Audit Committee report continued
Significant accounting areas and areas of significant management judgement or estimation uncertainty The table below summarises the significant accounting issues, judgements and estimates that the Committee considered during the year in relation to the Financial Statements. These are split between those items which are identified either as recurring items that the Committee regularly reviews or as items of current year focus. The table also sets out the financial context and potential impact of each item as well as the impacted metric. Finally, the table shows the degree of judgement or estimation that the Committee feels has to be applied for each item. Items with a significant impact but with a “low” judgement level will typically have extensive independent third party evidence of the bases for any judgement. Areas assessed as requiring a “high” level of judgement tend to rely more heavily on management estimates and historical trends than extensive independent third party evidence.
Review items
Accounting judgement
Estimation required
Goodwill carrying values (recurring)
N/A
High
Intangible assets – capitalisation of cloud-based software and development costs (revised)
Yes
N/A
Control of Iron Mountain IPM business (new)
Yes
N/A
Research and development tax credits (new)
N/A
High
Long-term loss-making contracts – other estimate (recurring)
Yes
Low
Significant issues considered during the year in relation to the Financial Statements During the year, the Committee reviewed and considered the following areas in respect of financial reporting and the preparation of the interim and annual Financial Statements: • The appropriateness of the accounting policies used • Significant areas of management judgement or estimation • The effectiveness and changes to the financial control environment • Compliance with external and internal financial reporting standards and policies • Disclosure and presentation of GAAP and Alternative Performance Measures (APMs) • Whether the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary to assess the Group’s financial position, performance, business model and strategy In carrying out this review the Committee challenged the significant estimates and judgements made by the Group’s finance team and considered the external auditor’s reports setting out its views on the accounting treatments and judgements included in the Financial Statements.
Goodwill carrying value (Recurring item: see Note 12 to the Financial Statements) 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.
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NCC Group plc — Annual report and accounts for the year ended 31 May 2021
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