Notes to the Financial Statements continued for the year ended 31 May 2022
34 Acquisitions continued Measurement of fair values continued
The valuation of purchase price accounting is a key source of estimation uncertainty, in which there are several key assumptions where, if a reasonably possible change in assumption is made, this could result in a material adjustment. A description of the key assumptions and possible sensitivities is described below:
Description of key assumption
Reasonably possible scenario
Impact
The impact of increasing the discount rate by 1% would be to reduce the value of the customer relationship intangible asset by £6.0m with a corresponding increase in the value of goodwill arising on acquisition. The amortisation on acquired intangibles charged to the Income Statement for the year ended 31 May 2022 would reduce by £0.3m. The impact of decreasing the discount rate by 1% would be to increase the value of the customer relationship intangible asset by £6.8m with a corresponding decrease in the value of goodwill arising on acquisition. The amortisation on acquired intangibles charged to the Income Statement for the year ended 31 May 2022 would increase by £0.3m. The impact of this scenario is to reduce the value of the customer relationship intangible asset by £3.1m with a corresponding increase in the value of goodwill arising on acquisition. The amortisation on acquired intangibles charged to the Income Statement for the year ended 31 May 2022 would reduce by £0.2m.
It is considered reasonably possible that this discount rate could be 1% higher or lower depending on the expected performance of the business post-acquisition.
The valuation of the customer relationships intangible asset of £91.4m assumes a discount rate of 10.7% driven by the internal rate of return implied by the consideration paid for the acquired business.
It is considered reasonably possible that this growth rate does not exceed an inflationary US long-term inflationary growth rate of 2%.
The valuation of the customer relationships intangible asset of £91.4m includes an estimate of a level of growth of the revenue
generated from that customer base, post-acquisition. The forecasts used
assume that revenue (excluding synergies) will increase incrementally to a maximum of a 3.7% annual increase in FY25 before returning to levels more consistent with the US long-term inflationary growth rate in FY26 and beyond.
Acquisition of Adelard business On 20 April 2022, shareholder approval was passed for the acquisition of substantially all of the assets of Adelard LLP for £3m subject to normalised working capital adjustment that will be finalised in due course. This gave rise to provisional goodwill of £1.1m, intangible assets of £1.3m, right of use assets £0.2m, trade receivables and other receivables £0.9m and current liabilities £0.5m. Consideration payable of £3m is represented by £1.0m cash and a further contingent consideration (dependent on novation of contracts and FY23 revenue performance) of £1.9m (discounted). Adelard is an assurance expert in high value critical systems for national and industrial infrastructure and its services are complementary to the Group.
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NCC Group plc — Annual report and accounts for the year ended 31 May 2022
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