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Key audit matter
How we addressed the key audit matter
GOODWILL AND OTHER INTANGIBLE ASSETS IMPAIRMENT ASSESSMENTS The Group holds goodwill and other intangible assets
In performing our audit procedures we: • understood the Group’s goodwill impairment assessment process and identified controls; • assessed the Group’s determination of CGUs based on our understanding of the nature of the group’s business units; • obtained the Group’s DCF models and agreed forecasts to a combination of the board approved FY19 budget and the FY19- FY23 strategic plan; • assessed key inputs to the DCF models including forecast EBIT, capital expenditure, discount rates and terminal growth rates; • assessed the accuracy of previous Group forecasting to inform our evaluation of forecasts included in the DCF models; • involved our valuation specialists, for those CGUs with a higher risk of impairment, to recalculate the group’s discount rates. Valuation specialists were also involved in assessing the DCF models for valuation methodology, including the treatment of assumptions for capital expenditure, working capital, terminal value and the net present value calculation; • performed sensitivity analysis on higher risk CGUs in two main areas being the discount rate and forecast earnings; and • evaluated the associated disclosures in the financial statements, particularly focusing on the disclosure of the CGUs which are sensitive to reasonably possible changes in assumptions. In performing our audit procedures we: • understood the Group’s processes and identified its controls for recording, managing and reporting of its derivatives; • involved our treasury specialists to evaluate the accuracy with which the Group revalues derivatives; • confirmed the existence of derivatives directly with counterparties at balance date; • assessed fair value movements on derivatives during the year to identify whether these movements were appropriately recognised in the Income Statement or the Statement of Comprehensive Income in accordance with NZ IFRS 9 Financial Instruments ; • performed hedge effectiveness testing across a sample of the hedged portfolio; and • evaluated the associated disclosures in the financial statements.
which are carried at $1.7 billion at 30 June 2018. The recoverable amount of goodwill and other intangible assets is determined each reporting period by reference to valuations prepared using discounted cash flow models (‘DCF models’). DCF models contain significant judgement and estimation in respect of future cash flow forecast, discount rate and terminal growth rate assumptions. Changes in certain assumptions can lead to significant changes in the assessment of the recoverable amount. Notes 21 and 22 of the financial statements disclose the key assumptions adopted and the sensitivity to reasonably possible changes in key assumptions which would reduce the recoverable amount and/ or create additional impairments at certain cash generating units (‘CGUs’).
TREASURY – DERIVATIVE VALUATION AND HEDGE ACCOUNTING The Group manages its economic risks through the use of derivative financial instruments (‘derivatives’) which primarily consist of interest rate swaps, foreign exchange contracts and cross currency interest rate swaps. Fair value movements in the derivatives are driven by movement in the financial markets. Note 16 of the financial statements discloses the fair value of the Group’s derivative assets and liabilities outstanding at balance date.
103 Fletcher Building Limited Annual Report 2018
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