Notes to the Financial Statements continued for the year ended 31 May 2021
2 Critical accounting judgements, key sources of estimation uncertainty and other estimates continued 2.2 Estimation uncertainties Information about estimation uncertainties that have a significant risk of resulting in a material adjustment to the carrying values of assets and liabilities within the next financial year is addressed below. Whilst every effort is made to ensure that such estimates and assumptions are reasonable, by their nature they are uncertain, and as such changes in estimates and assumptions may have a material impact. Estimates and assumptions used in the preparation of the Financial Statements are continually reviewed and revised as necessary at each reporting date. Carrying values of goodwill The Group has significant balances relating to goodwill at 31 May 2021 as a result of acquisitions of businesses in previous years. The carrying value of goodwill at 31 May 2021 is £182.9m (2020: £193.1m). Goodwill balances are tested annually for impairment. Tests for impairment are primarily based on the calculation of a value in use for each CGU. This involves the preparation of discounted cash flow projections, which require significant estimates of both future operating cash flows and an appropriate risk-adjusted discount rate. The commercial viability of individually capitalised development project costs is also part of the overall assessment of carrying values. Future cash flow estimates are based on two critical estimates: the rate of revenue growth and the discount rate, particularly in relation to the Europe Assurance CGU which is the most sensitive to movements in estimates. The calculation of an appropriate discount rate to apply to the future cash flow estimate is itself an estimate. While some aspects of discount rate calculations can be more mechanical in nature (such as using the 30 year gilt yield as a proxy for the risk free rate) others, such as entity or sector-specific risk adjustments, rely more on management estimates. The discount rate is also a key component in assessing the terminal value which is often an important part of any valuation. Sensitivity analysis on what are regarded as reasonably possible changes is provided in Note 12. Recognition of research and development tax credits The tax expense reported for the current year and prior year is affected by certain positions taken by management where there may be uncertainty. The most significant source of uncertainty arises from claims for US research and development (R&D) tax credits relating to historical periods. Uncertainty arises as a result of a degree of uncertainty concerning the interpretation of US legislation and because the statute of limitations has not expired. The basis on which the Group has claimed R&D tax credits involves a technical assessment of which party bears the economic risk in any research contracts entered into with third parties. This assessment is a key estimate. It is considered “probable” that the US taxation authority would accept the uncertain tax treatment in relation to the utilised tax credits recognised. For the periods ending 31 May 2017 to 31 May 2021, the aggregate net current tax benefit included in the Income Statement relating to the R&D US tax credits is £2.7m (2020: £4.3m). The gross deferred tax asset relating to the R&D US tax credits is £1.0m (2020: £0.8m), although due to the uncertainty we have made a provision of £0.6m (2020: £0.8m) against this asset. The aggregate gross amount of US R&D tax credits recognised amounts to £8.2m (2020: £5.1m) and we have made a provision of £5.1m (2020: £0.8m) against this gross position. It is considered reasonably possible that the outcome relating to historical claims ranges from a potential increase of tax credits of £5.1m to a potential reduction of £3.1m. 2.3 Other estimates Long-term loss-making contracts Some aspects of the Group’s revenue are derived from relatively long-term fixed price contracts. On this basis, estimation uncertainty is disclosed in relation to one contract: • An onerous provision recognised during the year ended 31 May 2020 of £0.2m has increased during the period by a further £1.9m, of which £1.7m has been utilised leaving a closing balance of £0.4m of a total provision for loss-making contracts of £1.1m (see Note 21). This additional provision relates to a European contract and has been caused by Covid-19 disruption and some project management challenges. Management prepares projections, which, due to the complexity of the contract, require estimates and accounting judgement of both revenue and cost recognition (including the number of performance obligations). Revenue is recognised based on the input method of IFRS 15 in relation to total costs and therefore management has to estimate the number of hours still required to complete the long-term projects and associated labour cost to complete. Due to the level of estimation and dependency on hours remaining to complete the performance obligation, sensitivity analysis on what is regarded a reasonably possible scenario for this contract is provided below: • A 20% increase in total labour hours to the project would give rise to a further provision of up to £0.2m 3 Alternative Performance Measures (APMs) and adjusting items The consolidated Financial Statements include APMs as well as statutory measures. These APMs used by the Group are not defined terms under IFRS and may therefore not be comparable with similarly titled measures reported by other companies. They are not intended to be a substitute for, or superior to, Generally Accepted Accounting Practice (GAAP) measures. All APMs relate to the current year results and comparative periods where provided. This presentation is also consistent with the way that financial performance is measured by management and reported to the Board, and the basis of financial measures for senior management’s compensation schemes, and provides supplementary information that assists the user in understanding the financial performance, position and trends of the Group. At all times, the Group aims to ensure that the Annual Report and Accounts give a fair, balanced and understandable view of the Group’s performance, cash flows and financial position. IAS 1 ‘Presentation of Financial Statements’ requires the separate presentation of items that are material in nature or scale in order to allow the user of the accounts to understand underlying business performance.
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NCC Group plc — Annual report and accounts for the year ended 31 May 2021
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