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 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
Low *
Fair value measurement – separately identifiable intangible assets (current year focus)
n/a
High
* A t the initial assessment stage, this was assessed as high estimation uncertainty. However, following the conclusion of management’s work and the Committee’s review, the estimation uncertainty has reduced to low. Given the focus of the Committee on this area in the year, we have included it in the table above as it continues to be an area of focus and close monitoring.
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 2022, totalling £266.1m (2021: £182.9m). Of this amount £76.9m relates to acquisitions in the current year including the acquisition of the IPM Software Resilience business while the remainder relates to acquisitions made in prior years. Goodwill is tested for impairment annually at the level of the CGU to which it is allocated. For the year ended 31 May 2021, the recoverable amount of all CGUs concerned was measured on a value in use (VIU) basis. For the year ended 31 May 2022, the recoverable amount of all CGUs concerned was measured on a VIU basis, with the exception of the Europe Assurance CGU and the IPM Software Resilience CGU, which were measured on a fair value less costs to sell basis. Fair value less costs to sell In accordance with IAS 36, for the year ended 31 May 2022, the recoverable amount of the Europe Assurance CGU and the IPM Software Resilience CGU has been determined on a fair value less costs to sell (FVLCTS) basis for the purposes of the impairment review. The VIU calculations prepared for both CGUs are highly sensitive to changes in inputs (for example reduced growth rates,
particularly beyond a period of three years), which could suggest that they were less than the carrying value of assets. Therefore, the Directors obtained two separate valuations performed by independent third parties that compiled evidence of comparable companies and precedent transactions to allow an assessment of FVLCTS. The Europe Assurance CGU and IPM Software Resilience CGU FVLCTS valuations have been calculated by assessing the value of the standalone Europe Assurance and IPM Software Resilience businesses calculated using an EBITDA 1 multiple based on sustainable earnings for the year ended 31 May 2022 adjusted for specific items where relevant. For the IPM Software Resilience business, integration costs associated with combining the business into the wider Group have been added back to sustainable earnings used in the calculation. For the Europe Assurance CGU no material adjustments have been made to the sustainable earnings used in the calculation. Each CGU FVLCTS valuation has been assessed under a Level 3 fair value hierarchy as defined by IFRS 13. The key assumptions used in the FVLCTS is the sustainable earnings and EBITDA 1 multiple. Sensitivity analysis has been performed in respect of certain scenarios where management considers a reasonably possible change in key assumptions could occur. Following this review, it was concluded that there was no reasonably possible change in those inputs that could give rise to an impairment. Value in use All other valuations have been assessed on a VIU basis; this involves the preparation of discounted cash flow projections, which require 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 estimates: the rate of revenue growth and the discount rate. 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. The Committee has reviewed the rationale used to determine the CGUs. The Committee also reviewed the valuation approach applied to assess the recoverable amount of each CGU.
96
NCC Group plc — Annual report and accounts for the year ended 31 May 2022
Made with FlippingBook Online newsletter maker