We have audited the financial statements (‘the financial statements’) of C&C Group plc for the year ended 28 February 2015, 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. Our audit work was conducted in accordance with International Standards on Auditing (‘ISAs’) (UK and Ireland).
In our opinion:
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:
– Year end balance of €143.5 million after impairment charge of €150 million recorded in the current year (2014: Year end balance of €242.2 million with no impairment charge recorded in the period)
As detailed in the accounting policy note, an impairment review of intangible assets and goodwill is performed annually by the Group. As a consequence of this review management recorded an impairment charge against the North America operating segment of €150 million as at 28 February 2015. We specifically focussed on the carrying value of the intangibles assets and goodwill within this operating segment. There is a risk that the carrying value of the remaining intangible assets and goodwill in the North America operating segment may not be recovered from future cashflows. 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 for the purposes of assessing the impairment charge.
In this area, our audit procedures included, amongst others, reviewing the appropriateness of management’s identification of cash generating units (“CGUs”) within the North America operating segment, the allocation of intangible assets, which are largely brands arising from acquisitions, to these CGUs and the allocation of goodwill to the operating segment, 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 also assessed whether the disclosures in note 12 presented the Group’s assumptions in relation to goodwill impairment and whether sensitivities of the outcome of the impairment assessment appropriately reflected the risks inherent in the valuation of goodwill.
We also performed similar procedures, to those outlined above, to management’s assessment of the carrying value of intangible assets and goodwill allocated to the Group’s other operating segments and the related disclosures.
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 €573 million at 28 February 2015 (2014: €855 million).
The Group carries its land and buildings and plant and machinery at fair value. The freehold land and buildings in Ireland, Portugal and North America and certain assets in Scotland are valued using a market approach. The Group’s remaining land and buildings assets in the UK, and its plant and machinery in Ireland, the UK and the US are valued using the Depreciated Replacement Cost (DRC) method.
During the current year the fair value of the majority of the Group’s PP&E assets were determined by independent external property and plant valuation experts whilst certain assets were subject to internal valuations. 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 when there is a lack of liquidity in the market and benchmark data for similar assets in similar locations given the specialised nature of the Group’s assets.
In relation to the Group’s land and buildings in Ireland and North America, our audit procedures involved an inspection of the valuation reports performed by external property and plant valuation experts in order to assess the key assumptions underpinning the valuations. We also assessed the independence and qualifications of the property valuers. We challenged the assumptions underlying the valuations prepared both internally by management and by the property and plant valuers 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 North America, our audit procedures involved an inspection of the valuation reports performed by the external valuation experts, in order to assess the integrity of the data and key assumptions underpinning the valuations. We also assessed the independence and qualifications of the valuers. We challenged the assumptions underlying the valuations prepared both internally by management and by the valuers and considered whether the assumptions were consistent with external market information, where available.
We also assessed whether the disclosures in note 11 presented the Group’s key assumptions in relation to the valuation of the PP&E assets.
The materiality for the Group financial statements as a whole was set at €5.5 million (2014: €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 here, 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 report to the Audit Committee all corrected and uncorrected misstatements we identified through our audit in excess of €275,000 (2014:€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 100% of Group total assets.
The audits undertaken for Group reporting purposes at the key operating units of the Group were all performed to component materiality levels set by the Group audit team. These component materiality levels were set individually and ranged from €0.5 million to €4.125 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 in person or by telephone 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 the Group’s Chief Financial Officer and senior members of the Group finance team.
One subsidiary was not in scope for Group reporting purposes. For this subsidiary, we performed other procedures to confirm there were no significant risks of material misstatements to the Group financial statements.
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:
The Listing Rules of the Irish Stock Exchange and the UK Listing Authority require us to review:
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.
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 2015 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.
As explained more fully in the Statement of Directors’ Responsibilities, 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.
13 May 2015
for and on behalf of
Chartered Accountants, Statutory Audit Firm
1 Stokes Place
St. Stephen’s Green