REG - Serco Group PLC - Annual Financial Report <Origin Href="QuoteRef">SRP.L</Origin> - Part 2

SercoAnnouncement

12/03/2015 10:00

- Part 2: For the preceding part double click  ID:nRSL2641Ha 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        experts in determining certain future contract costs.·       We have tested the historical accuracy of forecasting costs to complete.·       For contracts where onerous contract provisions have been recognised, we have assessed whether the provisions were 
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           a change of estimate arising from new circumstances in the year or whether they represented the correction of a prior period error.                                                                                                                             
 Impairment of goodwill and intangible assetsThe group has previously recognised goodwill of £1,270.8m allocated to its various cash generating units (CGUs). In the current year, the group has recognised an impairment of £466.0m of goodwill, including £339.7m in respect of businesses held for sale. Refer to note 20 for further detail on impairments and notes 2 and 3 for the group's accounting policy and critical judgements over impairment of goodwill. The test of impairment of goodwill requires management to estimate the recoverable amounts for the CGUs to which such goodwill is allocated. Estimation of the recoverable amount requires that the group make assumptions in respect of forecast operating cash flows and discount rates. The group has previously recognised £185.7m of intangible assets and recognised £41.7m of impairment and amortisation in the year. Refer to note 21 for further detail. The risk for intangible assets is that there are insufficient future operational cash inflows to allow the recovery of these assets which would then result in impairment.                                                                                                                                                                                                                                                                                                                                                                                                                                      ·       We have considered the results of management's strategy review and its implications on the carrying value of goodwill for related CGUs.·       Where businesses are held for sale, we have tested management's estimate of fair value less estimated    
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           costs to sell in arriving at the impairment of goodwill.·       We challenged management's assumptions within the cash flow forecasts used in the value in use calculations for CGU by reconciling the forecasts to budgets approved by the Board and by        
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           performing tests on historical forecasting accuracy. This has included a review and challenge of discount rates provided by third party experts.·       We have challenged the discount rate applied to the separate CGUs by utilising valuation experts, the   
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           prevailing group cost of capital at the year end and our understanding of the future prospects of the group. ·       We have challenged management's assumptions on the recoverability of intangible assets from future cash flows together with management's   
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           assumptions in the allocation of intangible corporate assets to related CGUs. ·       We have tested the consistency of forecasts used by management for the assessment of potential impairment of goodwill and intangible assets to the forecasts used for     
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           onerous contract provisions, recoverability of deferred tax assets and going concern.                                                                                                                                                                           
 Presentation of exceptional itemsThe group has recorded £661.5m as expenditures in respect of transactions that fall outside of the normal course of trading. Refer to note 3 for the group's critical accounting judgement on identification and note 11 for disclosure of such transactions. In particular, the group undertook a strategy review in the year and have decided to dispose of certain non-core businesses as disclosed in note 41 to the financial statements which has resulted in impairment of the related goodwill and intangible assets of £339.7m. Exceptional items are not defined by IFRSs as adopted by the European Union. The group is required to exercise judgement in respect of what constitutes a one-off transaction that would distort the underlying performance of the business and comparability of the results with previous years. The group has taken into account the Financial Reporting Council's ("FRC") guidance issued in December 2013 in respect of disclosures of such transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   ·       We reviewed the nature of exceptional items, challenged management's judgements in this area and agreed the quantification of the items to supporting documentation. ·       We assessed the other significant gains / losses incurred in the year to   
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           ensure that any other items that are exceptional in nature are appropriately disclosed.·       On the impairment of goodwill and intangible assets, we reviewed and challenged management's forecasts and underlying assumptions in determining the level of