Opinion on financial statements of SIG plc
In our opinion:
- the financial statements give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 31 December 2015 and of the Group's profit for the year then ended;
- the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union;
- the Parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice including, Financial Reporting Standard 101 "Reduced Disclosure Framework"; and
- the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.
The financial statements comprise the Consolidated Income Statement, the Consolidated and Company Statements of Comprehensive Income, the Consolidated and Company Balance Sheets, the Consolidated Cash Flow Statement, the Consolidated and Company Statements of Changes in Equity, the Statements of Significant Accounting Policies, the Critical Accounting Judgments and Key Sources of Estimation Uncertainty and the related Group Notes 1 to 30 and the related Parent Company Notes 1 to 14. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the Parent Company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) including, Financial Reporting Standard 101 "Reduced Disclosure Framework".
Going concern and the directors' assessment of the principal risks that would threaten the solvency or liquidity of the group
As required by the Listing Rules we have reviewed the Directors' statement regarding the appropriateness of the going concern basis of accounting contained within the Strategic Report in the Treasury risk management section and the Directors' statement on the longer-term viability of the Group contained within the Strategic Report, in the Treasury risk management section.
We have nothing material to add or draw attention to in relation to:
- the Directors' confirmation in the Treasury risk management section that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity;
- the disclosures in the Principal Risks and Uncertainties section that describe those risks and explain how they are being managed or mitigated;
- the Directors' statement in the Treasury risk management section about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the Group's ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; and
- the Directors' explanation in the Treasury risk management section as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
We agreed with the Directors' adoption of the going concern basis of accounting and we did not identify any such material uncertainties. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group's ability to continue as a going concern.
We are required to comply with the Financial Reporting Council's Ethical Standards for Auditors and we confirm that we are independent of the Group and we have fulfilled our other ethical responsibilities in accordance with those standards. We also confirm we have not provided any of the prohibited non-audit services referred to in those standards.
Our assessment of risks of material misstatement
The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team.
|Risk||How the scope of our audit responded to the risk|
The recognition and measurement of supplier rebate income
Rebate income earned by the Group is significant to the Group's result and affects the recorded value of cost of sales, trade payables and inventory. In some cases, rebate calculations are complex and judgmental, particularly at a time of uncertain demand and difficult trading conditions, being based on estimates of purchases and/or non-coterminous trading periods.
Further explanation is given in Critical Accounting Judgments and Key Sources of Estimation Uncertainty.
The consideration made by the Audit Committee is set out in the Audit Committee Report.
We evaluated the design and implementation of key controls related to the recognition of supplier rebate income where income is significant. We discussed significant rebate contracts with the commercial managers to understand the complexities and judgments that may exist over income recognition.
We circularised suppliers in business units where rebate income is significant to confirm a sample of amounts receivable, including high value balances. Where supplier responses were not returned, we reviewed further correspondence between the Group and the supplier to verify the position taken. We also considered post year end recoveries against receivables.
We re-performed a sample of management's calculations of rebate income, agreeing volumes to purchasing records and correspondence from suppliers where available or to other available documentation, and agreeing the rebate percentages applied to a signed contract where available or to other supplier correspondence. We compared rebate income earned by supplier against historical rates achieved and considered previous estimation accuracy to identify significant movements for further testing or enquiries.
We challenged whether the recognition policies and estimates were appropriate, particularly when there were non-coterminous trading periods, renegotiated rebate agreements and buy-ins, and we performed detailed testing to determine whether an appropriate level of rebate had been adjusted against stock to reflect the net cost of the related items.
The assessment of the carrying value of goodwill and intangible assets
The goodwill and intangible assets (excluding computer software) of £494.4m represent 33% of total assets and 71% of non-current assets and therefore the judgments over the carrying value are significant.
Management's judgments in relation to the financial forecasts of the business units, discount rates and perpetuity growth rates used to determine the value in use of the CGUs are subjective and are described in the Critical Accounting Judgments and Key Sources of Estimation Uncertainty and Note 11 to the financial statements.
We evaluated the design and implementation of key controls related to the assessment of the carrying value of goodwill and intangible assets.
We challenged management's assumptions used in the impairment model for goodwill and intangible assets, including specifically the cash flow projections, changes to the discount rates applied and perpetuity rates used. We performed sensitivity analysis against these assumptions. We have compared these to industry forecasts, the Group's historical performance, budgeting accuracy, benchmarking against comparator groups and our understanding of the future prospects of the business. We tested the integrity of the model using our computer assisted analytical tools.
Particular focus has been given to Larivière given its carrying value of goodwill of £144.7m and the difficult trading conditions in France. As a result we applied a greater level of verification to the growth rates and additional sensitivity analysis over the trading performance and judgments taken.
The recognition and presentation of Other items in the Consolidated Income Statement
The Group has consistently used a three column approach for the presentation of the Consolidated Income Statement to separately identify certain income/costs which are non-underlying in nature. This includes certain costs relating to a significant restructuring programme. The inappropriate or inconsistent inclusion of income/costs within Other items could distort the underlying profit disclosed. The Group's definition for separate presentation within Other items is set out in the Statement of Significant Accounting Policies. The net loss associated with Other items is £36.1m and reduces the Group's underlying profit before tax by 41%.
This is on the face of the Consolidated Income Statement and also Note 2.
We evaluated the design and implementation of key controls related to the recognition and presentation of Other items. We assessed the nature of the income/costs included in Other items and challenged whether they met the Group's definition for separate presentation. Where income/costs have been presented as Other items, we obtained evidence that enabled us to assess whether this presentation is appropriate. We performed detailed substantive testing for a sample of the costs/income by verifying these against supporting invoices, agreements and other records as appropriate. Particular focus has been given to net restructuring costs of £8.3m as set out in Note 2 to determine whether they arise from significant restructuring and changing the shape of the business rather than minor changes to the Group's structure.
The recognition and measurement of provisions for trade receivables
Trade receivables represent 49% of the Group's current assets. The judgments regarding aged or impaired receivables are significant and are subjective with respect to the trading conditions in some of the countries in which the Group operates, particularly in Ireland.
Further explanation is given in the Critical Accounting Judgments and Key Sources of Estimation Uncertainty and Note 15 in the Annual Report and Accounts.
We evaluated the design and implementation of key controls related to the recognition and measurement of provisions for trade receivables. We challenged the appropriateness of management's assumptions and estimates in relation to the provisions for trade receivables through discussions with local management who are the most knowledgeable of the customers themselves. In assessing completeness and accuracy we have reviewed evidence of customer disputes and defaults and whether this indicates that a provision is required. We have tested the ageing of the ledgers through agreement of ageing date to proof of customer delivery and recalculated the provision based upon this. We have assessed the appropriateness of provisions by considering subsequent cash receipts, past payment practices and the initial assessment of customer viability.
The risks noted above remain unchanged from the audit report in the prior year.
The description of risks above should be read in conjunction with the significant issues considered by the Audit Committee discussed on the Audit Committee Report.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.
We determined materiality for the Group to be £4.25m (2014: £5m), which is below 5% (2014: approximately 5%) of underlying pre-tax profit (as defined in the Consolidated Income Statement), and below 1% (2014: 1%) of equity. Deteriorating market conditions have had an adverse impact on sales, driving a lower underlying pre-tax profit resulting in a lower materiality being determined. We use underlying pre-tax profit to exclude the effect of volatility from our determination and because it represents one of the primary KPIs referred to both internally and externally. The recognition and presentation of Other items is treated as a significant risk as set out above.
Component materiality ranges between 50% and 95% of Group materiality (£2.1m to £4.0m) based on the components' blended revenue and underlying pre-tax profit contribution.
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £85,000 (2014: £100,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.
An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level. The Group audit and audit of the consolidation is performed at the Group's head office in Sheffield. The accounting records of the trading businesses within the Group are spread across the countries in which the Group operates. We perform audit work in each of the eight principal countries of operation.
Full scope audits were performed for the principal business units including the United Kingdom, Germany, France, Poland, and Ireland covering 75% of the Group's total assets (2014: 88%), 90% of revenue (2014: 91%) and 84% of pre-tax profit (2014: 89%). A further 17% of the Group's total assets (2014: 9%), 5% of revenue (2014: 6%) and 6% of pre-tax profit (2014: 9%) were subject to specified audit procedures where the extent of our testing was based on our assessment of the risks of material misstatement and of the materiality of the Group's operations at those locations. They were also selected to provide an appropriate basis for undertaking audit work to address the risks of material misstatement identified above. Our full scope audits and the specified audit procedures were executed at levels of materiality applicable to each individual entity which were lower than Group materiality.
At the Parent Company level we also tested the consolidation process, including testing on the acquisitions which are significant to the Group's results and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to audit or audit of specified account balances.
The Group audit team continued to follow a programme of planned visits that has been designed so that a senior member of the Group audit team visits each of the locations where the Group audit scope was focused once every year and the most significant of them at least twice a year. During 2015 and 2014 a senior member of the Group audit team visited Germany, France, Ireland and the United Kingdom at least twice, and also Poland once.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
- the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006;
- 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.
In the light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report and the Directors' Report.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
- we have not received all the information and explanations we require for our audit; or
- 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 are not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors' remuneration have not been made or the part of the Directors' Remuneration Report to be audited is not in agreement with the accounting records and returns. We have nothing to report arising from these matters.
Corporate Governance Statement
Under the Listing Rules we are also required to review the part of the Corporate Governance Statement relating to the Company's compliance with certain provisions of the UK Corporate Governance Code. We have nothing to report arising from our review.
Our duty to read other information in the Annual Report
Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is:
- materially inconsistent with the information in the audited financial statements; or
- apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or
- otherwise misleading.
In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the Directors' statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the Audit Committee which we consider should have been disclosed. We confirm that we have not identified any such inconsistencies or misleading statements.
Respective responsibilities of Directors and auditor
As explained more fully in the Directors' Responsibilities Statement, the Directors are responsible for the preparation of the 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 financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team and independent partner reviews.
This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.
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 the 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 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.
Simon Manning FCA (Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
8 March 2016