INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF C&C GROUP PLC
Opinions and conclusions arising from our audit
1 Our opinion on the financial statements is unmodified
We have audited the financial statements (‘the financial statements’) of C&C Group plc for the year ended 28 February 2014, which comprise the Group Income Statement, the Group Statement of Comprehensive Income, the Group and Company Balance Sheets, the Group and Company Cashflow Statements, the Group and Company Statements of Changes in Equity and the related notes on the following pages (or pages 90 to 163 of printed version). Our audit work was conducted in accordance with International Standards on Auditing (‘ISAs’) (UK and Ireland).
In our opinion:
- the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the EU, of the state of the Group’s affairs as at 28 February 2014 and of its profit for the year then ended;
- the parent Company balance sheet gives a true and fair view, in accordance with IFRSs as adopted by the EU as applied in accordance with the provisions of the Companies Acts 1963 to 2013, of the state of the Company’s affairs as at 28 February 2014; and
- the financial statements have been properly prepared in accordance with the Companies Acts 1963 to 2013 and, as regards the Group financial statements, Article 4 of the IAS Regulation.
2 Our assessment of risks of material misstatement
The risks of material misstatement detailed in this section of this report are those risks that we have deemed, in our professional judgement, to have had the greatest effect on: the overall audit strategy; the allocation of resources in our audit; and directing the efforts of the engagement team. Our audit procedures relating to these risks were designed in the context of our audit of the financial statements as a whole. Our opinion on the financial statements is not modified with respect to any of these risks, and we do not express an opinion on these individual risks.
In arriving at our audit opinion above on the Group financial statements, the risks of material misstatement that had the greatest effect on our Group audit were as follows:
Assessment of intangibles and goodwill for impairment - (€721.9 million)
Refer to page 57 (Directors’ Statement of Corporate Governance), pages 102 to 103 (accounting policy) and Note 13 to the financial statements.
There is a risk that the carrying value of the Group’s intangible assets and goodwill balance may not be recovered from future cash flows. As detailed in the accounting policy note on this page, an impairment review of intangible assets and goodwill is performed annually by the Group. There is inherent uncertainty involved in preparing forecasts and discounted future cash flow reports for this purpose and significant judgement is involved in relation to the assumptions used in the Group’s goodwill impairment model.
In this area, our audit procedures included, amongst others, interrogating the Group’s impairment model, evaluating the assumptions and methodologies used by the Group, in particular those relating to revenue growth, operating profit and the discount rate and terminal growth rate applied to the forecasted cash flows in the model. We compared the Group’s assumptions with externally derived data as well as our own assessment in relation to key inputs into the model. We challenged the sensitivity analysis performed by management and performed our own sensitivity analysis in relation to the key assumptions. We considered the difference between the market capitalisation of the Group and the book value of the Group’s net assets which indicated that the market capitalisation exceeded the book value by €855m at 28 February 2014.
Carrying value of Property, Plant and Equipment (‘PP&E’) - (€218.9 million)
Refer to page 57 (Directors Statement of Corporate Governance), pages 103 to 104 (accounting policy) and note 12 to the financial statements.
The Group carries its land and buildings in Ireland, the US and Portugal, and its plant and machinery in Portugal on its balance sheet at market value. The Group carries its land and buildings in the UK and its plant and machinery in Ireland, the UK and the US on its balance sheet at Depreciated Replacement Cost (DRC). As such, both valuation methods require an annual valuation. Such valuations were determined internally in the current year. Significant judgement is exercised in determining the appropriate assumptions underlying the valuation, including amongst others, market based assumptions, plant replacement costs and plant utilisation levels. There is inherent uncertainty involved in preparing valuations where there is a lack of liquidity in the market for similar assets in similar locations, and a risk for both land and buildings and plant and machinery, that assumptions applied in valuation techniques cannot be benchmarked to external data.
In relation to the Group’s land and buildings in Ireland, the US and Portugal, and its plant and machinery in Portugal, our audit procedures involved an inspection of the valuations performed in order to assess the key assumptions underpinning the valuations. We challenged the assumptions underlying the valuations prepared by management and considered whether the assumptions were consistent with external market information, where available.
In relation to the Group’s land and buildings in the UK, and its plant and machinery in Ireland, the UK and the US, our audit procedures involved an inspection of the valuations performed by the Group, in order to assess the integrity of the data and key assumptions underpinning the valuations.
We challenged the underlying valuation assumptions in the model prepared by management.
We benchmarked the key assumptions to externally derived current data where possible, and to the valuations prepared by independent external valuers at 28 February 2012, and performed procedures to assess key inputs into the model.
Retirement Benefit Obligations – (Deficit €22.8 million; surplus €1.4 million)
Refer to page 57 (Directors Statement of Corporate Governance), page 105 (accounting policy) and note 22 to the financial statements.
The Group operates a number of defined benefit pension schemes in Ireland and the UK. The deficit/surplus on the Group’s Balance Sheet is sensitive to changes in actuarial assumptions and modest changes to the assumptions used to value the Group’s defined benefit obligations would have a significant effect on the financial statements of the Group.
Our audit procedures included using a KPMG actuarial specialist to assist us in evaluating the assumptions and methodologies used by the Group’s actuarial advisors, in particular those relating to the discount rate, inflation and mortality assumptions. We compared the Group’s assumptions to externally derived data, as well as our own assessments in relation to these and other key inputs in assessing whether the assumptions used by the Group are reasonable. We directly confirmed the assets in the Group’s defined benefit pension schemes with the relevant investment managers. We also assessed whether the disclosures in note 22 are consistent with the requirements of IAS 19, Employee Benefits.
Accounting for the acquisition of the M. & J. Gleeson Group – (€12.4 million)
Refer to page 57 (Directors Statement of Corporate Governance), page 102 (accounting policy) and note 11 to the financial statements.
The Group acquired M & J Gleeson Group during the year for a consideration of €12.4 million. As part of a business combination, the Group is required to determine the fair values of all acquired assets and liabilities and to identify and value intangible assets, including goodwill. Significant judgement is exercised in the identification and valuation of acquired intangible assets and also in determining the adjustments to the values of acquired assets and liabilities. The Group engaged the services of external independent valuation specialists to assist in determining the fair value of the property assets and the identification and valuation of intangible assets acquired.
Our audit procedures involved amongst others, a critical assessment of the external property valuations including comparisons to available market information. We considered the process applied to identify intangible assets and performed procedures to assess the reasonableness of the assumptions applied in valuing such assets. Other procedures focused on assessment of the reasonableness of fair value adjustments applied to the other assets and liabilities acquired in this business combination.
3 Our application of materiality and an overview of the scope of our audit
Materiality is a term used to describe the acceptable level of precision in financial statements. Auditing standards describe a misstatement or an omission as “material” if it could reasonably be expected to influence the econom ic decisions of users taken on the basis of the financial statements. We identify a monetary amount, “materiality for the financial statements as a whole”, based on this criteria and apply the concept of materiality in planning and performing the audit, and in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements and in forming our opinion on them.
The materiality for the Group financial statements as a whole was set at €5.8 million. This has been calculated using a benchmark of 5% of Group profit before taxation excluding exceptional items, which we have determined, in our professional judgement, to be one of the principal benchmarks within the financial statements relevant to members of the Company in assessing financial performance. We believe that materiality for the financial statements as a whole is more appropriately determined based on profit before tax excluding exceptional items which, based on the Group’s exceptional items accounting policy set out on this page, reflects a measure of profit before tax excluding items of income and expenditure which, by virtue of their scale and nature, are separately highlighted by the Group in its financial reporting.
We agreed with the Audit Committee to report to it all corrected and uncorrected misstatements we identified through our audit in excess of €290,000, in addition to other audit misstatements below that threshold that we believe warranted reporting on qualitative grounds.
The structure of the Group’s finance function is such that certain transactions and balances are accounted for by the Group finance team, with the remainder accounted for in the operating units. We performed audit procedures, including those in relation to the significant risks set out above, on those transactions and balances accounted for at operating unit and Group level. In relation to the operating units, audits for Group reporting purposes were performed at each of the key operating units of the Group. These audits covered 100% of Group revenue, 100% of Group profit before tax and 99% of Group assets.
The audits undertaken for Group reporting purposes at the key operating units of the Group were all performed to local materiality levels set by, or agreed with, the Group audit team. These local materiality levels were set individually and ranged from €0.9 million to €4.9 million.
Detailed audit instructions were sent to all the auditors in all of the identified locations. These instructions covered the significant audit areas that should be covered by these audits (which included the relevant risks of material misstatement detailed above) and set out the information required to be reported to the Group audit team. Members of the Group audit engagement team including the Group Engagement Partner attended the closing meetings for each of the significant operating components, at which the results of the business unit audit were discussed with local and Group management. Members of the Group audit engagement team and the Group Engagement Partner attended the closing meeting at which the results of all operating units were discussed with Group’s Chief Executive Officer, Chief Financial Officer and senior members of the Group finance team.
One subsidiary was not in scope for Group reporting purposes. A statutory audit is performed at this subsidiary and is completed after the date of this report. For this subsidiary, we performed other procedures to confirm there were no significant risks of material misstatements to the Group financial statements.
4 We have nothing to report in respect of matters on which we are required to report by exception
ISAs (UK and Ireland) require that we report to you if, based on the knowledge we acquired during our audit, we have identified information in the Annual Report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading.
In particular, we are required to report to you if:
- we have identified any inconsistencies between the knowledge we acquired during our audit and the directors’ statement that they consider the Annual Report is fair, balanced and understandable and provides information necessary for shareholders to assess the entity’s performance, business model and strategy; or
- the Audit Committee Report within the Directors’ Statement of Corporate Governance does not appropriately disclose those matters that we communicated to the Audit Committee.
The Listing Rules of the Irish Stock Exchange and the UK Listing Authority require us to review:
- the directors’ statement, set out on this page, in relation to going concern;
- the part of the Directors’ Statement of Corporate Governance on this page relating to the Company’s compliance with the nine provisions of the UK Corporate Governance Code and the two provisions of the Irish Corporate Governance Annex specified for our review; and
- certain elements of disclosures in the report to shareholders by the Board of Directors’ remuneration.
In addition, the Companies Acts require us to report to you if, in our opinion, the disclosures of Directors’ remuneration and transactions specified by law are not made.
5 Our conclusions on other matters on which we are required to report by the Companies Acts 1963 to 2013 are set out below
We have obtained all the information and explanations which we consider necessary for the purposes of our audit.
The parent Company balance sheet is in agreement with the books of account and, in our opinion, proper books of account have been kept by the Company.
In our opinion the information given in the Directors’ Report is consistent with the financial statements and the description in the Directors’ Statement on Corporate Governance of the main features of the internal control and risk management systems in relation to the process for preparing the Group financial statements is consistent with the Group financial statements.
The net assets of the Company, as stated in the Company balance sheet, are more than half of the amount of its called-up share capital and, in our opinion, on that basis there did not exist at 28 February 2014 a financial situation which, under Section 40 (1) of the Companies (Amendment) Act, 1983, would require the convening of an extraordinary general meeting of the Company.
Basis of our report, responsibilities and restrictions on use
As explained more fully in the Statement of Directors’ Responsibilities set out on this page, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Group and parent Company financial statements in accordance with applicable law and International Standards on Auditing (ISAs) (UK and Ireland). Those standards require us to comply with the Financial Reporting Council’s Ethical Standards for Auditors.
An audit undertaken in accordance with ISAs (UK and Ireland) involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements.
In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Whilst an audit conducted in accordance with ISAs (UK and Ireland) is designed to provide reasonable assurance of identifying material misstatements or omissions it is not guaranteed to do so. Rather the auditor plans the audit to determine the extent of testing needed to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements does not exceed materiality for the financial statements as a whole. This testing requires us to conduct significant audit work on a broad range of assets, liabilities, income and expense as well as devoting significant time of the most experienced members of the audit team, in particular the engagement partner responsible for the audit, to subjective areas of the accounting and reporting.
Our report is made solely to the Company’s members, as a body, in accordance with section 193 of the Companies Act 1990. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
for and on behalf of
20 May 2014
Chartered Accountants, Statutory Audit Firm
1 Stokes Place
St. Stephen’s Green