INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF GKN PLC continued
Area of focus Assessment of the accounting position adopted on the opening balance sheet accounting for the Fokker acquisition
Refer to pages 18 to 21 (GKN Aerospace review), pages 40 to 47 (Risk management/Principal risks and uncertainties), pages 70 to 75 (Audit & Risk Committee report), note 1 (Accounting policies and presentation) and note 30 (Business combinations). The Group completed the acquisition of Fokker on 28 October 2015. We focused on this area because the accounting treatment for the provisional opening balance sheet position is inherently judgmental and requires the Directors to exercise many judgements over the valuation of intangible assets, fair value adjustments on identifiable assets, completeness and accuracy of liabilities and the calculation of associated goodwill of £101 million.
How our audit addressed the area of focus
For each of the areas of complexity identified within the provisional opening balance sheet, we validated the fair value adjustments recognised by the Directors to check that they were in line with IFRS 3 ‘Business Combinations’ and in accordance with the sale and purchase agreement. In particular: • For the valuation of non-operating intangible assets we assessed the key business drivers of the cash flow forecasts supporting the intangible valuation, being sales volumes, pricing and margin and validated them to contractually agreed sales volumes and prices, externally produced aircraft delivery forecasts as well as through reference to historical performance levels. We also engaged, and evaluated the work of, our specialists to validate the assumptions underlying the calculation of the fair value of non-operating intangible assets generated by the Directors’ external valuation experts; • We also assessed the inputs used by the Directors to calculate the discount rate and royalty rates applied and assessed them by using our specialists to draw comparison with a selection of comparable organisations. We also benchmarked this against the rates used for previous acquisitions, to ensure that these were comparable; • For the fair value exercise in relation to property, plant and equipment and inventories, we verified the assumptions to external market data or internal corroborative evidence. We attended physical inventory counts at key locations and assessed the degree of completion of work in progress; and • For liabilities recognised, we evaluated the assessment and calculation of material provisions to check that they reflected information that was known in relation to events that existed at the transaction date. We also checked that the Directors had considered a range of potential outcomes. We assessed the completeness of the Directors’ list of liabilities using our knowledge of the business, enquiries of the Directors, examining correspondence with customers, suppliers and legal counsel and reading the sale and purchase agreement. We note that the generated goodwill of £101 million is the residual value of the consideration over and above the fair value of the acquired net assets. We consider that the Directors’ assessment of the fair value of the provisional opening balance sheet of the Fokker acquisition to be supportable.
How we tailored the audit scope