2016_Halma_ARA_160610_2

Risk
Impairment of the carrying value of goodwill
At 2 April 2016, the net book value of goodwill was £544m (2015:
£406m), the increase is due to the four acquisitions in the period.
Management perform an impairment review under IAS 36
‘Impairment of Assets’ on an annual basis and whenever an
indication of impairment exists.
Assessment of the carrying value of goodwill is a significant risk due to
the quantum of the balance and the judgements involved in setting the
key assumptions and assertions used by management to support their
assessment of the carrying value. In testing the carrying value for
impairment, management has made a number of key assumptions,
including short-term and long-term growth rates, discount rates and
the use of 11 (2015: 10) cash generating unit (“CGU”) groups.
During the period, management has established a new CGU group
in respect of Sensor Technologies, to which the goodwill arising on
the CenTrak acquisition has been allocated for impairment testing.
The associated disclosure is included in note 11. The Audit
Committee has included their assessment of this risk on page 72
and it is included in the key accounting estimates and judgements
on page 110.
How the scope of our audit responded to the risk
We assessed whether the CGU groups represent the lowest level
within the Group at which the goodwill is monitored for internal
management purposes and the appropriateness of establishing the
new Sensor Technologies CGU group to allocate the goodwill
arising on the CenTrak acquisition.
We challenged the reasonableness of the short term growth rates
with reference to the budgets approved by the Board, historical
performance and post period trading data.
We assessed the long term growth rates by reference to market
specific GDP growth rates based on third party sources.
We performed a specific review and challenge, involving Deloitte’s
valuation specialists, of the discount rates applied for each group
of CGUs. We assessed the Group’s weighted average cost of
capital and sector specific risk premiums using external input
data and benchmarking the discount rates against published
peer group rates.
We recalculated management’s sensitivity analysis on key
assumptions and replaced key assumptions with alternative
scenarios e.g. applying further changes to discount rates and
forecast growth rates.
We have reviewed the disclosures made in the financial statements
and assessed compliance with IAS 36.
STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS
Acquisition accounting
There were four acquisitions in the period with a total initial
consideration of £188m. The acquisitions were Value Added
Solutions LLC, Firetrace USA LLC, Visiometrics S.L. and Visual
Diagnostics Inc. (together Visiometrics) and CenTrak Inc. The total
value of separable intangible assets arising on these acquisitions in
the period is £100m.
There is a risk that acquisitions are not accounted for correctly in
line with IFRS 3 ‘Business combinations’. The risk relates to the
assumptions and assertions used by management to fair value the
acquired assets and liabilities, including separately identified
intangible assets, together with the determination of deferred
contingent consideration at the date of acquisition.
In determining the fair value of acquired intangible assets
management use a valuation model that incorporates their
assumptions in respect of forecast revenues, useful life, forecast
margins and discount rates. Management engaged third party
valuation experts to assist them in the preparation of the acquisition
accounting for the Firetrace acquisition.
There is a maximum amount of potential deferred contingent
consideration payable in respect of the acquisition of Visiometrics of
€107m. Significant judgement has been applied by Management in
establishing their best estimate of the liability which is £21m based on
a risk weighted assessment of the forecast future performance of the
acquired business.
Details of the acquisitions are disclosed in note 24 to the
accounts. The Audit Committee has included their assessment
of this risk on page 72 and it is included in the key accounting
estimates and judgements on page 110.
We obtained the models for the acquisitions in the period and
reviewed the opening balance sheet and fair value adjustments by
reference to supporting schedules and evidence as applicable.
Our audit of the separately identified acquired intangible assets
focused on the assumptions in management’s valuation model.
We challenged the key assumptions including forecast revenues,
useful life, forecast margin and discount rates utilising our internal
valuation specialists to support our assessment of the discount
rates used.
We benchmarked the output of the acquisition models, including
the goodwill to intangible asset ratio, to similar prior year
acquisitions challenging any significant variances and considering
the business rationale.
We agreed the underlying data in the deferred contingent
consideration calculation to signed sale and purchase agreements.
We assessed Management’s process and the assumptions used to
determine the estimate of future deferred contingent consideration
payable including a comparison of forecast trading performance
against historical and post-acquisition financial results. Given the
dependence on future trading we have also considered the
disclosures in respect of this.
We assessed management’s treatment of deferred contingent
consideration payments as additional purchase consideration
(as opposed to post-acquisition remuneration by reviewing the
terms of the Sale and Purchase Agreements (SPA)).
Halma plc Annual Report and Accounts 2016 97 95