degree of uncertainty concerning 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 tax credits is £2.7m (2020: £4.3m). The gross deferred tax asset relating to the R&D tax credits is £1.0m, although due to the uncertainty we have made a provision of £0.6m 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. Sensitivity analysis on what are regarded as reasonably possible changes is provided in Note 2. The Committee has reviewed management’s assessment of US R&D tax credits together with an independent third party review assessment and is satisfied the estimate made is reasonable and consistent with IFRIC 23 ‘Uncertainty over Income Tax Treatments’. Loss-making contracts – other estimate (Recurring item: see Note 21 to the Financial Statements) Some aspects of the Group’s revenue are derived from relatively long-term fixed price contracts. On this basis, an estimate 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 during the year. 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 labour cost to complete. Sensitivity analysis on what are regarded as reasonably possible changes is provided in Note 2 The Committee reviewed and challenged the assumptions underpinning this accounting treatment and is satisfied that the contract has been correctly treated, and that in the case of the loss-making contract the liabilities recorded are reasonable. The Group’s approach to materiality In considering the materiality of any individual issue or issues in aggregate, the Group looks at a range of qualitative and quantitative measures to assess whether or not omitting, misstating or obscuring information could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements. The range of measures includes (but is not limited to) the primary Financial Statements themselves, the individual line item in question, and whether or not the issue moves the result from one side of an inflection point to another (for example, turning a profit into a loss or a net asset into a net liability). Qualitative and quantitative measures are both considered as is any potential impact on remuneration or banking arrangements such as debt covenants.
The Committee has reviewed the rationale used to determine the CGUs including a change in CGUs driven by how the business is managed. The Committee also reviewed assumptions used in future cash flows that underpin the valuation of goodwill, particularly in relation to Europe Assurance since this CGU is the most sensitive to movements in estimates and assumptions. The Committee concurred with the view of management that no impairment should be recognised as either the discounted future cash flows or fair value was higher than carrying value. Intangible assets – capitalisation of cloud-based software and development costs (Revised item: see Note 12 and 34 to the Financial Statements) Where software costs are incurred as part of a service agreement, judgement is required in assessing whether the Group has control over the resources defined in the arrangement. Software development activities involve a plan or design for the production of new or substantially improved products or processes. Judgement is required in determining whether the project is technically and commercially feasible; judgement is required in assessing the future economic benefit and viability of the project. Such judgements are inherently subjective and can have a material impact on determining whether such costs should be capitalised. The total net book value of software and development costs on 31 May 2021 was £5.4m, including additions of £2.3m. The Committee reviews the level of intangible additions and especially how capitalised internal staff time relates to specific assets to ensure alignment with the Group’s policy and is satisfied the policy was applied appropriately for the year ended 31 May 2021. During the year, the Committee has reviewed judgements taken when applying the Group’s new accounting policy in relation to the IFRIC agenda decision regarding configuration and customisation costs incurred in implementing Software-as-a-Service (SaaS). This resulted in a prior year restatement. See Note 34 of the consolidated Financial Statements for further details. The Committee is satisfied with the judgements made for the year ended 31 May 2021. Control of IPM Software Resilience business (Current year focus item: see Note 35 to the Financial Statements) A key judgement in the year ended 31 May 2021 is the acquisition date for the purchase of the IPM Software Resilience business. Management considers shareholder approval of the transaction constitutes a change in control and therefore the date of shareholder approval is considered to be the acquisition date for the transaction. Shareholder approval was granted on 1 June 2021 and the IPM Software Resilience business will be consolidated into the Group results from that date. The Committee has reviewed management’s assessment of the date of change of control of the Iron Mountain IPM business and is satisfied that it is reasonable. Recognition of research and development tax credits (Current year focus item: see Note 9 to the Financial Statements) 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
NCC Group plc — Annual report and accounts for the year ended 31 May 2021
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