Independent auditors report to the members of Interserve Plc - PDF document

INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS INdEPENdENT AUdITOR’S REPORT 103 Independent auditor’s report to the members of Interserve Plc OVERVIEW Our opinion on the financial statements is unmodified In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2014 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; • the parent company financial statements have been properly prepared in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice); and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. STRATEGIC REPORT What we have audited: Interserve Plc’s financial statements comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated and Parent Company Balance Sheets, the Consolidated Statement of Changes in Equity, the Consolidated Cash Flow Statement and the related notes. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is United Kingdom Generally Accepted Accounting Practice. Our assessment of risk Without modifying our opinion, we highlight the following matters that are, in our judgement, likely to be most important to users’ understanding of our audit. Our audit procedures relating to these matters were designed in the context of our audit of the Group financial statements as a whole and not to express an opinion on individual transactions, account balances or disclosures. GOVERNANCE FINANCIAL STATEMENTS

104 INTERSERVE ANNUAL REPORT 2014 FINANCIAL STATEMENTS INdEPENdENT AUdITOR’S REPORT Independent auditor’s report continued Audit risk How we responded to the risk Our audit work included, but was not limited to: Revenue recognition and contract accounting See note 1 on page 116 and pages 70 and 71 of the Audit • testing key controls, where applicable, over the recognition Committee Report. of revenue and the allocation of costs to the contracts, including those over contract execution, invoicing, Revenue is recognised throughout the Group as the fair value of collections, cost approvals and cost allocations; consideration receivable in respect of provision of services and • selecting a sample of contracts in progress determined by construction contracts and the rental and sale of equipment. reference to materiality and other risk factors including loss- Provision is made for expected contract losses as soon as they making contracts and contracts with aged work-in-progress are foreseen. and debtor balances and testing of management’s application Determining the amount of revenue to be recognised, costs to of the contractual terms and conditions, recalculating complete and assessment of any other costs arising, the impact revenue recognised under the percentage of completion of any changes in scope of work, together with the level of method based on costs incurred to date (where applicable) recoverable work-in-progress and receivables requires significant and testing a sample of costs recorded on projects; management judgement and estimates. • challenging management’s assertion relating to the expected costs to complete by reference to supporting documentation We therefore identified revenue recognition and contract such as customer certifications, forecast models and accounting as a significant risk. comparing previous cost estimates against actual results and examining variation and claim agreements; • rationalising revenues against contracted amounts and reconciled differences to variations that were invoiced during the period; • testing a sample of revenue items for each stream, covering both hire and sale revenue, agreeing items selected for testing through to supporting documentation; • reviewing management’s assessment of forward loss provisions recorded on longer term contracts, including challenging management on the judgements inherent within their contract forecasts, understanding the basis for claims revenue projections and projected cost savings, review of historical experience and comparing against expected outcomes; and • investigating the recovery of trade receivables and work- in-progress balances, by reference to post-balance sheet cash collection, certifications and correspondence from customers, review of subsequent and historical credit notes and examining the Group’s historical experience of recovery. Our audit work included, but was not limited to: Acquisition of Initial Facilities See note 12 on page 127 and page 71 of the Audit Committee Report. • agreeing purchase consideration to purchase agreements and bank accounts; On 18 March 2014 the Group acquired the facilities services • testing the validity of a sample of fair-value adjustments business of Rentokil Initial Plc for a cash consideration of made to the opening balance sheet and ensuring the £245.7 million. As a result of this acquisition, the Group recorded quantum of the adjustments was appropriate; intangible assets and goodwill of £87.8 million and £140.3 million respectively. • testing a sample of acquisition and integration-related costs incurred and ensuring that their accounting treatment and Determining the fair value of intangible assets and goodwill disclosure was appropriate; arising from the acquisition required fair-value adjustments • recalculating the valuation of recorded intangible assets, to be made to the net assets acquired and the application including the benchmarking of valuation assumptions and of a valuation model to determine the fair value of the estimates to industry data and independent review by our identifiable intangible assets. The valuation model includes own valuation specialists; and certain assumptions which are judgemental in nature including estimates of future revenue, growth rates, customer retention • re-perform the calculation of goodwill recognised on rates and discount rates. acquisition. We therefore identified the determination and valuation of the intangible assets and goodwill arising from the acquisition as a significant risk.