Independent auditor’s report continued to the members of NCC Group plc
2 Key audit matters: our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters, in decreasing order of audit significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.
The risk
Our response
Our procedures included: • Accounting clarity: We assessed the accounting clarification of the IFRIC April 2021 decision against the proposed change in the Group’s accounting policy • Test of detail: We agreed a sample of costs related to cloud-based software arrangements to supporting documentation, including labour costs to timesheets and other relevant project information to understand the nature of the items and considered this against the accounting standards and related interpretations • Personnel enquiries: We interviewed selected employees who were assigned to projects to corroborate the nature of the work performed and considered this against the accounting standards and related interpretations • Assessing transparency: We assessed the adequacy of the Group’s related disclosures in respect of the change in accounting policy and the judgements taken by management Our results We found the accounting treatment of costs related to cloud-based software arrangements to be acceptable. Our procedures included: • Inspecting correspondence : We inspected correspondence with the Group’s tax advisors for both the current and historic claims • Assessment of experts: We assessed the competence, capabilities and objectivity of the external tax experts engaged by the Group • Tests of detail: Together with our own tax specialists, we challenged the appropriateness of recognition of the US R&D tax credits and the basis on which the claims have been made, focussing on economic risk and who bears this under the contractual arrangements entered into by the Group. We have challenged the findings of management’s experts, including performing sample testing on the findings of management’s experts • Assessing transparency: We assessed the adequacy of the Group’s related disclosures in respect of the uncertain tax position and the estimation uncertainty Our results We found the recognition of US R&D Tax Credits and the related disclosures to be acceptable.
Accounting treatment of costs related to cloud-based software arrangements Costs related to cloud-based software £5.1m (2020 restated: £7.9m) Refer to page 91 (Audit Committee Report), page 142 (accounting policy) and page 151, page 156, pages 160–161 and pages 184–185 (financial disclosures)
Accounting treatment Previously, the Group capitalised internal and external costs in respect of cloud-based software arrangements. In April 2021 the IFRS Interpretations Committee (‘IFRIC’) published an agenda decision on configuration and customisation costs incurred in implementing Software-as-a-Service (SaaS) arrangements. This IFRIC decision has been considered by the Group and the Group have identified that a change in accounting policy in respect of the capitalisation of certain costs associated with SaaS arrangements is required. The risk is that the accounting policy change is not appropriately applied to both the current and prior years. Uncertain tax position The Group submits R&D tax claims in the US. These claims are open to challenge by the Internal Revenue Service (‘IRS’). Unutilised tax credits of £1.0m remain open to challenge by the IRS as at 31 May 2021 and utilised tax credits of £7.2m. The Group have recognised a provision against these balances to reflect the uncertain tax position, therefore the net tax creditor and net deferred tax asset recognised in the accounts are £2.7m and £0.4m respectively. Therefore a risk exists in relation to the accounting estimation applied by management. The basis on which the Group has claimed R&D tax credits involves a technical assessment of which party is bearing economic risk in research contracts entered into with third parties. The risk has increased in year following the increase in quantum of claims, resulting in a high risk of material misstatement. The Group have engaged an external expert to assess these claims. The effect of these matters is that, as part of our risk assessment, we determined that the US R&D tax credit accounting has a high degree of estimation uncertainty with a potential range of outcomes greater than our materiality for the financial statements as a whole. The financial statements (note 2) disclose the range estimated by the Group.
Recognition of US R&D Tax Credits
US R&D net current tax benefit £2.7m and US R&D deferred tax asset £0.4m Refer to page 91 (Audit Committee Report), page 151 (accounting policy) and page 152, pages 158–159 and page 168 (financial disclosures)
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NCC Group plc — Annual report and accounts for the year ended 31 May 2021
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