Independent auditor’s report continued to the members of NCC Group plc
2 Key audit matters: our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters in decreasing order of audit significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.
The risk
Our response
We performed the tests below rather than seeking to rely on any of the Group’s controls because the nature of the balance is such that we would expect to obtain audit evidence primarily through the
Valuation of separately identifiable intangible assets recognised as part of the NCC Group Software Resilience (NA) (‘IPM’) acquisition Customer relationship valuation £91.4m at acquisition. Refer to page 97 (Audit Committee Report), pages 153–154 (accounting policy) and pages 200–202 (financial disclosures).
Subjective Valuation In June 2021, the Group completed the
acquisition of IPM. The fair value of the customer relationship has been identified as the significant area of estimation uncertainty, specifically the key assumptions being the discount rate and revenue growth rate used in the fair value model. The outcome could vary significantly if different assumptions were applied in the model. As part of our risk assessment, we determined that the valuation of the separately identifiable intangible assets identified as part of the IPM acquisition had a high degree of estimation uncertainty. There is 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 34) disclose the sensitivity estimated by the Group, in particular over the growth rate and discount rate in the customer relationship intangible asset.
detailed procedures described. Our procedures included:
• Historical comparison: We assessed the reasonableness of the forecasts used in the customer relationship valuation, by comparing actual results in the year for IPM to the Group’s previous forecast for IPM, for the year; • Methodology choice: With the assistance of our valuation specialists, we assessed the results of the valuation by checking that the valuation methodology was in accordance with relevant accounting standards and acceptable valuation practice; • Benchmarking assumptions: We challenged, with the support of our own valuation specialists, the appropriateness of the valuation methodology and key assumptions used, including the discount rate, having regard for market observable data with regard to risk free rates for comparator companies. We also evaluated the revenue growth assumptions, comparing to data from the rest of the Group, the due diligence performed for the acquisition and external sources of data including industry growth rates; • Sensitivity analysis: We performed sensitivity analysis over the key assumptions, including the revenue forecasts and discount rate; • Assessing transparency: We assessed the appropriateness of the Group’s disclosures in respect of the valuation of separately identifiable intangible assets recognised on acquisition of IPM. Our results We found the Group’s assessment of the valuation of separately identified acquired intangible assets recognised as part of the NCC Group Software Resilience (NA) (‘IPM’) acquisition to be acceptable.
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NCC Group plc — Annual report and accounts for the year ended 31 May 2022
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