REG - Melrose Industries - Notification of transfer to a Premium Listing <Origin Href="QuoteRef">MRON.L</Origin> - Part 5
24/03/2017 14:35
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At end of year 556.0 360.7
(1) Transferred to liabilities held for sale at 30 June 2015 in accordance with IFRS 5, subsequently disposed on 29
December 2015.
The defined benefit plan liabilities were 2% (31 December 2015: nil%) in respect of active plan participants, 53% (31
December 2015: 53%) in respect of deferred plan participants and 45% (31 December 2015: 47%) in respect of pensioners.
The weighted average duration of the defined benefit plan liabilities at 31 December 2016 was 14.4 years (31 December 2015:
15.0 years).
Movements in the fair value of plan assets during the year:
Year ended 31 December2016 Year ended 31 December2015
£m £m
At beginning of year 343.5 1,125.2
Acquisition of businesses 94.1 -
Interest income on plan assets 14.5 25.7
Return on plan assets, excluding interest income 55.9 (24.4)
Contributions 10.0 15.4
Benefits paid out of plan assets (26.6) (56.1)
Plan administrative costs (1.9) (2.2)
Currency translation differences 33.1 8.5
Transfer to held for sale(1) - (748.6)
At end of year 522.6 343.5
(1) Transferred to liabilities held for sale at 30 June 2015 in accordance with IFRS 5, subsequently disposed on 29
December 2015.
The actual return on plan assets was a gain of £70.4 million (2015: £1.3 million).
23. Retirement benefit obligations (continued)
Income Statement disclosures
Amounts recognised in the Income Statement in respect of these defined benefit plans were as follows:
Year ended 31 December2016 Year ended 31 December2015
£m £m
Continuing operations
Included within underlyingoperating profit:
- current service cost 0.1 -
- past service cost - (2.2)
- plan administrative costs 1.9 1.3
Included within net finance costs:
- interest cost on defined benefit obligations 15.4 14.5
- interest income on plan assets (14.5) (12.9)
Discontinued operations
Included within operating profit:
- current service cost - 2.2
- past service cost - (0.1)
- plan administrative expenses - 2.7
- terminations - (2.6)
Included within net finance costs:
- interest cost on defined benefit obligations - 30.0
- interest income on plan assets - (26.3)
Statement of Comprehensive Income disclosures
Amounts recognised in the Statement of Comprehensive Income in respect of these defined benefit plans were as follows:
Year ended31 December2016 Year ended 31 December2015
£m £m
Return on plan assets, excluding amounts included in net interest expense 55.9 (38.2)
Actuarial gains arising from changes in demographic assumptions 6.1 31.9
Actuarial (losses)/gains arising from changes in financial assumptions (42.1) 48.7
Actuarial gains arising from experience adjustments 2.8 15.1
Net remeasurement gain on retirement benefit obligations 22.7 57.5
Risks and sensitivities
The defined benefit plans expose the Group to actuarial risks, such as longevity risk, currency risk, salary risk, interest
rate risk and market (investment) risk. The Group is not exposed to any unusual, entity specific or plan specific risks.
A sensitivity analysis on the principal assumptions used to measure the plan liabilities at the year end was as follows:
Change in assumption Decrease/(increase) to plan liabilities£m Increase/(decrease) to profit before tax£m
Discount rate Increase by 0.10% 7.7 0.2
Decrease by 0.10% (8.0) (0.2)
Inflation assumption(1) Increase by 0.10% (4.5) n/a
Decrease by 0.10% 1.8 n/a
Assumed life expectancy at age 65 (rate of mortality) Increase by 1 year (19.4) n/a
Decrease by 1 year 18.5 n/a
(1) The inflation sensitivity encompasses the impact on pension increases, where applicable.
The sensitivity analysis above was determined based on reasonable possible changes to the respective assumptions, while
holding all other assumptions constant. There has been no change in the methods and assumptions used in preparing the
sensitivity analysis from prior years.
23. Retirement benefit obligations (continued)
The sensitivities were based on the relevant assumptions and membership profile as at 31 December 2016 and were applied to
the obligations at the end of the reporting period. Whilst the analysis does not take account of the full distribution of
cash flows expected, it does provide an approximation to the sensitivity of the assumptions shown. Extrapolation of these
results beyond the sensitivity figures shown may not be appropriate and the sensitivity analysis presented may not be
representative of the actual change in the defined benefit obligation as it is unlikely that the change in assumptions
would occur in isolation of one another as some of the assumptions may be correlated.
24. Financial instruments and risk management
The table below sets out the Group's accounting classification of each category of financial assets and liabilities and
their fair values at 31 December 2016 and 31 December 2015:
Nortek£m Energy£m Central£m Total£m
31 December 2016
Financial assets
Cash and cash equivalents - - 42.1 42.1
Net trade receivables 259.7 70.2 0.2 330.1
Derivative financial assets 1.0 0.9 7.1 9.0
Financial liabilities
Interest-bearing loans and borrowings (3.3) - (580.3) (583.6)
Derivative financial liabilities (1.5) (1.7) (1.0) (4.2)
Other financial liabilities (357.6) (55.4) (19.7) (432.7)
31 December 2015
Financial assets
Cash and cash equivalents - - 2,451.4 2,451.4
Net trade receivables - 56.5 0.8 57.3
Derivative financial assets - 1.0 0.2 1.2
Financial liabilities
Derivative financial liabilities - (1.3) (0.2) (1.5)
Other financial liabilities - (60.8) (9.5) (70.3)
Credit risk
The Group considers its maximum exposure to credit risk was as follows:
Nortek£m Energy£m Central£m Total£m
31 December 2016
Financial assets
Cash and cash equivalents - - 42.1 42.1
Net trade receivables 259.7 70.2 0.2 330.1
Derivative financial assets 1.0 0.9 7.1 9.0
31 December 2015
Financial assets
Cash and cash equivalents - - 2,451.4 2,451.4
Net trade receivables - 56.5 0.8 57.3
Derivative financial assets - 1.0 0.2 1.2
The Group's principal financial assets were cash and cash equivalents, trade receivables and derivative financial assets
which represented the Group's maximum exposure to credit risk in relation to financial assets.
The Group's credit risk on cash and cash equivalents and derivative financial assets was limited because the counterparties
were banks with strong credit ratings assigned by international credit rating agencies. The Group's credit risk was
primarily attributable to its trade receivables. The amounts presented in the Consolidated Balance Sheet were net of
allowances for doubtful receivables, estimated by the Group's management based on prior experience and their assessment of
the current economic environment. Note 16 provides further details regarding the recovery of trade receivables.
Capital risk
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern.
The capital structure of the Group as at 31 December 2016 consists of net debt, which includes the borrowings disclosed in
note 19, after deducting cash and cash equivalents and equity attributable to equity holders of the parent, comprising
Issued share capital, Reserves and Retained earnings as disclosed in the Consolidated Statement of Changes in Equity.
Liquidity risk
The Group's policy for managing liquidity rate risk is set out in the Finance Director's review.
24. Financial instruments and risk management (continued)
Fair values
The Directors consider that the financial assets and liabilities have fair values not materially different to the carrying
values.
Foreign exchange contracts
As at 31 December 2016, the Group held foreign exchange forward contracts to mitigate expected exchange rate fluctuations
on cash flows on sales to customers and purchases from suppliers. These instruments operate as cash flow hedges unless the
amounts involved are small. The terms of the material currency pairs with total principals in excess of Sterling £1.0
million equivalent were as follows:
31 December 31 December 31 December 31 December
2016 2016 2015 2015
Selling currency Average hedged Selling currency Average hedged
millions rate millions rate
Sell Australian Dollar/Buy Sterling AUD 6.1 GBP/AUD 1.74 - -
Sell Canadian Dollar/Buy US Dollar CAD 19.7 USD/CAD 1.32 - -
Sell Chinese Renminbi/Buy Euro - - CNY 33.5 EUR/CNY 7.11
Sell Czech Koruna/Buy Sterling - - CZK 139.2 GBP/CZK 37.65
Sell Euro/Buy Czech Koruna EUR 31.3 EUR/CZK 26.89 EUR 20.7 EUR/CZK 27.08
Sell Euro/Buy Sterling EUR 14.4 GBP/EUR 1.17 EUR 8.8 GBP/EUR 1.38
Sell Euro/Buy Polish Zloty EUR 1.2 EUR/PLN 4.33 - -
Sell Euro/Buy US Dollar EUR 12.6 EUR/USD 1.13 - -
Sell Sterling/Buy Czech Koruna GBP 3.8 GBP/CZK 31.95 GBP 14.6 GBP/CZK 37.13
Sell Sterling/Buy Euro GBP 15.3 GBP/EUR 1.16 GBP 13.9 GBP/EUR 1.38
Sell Sterling/Buy US Dollar GBP 5.0 GBP/USD 1.26 - -
Sell US Dollar/Buy Canadian Dollar USD 22.6 USD/CAD 1.32
Sell US Dollar/Buy Chinese Renminbi USD 142.3 USD/CNY 7.10
Sell US Dollar/Buy Euro USD 2.7 EUR/USD 1.12 - -
Sell US Dollar/Buy Czech Koruna - - USD 4.1 USD/CZK 25.08
Sell US Dollar/Buy Mexican Peso USD 14.7 USD/MXN 19.69 - -
Sell US Dollar/Buy Polish Zloty USD 1.7 USD/PLN 3.87
Sell US Dollar/Buy Sterling USD 15.0 GBP/USD 1.34 USD 25.9 GBP/USD 1.54
The foreign exchange contracts all mature between January 2017 and December 2017.
The fair value of the contracts at 31 December 2016 was a net liability of £2.3 million (31 December 2015: £0.3 million).
Hedge of net investments in foreign entities
Included in interest bearing loans at 31 December 2016 were the following amounts which were designated as hedges of net
investments in the Group's subsidiaries in the USA and were being used to reduce the exposure to the foreign exchange
risks.
Borrowings in local currency designated as hedges of net investments:
31 December 2016£m 31 December2015£m
US Dollar 590.5 -
-
Interest rate sensitivity analysis
Assuming the net debt (31 December 2015: cash) held as at the Balance Sheet date was outstanding for the whole year, a one
percentage point rise in market interest rates for all currencies would increase/(decrease) profit before tax by the
following amounts:
Year ended 31 December 2016£m Year ended 31 December 2015£m
Sterling (0.1) 24.5
US Dollar (1.4) -
(1.5) 24.5
The interest rate sensitivity of Sterling at 31 December 2015 included the impact of the Group holding the cash proceeds
from the disposal of the Elster businesses. Adjusting for the Return of Capital which took place in February 2016, the
sensitivity for Sterling would have been £0.6 million.
24. Financial instruments and risk management (continued)
Interest rate risk management
The Group's policy for managing interest rate risk is set out in the Finance Director's review.
In October 2016 the Group entered into new interest rate swap arrangements. The profile of the interest rate swaps have
been designed to hedge on average 70% of the interest exposure on the projected gross debt as it reduces over the 5 year
term. Under the terms of these swap arrangements, the Group will pay 1.0% up to 30 June 2018, 1.1% up to 30 June 2019, and
1.2% until the remaining swaps terminate on 6 July 2021. The interest on the swaps is payable annually in arrears on 1
July. The bank margin is payable monthly.
The interest swaps are designated as cash flow hedges and were highly effective throughout 2016. The fair value of the
contracts at 31 December 2016 was a net asset of £7.1 million (31 December 2015: £nil).
Foreign currency risk
The Group's policy for managing foreign currency risk is set out in the Finance Director's review on pages 35 to 36.
Foreign currency sensitivity analysis
Currency risks are defined by IFRS 7: "Financial instruments: Disclosures" as the risk that the fair value or future cash
flows of a financial asset or liability will fluctuate because of changes in foreign exchange rates.
The following table details the transactional impact of hypothetical changes in foreign exchange rates on financial assets
and liabilities at the Balance Sheet date, illustrating the increase/(decrease) in Group operating profit caused by a 10
per cent strengthening of the US Dollar, Euro and Chinese Renminbi against Sterling compared to the year end spot rate. The
analysis assumes that all other variables, in particular other foreign currency exchange rates, remain constant. The Group
operates in a range of different currencies, and those with a notable impact are noted here:
Year ended31 December 2016£m Year ended31 December 2015£m
US Dollar (7.4) 0.1
Euro 0.6 0.4
Chinese Renminbi (1.3) -
(1.3)
-
The relatively high sensitivity on the US Dollar is due to a currency swap for £55.0 million, that was put in place ahead
of the year end, to swap excess Sterling cash in order to temporarily reduce the US Dollar debt. Adjusting for the currency
swap, the sensitivity on the US Dollar at 31 December 2016 would be a loss of £1.3 million.
The following table details the impact of hypothetical changes in foreign exchange rates on financial assets and
liabilities at the Balance Sheet date, illustrating the increase/(decrease) in Group equity caused by a 10 per cent
strengthening of the US Dollar, Euro and Chinese Renminbi against Sterling. The analysis assumes that all other variables,
in particular other foreign currency exchange rates, remain constant.
31 December 2016£m 31 December 2015£m
US Dollar 12.1 (0.5)
Euro (1.6) (0.2)
Chinese Renminbi 8.8 -
8.8
-
In addition, the change in equity due to a 10 per cent strengthening of the US Dollar against Sterling for the translation
of net investment hedging instruments would be a decrease of £65.6 million (31 December 2015: £nil). However, there would
be no overall effect on equity because there would be an offset in the currency translation of the foreign operation.
24. Financial instruments and risk management (continued)
Fair value measurements recognised in the Balance Sheet
Foreign currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted
interest rates matching the maturities of the contracts.
Interest rate swap contracts are measured using yield curves derived from quoted interest rates.
The following table sets out the Group's assets and liabilities that are measured and recognised at fair value:
Recurring fair value measurements 31 December 2016Current£m 31 December2016Non-current£m 31 December 2016Total£m 31 December 2015Current£m 31 December2015Non-current£m 31 December 2015Total£m
Derivative financial assets
Foreign currency forward contracts 1.9 - 1.9 1.2 - 1.2
Interest rate swaps 1.9 5.2 7.1 - - -
Total recurring financial assets 3.8 5.2 9.0 1.2 - 1.2
Derivative financial liabilities
Foreign currency forward contracts (4.2) - (4.2) (1.5) - (1.5)
Interest rate swaps - - - - - -
Total recurring financial liabilities (4.2) - (4.2) (1.5) - (1.5)
The fair value of these financial instruments are derived from inputs other than quoted prices that are observable for the
asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) and they are therefore
categorised within Level 2 of the fair value hierarchy set out in IFRS 13: "Fair value measurement". The Group's policy is
to recognise transfers into and out of the different fair value hierarchy levels at the date the event or change in
circumstances that caused the transfer to occur. There have been no transfers between levels in the year.
25. Issued capital and reserves
Share Capital 31 December 2016 31 December2015£m
£m
Allotted, called-up and fully paid
1,886,746,589 (31 December 2015: 995,206,966) Ordinary Shares of 48/7p each (31 December 2015: 1p each) 129.4 10.0
129.4 10.0
The rights of each class of share are described in the Directors' Report.
On 27 January 2016 the Court approved a proposal to return £2,388.5 million to shareholders.
In conjunction with this Return of Capital, on 28 January 2016 the number of Ordinary Shares in issue was consolidated in a
ratio of 7 for 48 in order to maintain comparability of the Company's share price before and after the Return of Capital.
On 28 January 2016 the number of Ordinary Shares in issue became 145,134,353 each with a nominal value of 48/7 pence.
On 24 August 2016 a 12 for 1, fully underwritten, Rights Issue was completed by Melrose Industries PLC and 1,741,612,236
Ordinary Shares were issued raising £1,654.5 million to part fund the acquisition of Nortek. This resulted in an increase
to nominal Share Capital of £119.4 million and an increase to the share premium account, after deducting associated costs
of £42.5 million, of £1,492.6 million.
25. Issued capital and reserves (continued)
Translation reserve
The Translation reserve contains exchange differences on the translation of subsidiaries with a functional currency other
than Sterling and exchange gains or losses on the translation of liabilities that hedge the Company's net investment in
foreign subsidiaries.
Hedging reserve
The Hedging reserve represents the cumulative fair value gains and losses on derivative financial instruments for which
cash flow hedge accounting has been applied.
Merger reserve and Other reserves
The Merger reserve represents the excess of fair value over nominal value of shares issued in consideration for the
acquisition of subsidiaries. Other reserves comprise accumulated adjustments in respect of Group reconstructions.
26. Cash flow statement
Year ended 31 December 2016£m Year ended 31 December2015£m
Reconciliation of underlying operating profit to cash generated by continuing operations
Underlying operating profit from continuing operations 104.1 24.8
Adjustments for:
Depreciation of property, plant and equipment 15.9 7.6
Amortisation of computer software and development costs 2.2 0.5
Restructuring costs paid and movements in provisions (37.6) (32.8)
Defined benefit pension contributions paid (10.5) (5.1)
Decrease/(increase) in inventories 15.0 (9.9)
Decrease in receivables 22.5 10.8
Decrease in payables (9.3) (12.3)
Acquisition costs (41.3) -
Tax paid (5.9) (2.8)
Interest paid (4.5) (38.6)
Net cash from/(used in) operating activities from continuing operations 50.6 (57.8)
Cash flow from discontinued operations Year ended 31 December 2016£m Year ended 31 December2015£m
Cash generated from discontinued operations - 172.9
Defined benefit pension contributions paid - (30.1)
Tax paid - (51.2)
Interest paid - (1.6)
Acquisition costs - (0.8)
Net cash from operating activities from discontinued operations - 89.2
Purchase of property, plant and equipment - (26.0)
Proceeds from disposal of property, plant and equipment - 1.7
Purchase of computer software and development costs - (15.5)
Purchase of non-controlling interests - (1.5)
Dividends received from joint ventures - 2.2
Dividends paid to non-controlling interests - (0.4)
Interest received - 0.8
Net cash used in investing activities from discontinued operations - (38.7)
Net cash used in financing activities from discontinued operations - -
26. Cash flow statement (continued)
Net debt reconciliation
31 December 2015 Cash flow Acquisitions Other non-cash movements Foreign exchange difference 31 December 2016
£m £m £m £m £m £m
Cash 2,451.4 (1,250.8) (1,161.9) - 3.4 42.1
External debt - 535.0 (1,064.3) 5.4 (58.1) (582.0)
Finance leases - - (1.6) - - (1.6)
Net cash/(debt) 2,451.4 (715.8) (2,227.8) 5.4 (54.7) (541.5)
27. Commitments and contingencies
Future total minimum rentals payable under non-cancellable operating leases were as follows:
31 December 31 December 2015£m
2016£m
Amounts payable:
Within one year 21.9 2.2
After one year but within five years 55.1 1.1
Over five years 24.0 -
101.0 3.3
The Group leases properties, plant, machinery and vehicles for operational purposes. Property leases vary in length. Plant,
machinery and vehicle leases typically run for periods of up to five years. The increase in minimum rentals payable under
non-cancellable operating leases during the year was primarily as a result of the acquisition of Nortek.
Capital commitments
At 31 December 2016, there were commitments of £2.4 million (31 December 2015: £0.8 million) relating to the acquisition of
new plant and machinery.
28. Related parties
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and
are not disclosed in this note.
The Group did not enter into any significant transactions in the ordinary course of business with joint ventures during the
current or prior year.
Sales to and purchases from Group companies are priced on an arm's length basis and generally are settled on 30 day terms.
Remuneration of key management personnel
The remuneration of the Directors, who are the key management personnel of the Group, is set out below in aggregate for
each of the categories specified in IAS 24: "Related party disclosures". Further information about the remuneration of
individual Directors is provided in the audited part of the Directors' Remuneration Report on page 78.
Year ended31 December 2016£m Year ended31 December 2015£m
Short-term employee benefits 3.2 3.0
Share-based payments 2.7 2.7
5.9 5.7
29. Post Balance Sheet events
There are no post balance sheet events which require disclosure.
30. Contingent liabilities
As described in note 12, certain contingent legal and warranty liabilities were identified as part of the fair value review
of the acquisition Balance Sheet. Whilst it is difficult to reasonably estimate the timing and ultimate outcome of these
claims, the Directors' best estimate has been included in the Balance Sheet where they existed at the time of acquisition
and hence were recognised in accordance with IFRS 3: "Business combinations". Where a provision has been recognised,
information regarding the different categories of such liabilities and the amount and timing of outflows is included within
note 20.
Given the nature of the Group's business many of the Group's products have a large installed base, and any recalls or
reworks related to such products could be particularly costly. The costs of product recalls or reworks are not always
covered by insurance. Recalls or reworks may have a material adverse effect on the Group's financial condition, results of
operations and cash flows.
The Group has contingent liabilities representing guarantees and contract bonds given in the ordinary course of business on
behalf of trading subsidiaries. No losses are anticipated to arise on these contingent liabilities. The Group does not have
any other significant contingent liabilities.
Independent auditor's report to the members of Melrose Industries PLC
Opinion on financial statements of Melrose Industries PLC
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 2016 and of the Group's loss 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 United Kingdom Generally Accepted
Accounting Practice, including FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland"; 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. The financial statements comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated and the Company Balance Sheets, the Consolidated
Statement of Cash Flows, the Consolidated and Company Statements of Changes in Equity, the related notes 1 to 30 to the consolidated financial statements and the related notes 1 to 8 to the Company financial statements. 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
applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland".
Summary of our audit approach
Key risks The key risks that we identified in the current year were:· Acquisition accounting; focused on the valuation of intangible assets and fair value of provisions· Carrying value of goodwill and other non-current assets· Classification of non-underlying items
Materiality The materiality that we used in the current year was £11 million which has taken into consideration revenue, underlying profit before tax and net assets of the enlarged Group following the acquisition of the Nortek business during the year.
Scoping Full scope audit work was completed on 12 components and the head office function, and specified audit procedures over certain balances were performed on 5 components. In total our scope represented 82% of Group revenue, 86% of Group operating profit and 92% of Group net assets.
Significant changes in our approach Following the significant change in the structure of the group as a result of the disposal of the Elster group and the acquisition of the Nortek group, we have revised our audit scoping, materiality basis and consideration of the risks most specific to the group. Particularly, we have considered the risk in relation to the acquisition of Nortek group in the current year.
Going concern and the directors' assessment of the principal risks that would threaten the solvency or liquidity of the Group
We are required to state whether we have anything material to add or draw attention to in relation to:· the Directors' confirmation on page 39 that they have carried out a robust assessment of the principal risks facing the Group, including those that We confirm that we have nothing material to add or draw attention to in respect of these matters. We agreed with the directors' adoption of the going concern basis of accounting and we did not identify any such material uncertainties. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group's ability to continue as a going concern.
would threaten its business model, future performance, solvency or liquidity;· the disclosures on pages 40-45 that describe those risks and explain how they are being managed or mitigated;· the Directors' statement in note 2 to the financial
statements about whether they consider it appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the Group's ability to continue to do so over a period of at least twelve
months from the date of approval of the financial statements;· the Directors' explanation on page 37 as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and
their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any
necessary qualifications or assumptions.
Independence
We are required to comply with the Financial Reporting Council's Ethical Standards for Auditors and confirm that we are independent of the Group and we have fulfilled our other ethical responsibilities in accordance with those standards. We confirm that we are independent of the Group and we have fulfilled our other ethical responsibilities in accordance with those standards. We also confirm we have not provided any of the prohibited non-audit services referred to in those standards.
Our assessment of risks of material misstatement
The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team.
Risk description How the scope of our audit responded to the risk Key observations
Acquisition accounting; focused on the valuation of intangible assets and fair value of provisions
The group completed the acquisition of Nortek Inc. on 31 August 2016. The Group applied IFRS 3, Business Combinations, to identify and value the identifiable net assets of the acquired business at this date. The valuation of intangible assets of £868.4 million arising on the acquisition is considered to be a key risk as the valuation is based on a number of assumptions such as discount rate and growth rate which are subject to significant judgement. There is also considered to be a key risk in determining the fair value of acquired provisions and contingent liabilities of £209.7 million due to the judgements required in valuing liabilities of inherently uncertain outcome, such as the outcome of warranty, legal and product liability claims against the acquired group. We have evaluated management's determination of the fair value of the net assets acquired, focussing on the valuation of intangible assets and provisions recognised at Based on our detailed audit work performed, we consider that management's key judgements and assumptions used in the valuations of net assets at the acquisition date fall within an acceptable range.
the acquisition date. We challenged management's methodology and assumptions underlying the valuation of intangible assets by:• consulting with our internal
valuation specialists to assess and recalculate the discount rate and growth rate used based on external market data, and comparing these rates to the rates used by
management and the Group's external valuation expert. • involving our internal valuation specialists to evaluate the valuation methodology used by management and
the Group's external valuation expert.• checking the calculations of the valuations by performing parallel valuations based on the same underlying data. We
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