Area of focus Assessment of the accounting position adopted on complex contractual obligations
Refer to pages 40 to 47 (Risk management/ Principal risks and uncertainties), pages 70 to 75 (Audit & Risk Committee report), note 1 (Accounting policies and presentation), note 2 (Segmental analysis) and note 21 (Provisions). The Group continues to work closely with its customers and suppliers to resolve contractual and other claims and disputes. These matters are principally in respect of contract variations and recoveries, onerous contracts, warranty, delivery performance and pricing. We focused on this area because the Directors are required to perform an assessment of the expected outcome in line with relevant accounting standards and consider each item individually. The determination of whether to recognise a liability or not, or make disclosure in the financial statements requires the Directors to exercise considerable judgement. In addition, given the wide ranging geographical and market spread of the Group, there is also complexity in the Directors ensuring they have considered all known disputes, claims and potential recoveries.
How our audit addressed the area of focus
We tested, on a sample basis, the valuation and calculation of individual liabilities that made up the total. In particular: For liabilities recognised, we validated that the assessment and calculation of any provision was consistent with the requirements of IAS 37 ‘Provisions, contingent liabilities and contingent assets’ and that all potential outcomes had been considered and appropriately disclosed in the financial statements. We assessed the completeness of the Directors’ knowledge of contract variations and recoveries, onerous contracts, warranty, delivery performance and pricing claims using our knowledge of the business, enquiries of the Directors, examining post year-end correspondence with customers and suppliers and assessing the Directors’ material litigation process. We found no material exceptions from the procedures noted above. We consider the Directors’ recognition of liabilities to be reasonable and within an acceptable range of potentially likely outcomes and consistent with the requirements of IAS 37. This finding is consistent with the results of our work in 2014.
GKN plc Annual Report and Accounts 2015