2 Key audit matters: our assessment of risks of material misstatement continued The risk Our response
Our procedures included: • Historical comparison: We assessed the reasonableness of the forecast used, by considering the Group’s forecasting accuracy by comparing actual results in the year to the Group’s previous forecast for the year • Benchmarking assumptions: We challenged, with the support of our own valuation specialists, the risk adjusted discount rates, having regard for market observable data with regard to risk free rates and returns on equity for comparator companies. We also evaluated the revenue growth assumptions and the long-term growth rates into perpetuity, comparing to external sources of data including industry growth rates and internal sources including the order book • Sensitivity analysis: We performed breakeven analysis on the key assumptions, including the revenue compound annual growth rate (“CAGR”) and the discount rate • Comparing valuations: We compared the sum of the discounted cash flows to the Group’s market capitalisation adjusted for debt to assess the reasonableness of the value in use calculations • Assessing transparency: We assessed whether the Group’s disclosures regarding the sensitivity of the impairment assessment to changes in key assumptions reflected the risks inherent in the valuation of the goodwill Our results We found the carrying value of the goodwill related to the EU Assurance CGU to be acceptable (2020 result: acceptable). Our procedures included: • Test of detail: For a sample of the selected contracts, we agreed costs incurred to date (such as direct costs, labour charges and hardware costs) to purchase orders and challenged the internal hours charged, to assess the stage of completion • Personnel enquiries: We corroborated forecasts used in the long-term contract accounting through discussions with operational management for the same sample of contracts regarding their expectations for the contracts, including forecast costs to complete and the timetable to completion for these contracts. We also periodically attended regular project meetings throughout the year to observe the project teams and challenge • Historical comparison: We assessed the forecasting accuracy of costs to complete by comparing actual results in the year to what was previously forecast • Assessing transparency: We assessed the completeness and accuracy of the matters covered in the disclosures relating to Fox IT long term contract accounting and assessed the adequacy of the Group’s disclosures about the sensitivity of the impact of reasonably possible changes in the key assumptions in the long term contract accounting Our results We found the accounting treatment and estimates of the revenue associated with long term contracts and the provisions for long term contracts and the related disclosures to be acceptable (2020 result: acceptable).
Recoverability of goodwill in respect of EU Assurance cash generating Unit (‘CGU’) Goodwill £64.7m (2020: £64.3m before current year change in CGUs) Refer to page 90 (Audit Committee Report), pages 142–143 (accounting policy) and page 152 and pages 161–163 (financial disclosures)
Forecast based valuation There is inherent uncertainty involved in forecasting and discounting future cash flows, which are the basis of the assessment of goodwill recoverability. The outcome could vary significantly if different assumptions were applied in the model. There is a risk of error, due to the judgemental and complex nature of the impairment model. This risk currently is specific to the EU Assurance Cash generating unit (‘CGU’). This is a result of limited headroom historically in the impairment model and the sensitivity of the value in use calculation to reasonably possible changes in key assumptions. We consider that the value-in-use calculation of EU Assurance has a high degree of estimation uncertainty, specifically around the revenue growth assumptions, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. The financial statements (note 12) disclose the sensitivity estimated by the Group.
Fox IT long term fixed price contract accounting Revenue associated with long term contracts £1.8m (2020: £1.1m) Provision for long term contracts £1.1m (2020: £0.2m) Refer to page 91 (Audit Committee Report), page 149 (accounting policy) and page 152 and page 170 (financial disclosures)
Accounting treatment and subjective estimates
The contractual arrangements that underpin the measurement of revenue and associated profit, within the long-term contracts within Fox IT can be complex. These involve judgements around the accounting treatment and subjective estimates, which form the basis of both the in-year and future recognition of revenue and profit. Incentives and pressures to meet market expectations, increase the risk of fraudulent revenue recognition. The significant risk relates to fixed price long term contracts that are not completed as at the balance sheet date. Within Fox IT, the forecasts used in assessing the contract outturn positions are inherently judgemental, due to the uncertainty involved in forecasting future cash flows, including costs to complete. Furthermore, where the fixed price contracts are loss-making or low margin, these assumptions may have a significant impact on the recognition of revenue and profit in the period and may result in impairment of related contract assets or further onerous contract provisions being required. The financial statements (note 2) disclose the sensitivity estimated by the Group.
NCC Group plc — Annual report and accounts for the year ended 31 May 2021
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