QinetiQ Annual Report 2017

QinetiQ Group plc Annual Report and Accounts 2017
Governance | Independent auditor’s report
97
US Global Products goodwill –
£43.4 million (2016: £37.9 million)
Refer to page 61 (Report of the Audit Committee),
page 107 (accounting policy note) and page 121
(financial disclosures).
The risk:
Forecast based valuation
The carrying value of goodwill associated with the
US Global Products business was written down to its
recoverable amount in the year ended 31 March 2016.
As a result, any deterioration in these projections or an
increase in the discount rate applied may result in a further
write down being required. The carrying value of the US
Global Products goodwill has been reassessed in 2017
based on the discounted projected cash flows of this
business, which are inherently uncertain due to the
variability of future sales and product mix, and selection of
an appropriate discount rate used for the purposes of the
impairment calculations. Whilst the projections anticipate
future growth based on 2017 performance, there remains
uncertainty around the impact of new revenue streams
and demand for the current portfolio of products.
Our response:
Our procedures included:
Assessing methodology: Testing the principles and
mathematical integrity of the Group’s discounted
cash flow model;
Benchmarking assumptions: With the assistance of
our valuation specialists, we assessed the growth and
discount rate used in the impairment calculation by
comparing the Group’s assumptions to external data;
Our sector experience: Challenging the cash flow
projections by reviewing the timing of new revenue
streams and product mix against market conditions
and the current level of sales;
Sensitivity analysis: Testing the sensitivity of the
impairment calculation to changes in the underlying
assumptions;
Assessing disclosures: Assessing whether the Group’s
disclosures about the sensitivity of the outcome of the
impairment assessment to changes in key assumptions
properly reflected the risks inherent in the valuation
of goodwill.
Other payables, provisions and contingent liabilities
– included within other payables of £157.6 million
(2016: £163.3 million), provisions of £24.0 million
(2016: £19.1 million) and contingent liabilities
of £Nil (2016: £Nil)
Refer to page 61(Report of the Audit Committee),
page 109 (accounting policy note) and page 127
(financial disclosures).
The risk:
Subjective estimates
The Group holds provisions in respect of contractual,
legal and regulatory issues. The Group operates in
regulated environments and a failure to comply with
particular regulations could result in fines and/or
penalties. There is judgement required in determining
the significance of any instances of potential noncompliance
and potential liability based on
management’s assessment of the most likely outcome.
The financial statements should disclose any contingent
liabilities in respect of contractual, regulatory or legal
issues which have not been provided for on the basis
that they are not considered to qualify for recognition
as provisions. This is one of our key areas of audit focus.
Our response:
Our procedures included:
Our sector experience: Critical assessment of the extent
to which the Directors’ estimates take into account a
balanced assessment of the latest available information
and the accuracy and reliability of the sources of that
information;
Benchmarking assumptions: We corroborated the
appropriateness of the Directors’ assumptions by
reference to third party confirmations and legal
advice, where available;
Historical comparison and sector experience: We
considered whether our understanding of the business
gained throughout the audit process corroborated
the provisions recorded. We challenged the Directors’
estimates of the most likely outcomes based on
the range of possible outcomes to determine if
the amounts provided are appropriate;
Assessing disclosures: We considered the adequacy
of the Group’s disclosures in respect of other payables,
provisions and contingent liabilities.
Tax provisioning – current tax payable £43.7 million
(2016: £39.9 million), deferred tax asset £5.4 million
(2015: £4.1 million)
Refer to page 61(Report of the Audit Committee), page
107 (accounting policy note) and pages 124 and 127
(financial disclosures).
The risk:
Subjective estimates
The Group is subject to income taxes in the UK, USA
and a number of other overseas jurisdictions. The level
of current tax and deferred tax recognised requires
judgements as to the likely outcome of decisions to be
made by the tax authorities. This includes those related
to specific tax allowances, such as the UK Research
and Development tax credit. There is a risk that the
judgements on which the provisions are based do not
take into account or do not properly reflect the latest
available, reliable information or an appropriate
application of relevant tax legislation, and are either
under or overstated as a result.
Our response:
Our procedures included:
Our expertise: Challenging the appropriateness of the
Directors’ assumptions and estimates in relation to tax
assets and liabilities, by critically assessing the range of
possible amounts that may be assessed under tax laws,
likely settlements based on the latest correspondence
with the relevant tax authorities and the complexity of
the relevant tax legislation. We involved our own tax
specialists in analysing and challenging the assumptions
used to determine tax provisions based on our
knowledge and experience of the application of the
legislation by the relevant authorities and courts.