Opinion on financial statements of Severfield 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 March 2014 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; 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 Group financial statements comprise the consolidated income statement, the consolidated statement of changes in equity, the consolidated balance sheet, the consolidated statement of comprehensive income, the consolidated cash flow statement and the related notes to the consolidated 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 parent company financial statements comprise the parent company balance sheet and the related notes to the company financial statements. 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).
As required by the Listing Rules we have reviewed the directors' statement contained within the strategic report that the Group is a going concern.
We confirm that:
- we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate; and
- we have not identified any material uncertainties that may cast significant doubt on the Group's ability to continue as a going concern.
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.
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||How the scope of our audit responded to the risk|
|Contract valuation, revenue and profit recognition in relation to the final outcome of material construction contracts|
The judgements made in relation to the stage of completion of contracts including:
- the recoverability of unagreed variations and claims;
- the estimates of future costs to complete; and
- the outcome of other uncertain future events can have a material impact on the financial statements.
|We have focused our audit procedures on material contracts based on the following principal criteria:|
- the balance sheet carrying value;
- the contribution to profit in the year;
- the stage of completion;
- the value at risk identified by management; and
- our assessment of the degree of judgement involved in the contract accounting.
- reviewed the design and implementation of management's internal controls over contract accounting; and
- performed the following substantive audit procedures:
agreed revenue recognised on contracts to evidence of third party certifications and cash receipts;
challenged management on any revenues recognised which exceed the certified revenue, particularly in relation to unagreed variations and claims, and on their estimates of future costs to complete. This included the inspection of variation instructions, enquiries of quantity surveyors and contract managers, liaison with internal and external legal advisers, review of the detailed forecast cost to complete schedules, including agreeing estimates of future costs and critical assumptions to supporting evidence, such as agreed third party quotes for site work and materials price lists;
performed a retrospective review of previous judgements on contracts to understand the historical forecasting accuracy; and
performed a review of subsequent events on contracts that may have a material impact on the financial statements up to the date of signing this auditor's report.
|Impairment of goodwill and other non-current assets|
The consolidated balance sheet includes:
- goodwill and intangible assets of £63.9m;
- the investment in the Indian joint venture of £3.3m; and
- the fair value of a financial guarantee associated with the Indian joint venture of £2.2m.
Management has made its annual assessment of the impairment risk in relation to these carrying values, which includes a number of important judgements on uncertain future events. The most subjective judgements relate to the forecast financial performance of the cash-generating units ('CGU'), including the growth rates, operating margins and the appropriate discount rates for future cash flows.
- assessed management's assumptions (described in notes 11 and 15 to the financial statements) included in its impairment model for goodwill and intangible assets, and the joint venture. These include the trading and cash flow projections, the growth and perpetuity rates and the discount factors applied;
- compared these to external medium term growth rate projections for the UK and India, the historical trading and cash flow performance of the business units, and the discount rates of relevant comparator companies;
- taken into account the Group's historical budgeting accuracy, including comparing the operating profit margin assumed in the order book with historical performance and reviewing the prospects list and conversion assumptions with the historical performance of the business units.
The audit committee's consideration of these risks is set out in the audit committee report.
Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not to express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any of the risks described above, and we do not express an opinion on these individual matters.
Our application of materiality
We define materiality as the magnitude of misstatement 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.
In recent years the Group has reported both profits and losses, and has made adjustments to highlight non-underlying items included in its statutory results. In the absence of a stable profit base, we have used Group revenue to determine materiality of £1m by applying 0.5 per cent to turnover for the year. We also sense-checked this materiality threshold by reference to the scale of underlying profits and losses in recent years and the directors' expectation of future profits.
We agreed with the audit committee that we would report to the committee all audit differences in excess of £20,000, 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 and parent company audits are performed at the Group's head office at Dalton, North Yorkshire. All of the subsidiaries are based in three locations in the UK, together with a joint venture based in India and an associate based in South Yorkshire.
Full scope audits are completed on all the businesses located in the UK. The joint venture is audited by Deloitte Mumbai and is a full scope audit to a component materiality. The associate business is scoped out of our Group audit procedures on the grounds of materiality. The audits of the UK subsidiaries were executed to a component materiality which is less than Group materiality.
The Group audit team continued to follow a programme of planned visits that has been designed so that the senior statutory auditor attends the principal financial reporting locations in the UK and the Indian joint venture each year including attendance at the audit close meetings.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
- the part of the directors' remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; and
- 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.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under 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 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.
We have nothing to report in respect of these matters.
Under 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 the accounting records and returns. We have nothing to report arising from these matters.
Corporate governance statement
Under the Listing Rules we are also required to review the part of the corporate governance statement relating to the Company's compliance with nine provisions of the UK corporate governance code. We have nothing to report arising from our review.
Our duty to read other information in the annual report
Under 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 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. We confirm that we have not identified any such inconsistencies or misleading statements.
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). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors. 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.
(Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered accountants and statutory auditor,
Newcastle, United Kingdom
11 July 2014