REG - Melrose Industries - Notification of transfer to a Premium Listing <Origin Href="QuoteRef">MRON.L</Origin> - Part 6
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challenged management's methodology and assumptions underlying the valuation of provisions and contingent liabilities acquired by:• challenging the reasonableness
of and verifying inputs used to calculate the valuation of provisions and contingent liabilities;• we assessed the level of historical warranty claims and obtained
the specific warranty terms and conditions provided in order to ascertain whether the warranty provisions held were sufficient to cover all obligations in existence at
the acquisition date, in light of known claims and standard warranty periods provided;• we reviewed the nature and timings of formal restructuring plans, in order
to determine that these relate to pre-acquisition restructurings;• holding discussions with the Group's internal and external lawyers;• reviewing third party
correspondence including legal confirmations• involving our actuarial specialists to review the approach and methodology used to calculate the product liability
provision and the approach for selecting key assumptions.
Carrying value of goodwill and other non-current assets
The carrying value of goodwill in the Energy group of cash-generating units (the Energy group) as at 31 December 2016 was £212.9 million and the carrying value of the Brush China assets as at 31 December 2016 was £34.4 million. Management perform an impairment review for all goodwill balances on an annual basis and for other assets whenever an indication of impairment is identified. We consider there to be a risk of material misstatement in Energy group goodwill and intangibles and Brush China assets as a result of the application of management judgement and estimation in performing the impairment reviews, in particular in relation to the forecasting of future cash flows, the growth rate and the selection of an appropriate discount rate, as detailed within note 12 to the consolidated financial statements. The future market for generators in China is also considered a significant judgement within the assessment of the recoverability of Brush China assets, as detailed within key sources of estimation uncertainty in note 3 to the financial statements and in the Audit Committee Report. We challenged the reasonableness of the assumptions which underpin management's forecasts with reference to the recent and historical trading performance of the Energy Based on our detailed audit work performed, we concur with the key judgements and assumptions in the impairment models and with the disclosures in the financial statements. Based on management's current expectation the assets remain supportable.
group, as well as the current contractual arrangements and external market data. For Brush China, we challenged the reasonableness of the significant judgement relating
to the future market for generators in China by assessing the Group's contractual arrangements in place and under discussions, as well as considering the external future
market indicators for generators in China. We validated the integrity of the impairment models through testing of the mechanical accuracy and verifying the application of
the input assumptions and understood the underlying process used to determine the risk adjusted cash flow projections. Our procedures included consulting with our
valuation specialists to assess the discount rates applied to future cash flows and benchmarking assumptions such as the growth rates and discount rates to external macro
-economic and market data. Having ascertained the extent of change in those assumptions that either individually or collectively would be required for the assets to be
impaired by performing sensitivity analysis on the key assumptions, we considered the likelihood of such a movement in those assumptions arising. We have reviewed the
disclosures in note 12 in relation to the impact of a reasonable possible change, and also the key sources of estimation uncertainty disclosure in note 3 for Brush China.
Based on our detailed audit work performed, we concur with the key judgements and assumptions in the impairment models and
with the disclosures in the financial statements. Based on management's current expectation the assets remain supportable.
Classification of non-underlying items
Management has changed the presentation of the Consolidated Income Statement in the current year to show a consolidated statutory format with no underlying adjustments. A sample of non-underlying items, including all material items, have been agreed to source documentation and evaluated by the component and Group audit teams as to their nature in order to assess whether they are in line with the Group's accounting policy, and also to assess consistency of non-underlying items between periods in the financial statements. We also assessed whether the disclosures within the financial statements provide sufficient detail for the reader to understand the nature of these items and how non-underlying results are reconciled to statutory results. We consider the disclosure of non-underlying items to be in line with the Group's accounting policies and that the presentation of non-underlying items is consistent between the periods presented.
Separately, underlying results are shown underneath the Consolidated Income statement. New guidance has been issued by the European Securities and Markets Authority on
the presentation of alternative performance measures. There is a risk around presentation and consistency of costs and income within non-underlying items, which is a key
determinant in the assessment of the quality of the Group's underlying earnings. The non-underlying operating costs for the year ended 31 December 2016 were £165.7
million for the Group. Note 2 includes the Group's accounting policy for non-underlying items and the note 6 includes further details on the non-underlying items.
Our prior year audit report also included risks relating to the disposal of the Elster group and recognition and measurement of provisions. The disposal was completed in 2015 and is therefore not considered to be a key risk in 2016. We have however assessed the recognition and measurement of provisions and contingent liabilities acquired from the Nortek group, as detailed above. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters.
Our application of materiality
We define materiality as the magnitude of misstatements in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.
We determined materiality for the Group to be £11 million (2015: £11 million), based on professional judgement, the requirement of auditing standards and the financial measures most relevant to users of the financial statements. When determining materiality in the current year, we considered a range of benchmarks due to the impact of the timing of the acquisition of Nortek Inc. The Nortek acquisition has resulted in only four months of Nortek trading being recorded within the Group's financial results for
2016, whilst the assets and liabilities for the acquired business will be recorded on the balance sheet at the year-end, including newly created goodwill and intangible assets. Therefore, in addition to considering revenue (materiality equates to 1% of revenue) and the underlying profit before tax (materiality equates to 11% of underlying profit before tax), we have placed increased emphasis on a net assets benchmark (materiality equates to 0.5% of net assets) in determining our materiality. This approach
differs from previous periods where materiality was based solely on underlying profit before tax. We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £250,000 (2015: £250,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.
An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level. The Group is organised into an Energy division and the three divisions acquired from the Nortek acquisition.Our Group audit scope focused primarily on audit work at 17 components (2015: 22 including Elster), of which 4 relate to components which form part of the legacy Energy division, 6 relate to Air Management, 4
relate to Security and Smart technology, 2 relate to the Ergonomics division and 1 relates to the Nortek head office function. The change in the number of components reflects the disposal of the Elster division, the acquisition of the Nortek group and our risk assessment in the current year.The extent of our testing was based on our assessment of the risks of material misstatement and on the materiality of the Group's business operations at these locations. In total our scope represented 82% of Group
revenue, 86% of Group operating profit and 92% of Group net assets.Energy divisionIn respect of the Energy division, all 4 components were subject to a full audit (2015: 4). These 4 components accounted for 81% of the Energy division's revenue and 79% of the Energy division's underlying operating profit and divisional costs (before central costs). The work performed at these 4 components together with the work performed centrally by the Group audit team accounted for 98% of the Energy division net assets.
Our work at the 4 components forming part of the Energy division was principally performed to levels of materiality applicable to each individual entity which were lower than group materiality and ranged between £0.4 million and £3.3 million.In 2015, these 4 components accounted for 86% of the revenue and 93% of the headline operating profit and divisional costs (before central costs) of the Energy division.Nortek groupFor the newly acquired Nortek group, 8 components were subject to a full audit and 5 were
subject to specified audit procedures on certain balances that represent a risk to the group. The 13 newly acquired components subject to full audit and specified audit procedures accounted for 82% of revenue and 78% of underlying operating profit and divisional costs (before central costs). The work performed at these components together with the work performed centrally by the Group audit team accounted for 92% of the acquired net assets at 31 December 2016. Our work and audit procedures at the newly
acquired Nortek components were performed at levels of materiality which were lower than group materiality, determined by reference to the relative scale of the business concerned, and ranged between £2.8 million and £3.9 million. Involvement in the work of component auditors and work performed at group level The senior statutory auditor or other senior members of the Group audit team visited 8 of the largest components for the audit (2015: 8). The senior statutory auditor also held close meetings which
covered all businesses. In years when we do not visit a component within our Group audit scope; we will include the component audit team in our team briefing, discuss their risk assessment and review documentation of the findings from their work. At the parent entity level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the remaining components
not subject to audit or audit of specified account balances.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:· the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; · the information given in the Strategic Report and the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and· the Strategic Report and the Directors' Report have been prepared in accordance with applicable
legal requirements. In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report and the Directors' Report.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting recordsUnder the Companies Act 2006 we are required to report to you if, in our opinion:· we have not received all the information and explanations we require for our audit; or· adequate accounting We have nothing to report in respect of these matters.
records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or· the Parent Company financial statements are not in agreement with the accounting records and returns.
Directors' remunerationUnder the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors' remuneration have not been made or the part of the Directors' Remuneration Report to be audited is not in agreement with We have nothing to report arising from these matters.
the accounting records and returns.
Other matter Although not required to do so, the directors have voluntarily chosen to make a corporate governance statement detailing the extent of their compliance with the UK Corporate Governance Code. We reviewed the part of the Corporate Governance We have nothing to report arising from our review.
Statement relating to the company's compliance with certain provisions of the UK Corporate Governance Code.
Our duty to read other information in the Annual ReportUnder International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is:· materially inconsistent with the information We confirm that we have not identified any such inconsistencies or misleading statements.
in the audited financial statements; or· apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or· otherwise misleading. In particular, we are required
to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors' statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately
discloses those matters that we communicated to the audit committee which we consider should have been disclosed.
Respective responsibilities of directors and auditor
As explained more fully in the Directors' Responsibilities Statement, 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 financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure
that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team and independent partner reviews. This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. 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.
Scope of the audit of the financial statements
An audit 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 and the Parent Company'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.
Stephen Griggs, FCA (Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London
2 March 2017
This information is provided by RNS
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