
We formally reviewed the effectiveness of the external audit
process. The Committee adopted a formal framework by way
of a questionnaire to review the effectiveness of the external
auditor. The framework is completed annually by each member
of the Committee and by the Finance Director. Feedback was
also received from the Chief Executive, the Group Financial
Controller, Group and Divisional Management. The feedback
from this process was considered by the Committee and was
provided to the external auditor. As a result of this exercise the
Committee believes the performance has been satisfactory
and the external auditor is considered to be effective. In
particular the quality of the audit work continues to improve.
Further improvement actions were identified and plans have
been put in place to address these, including the continuity
of audit team members and continuing to shorten the lines
of communication between the auditor’s Group team, the
component audit teams and the Group’s local operations.
53
Strategic Review
Performance Review
Corporate Governance
Financial Statements
Introduction
Annual Report and Accounts 2014
