AUDIT & RISK COMMITTEE REPORT continued
We identified the issues below as significant in the context of the 2015 financial statements. We consider these areas to be significant taking into account the level of materiality and the degree of judgement exercised by management. We debated the issues in detail to ensure that the approaches taken were appropriate.
Acquisition accounting for Fokker
The Company acquired Fokker in October 2015. The acquisition accounting was particularly complex as Fokker operates through four divisions. Certain judgements were required to be made on the valuation of intangible assets and contractual matters.
See note 30 to the financial statements
We considered the judgements taken by management to establish the fair value of the acquired assets and liabilities. In particular, we focused on: • the valuation of intangible assets. An independent valuation was conducted by external advisers which involved valuing more than 30 contracts and Fokker’s technology assets and brands. Assumptions included foreign exchange rates, discount rates and the achievement of a certain level of synergies • property, plant, equipment, and certain investments were also valued by independent external advisers • the inclusion of certain provisions and liabilities, principally in relation to an unresolved regulatory matter, ongoing contractual obligations and the requirement to repay government refundable advances. We discussed with PwC the audit work performed by them to assess whether the assets and liabilities were included at fair value. Having considered PwC’s view and the documentation provided by management, we were satisfied that the assumptions used were reasonable and that the provisional assets and liabilities had been established appropriately.
An impairment review is carried out annually by management to identify business units in which the recoverable amount is less than the value of the assets carried in the Group’s accounts. Impairment results in a charge to the Group income statement. Key judgements and assumptions need to be made when valuing the assets of the business units and the amount of potential future cash flows arising from them.
See note 11 to the financial statements
We considered the significant judgements, assumptions and estimates made by management in preparing the impairment review to ensure that they were appropriate. We reviewed assumptions relating to: • the discount rates used to discount the expected future cash flows to their present value. These rates reflected the risk inherent in each unit taking into account factors such as geography and sector • the estimation of long-term growth rates for the regions in which the units were based • the forecast of operating cash flows, based on the most recent budget and strategic reviews and taking into account data such as sales profile and prices, market performance, volume, raw material costs and capital expenditure levels. We also considered sensitivities that would affect the assumptions noted above. We obtained the external auditors’ view in relation to the appropriateness of the approach and the outcome of the review. Taking this into account, together with the explanations given by management, we were satisfied that the approach taken was thorough and the judgements taken were appropriate. The review resulted in the impairment of four units and a charge to the income statement of £71 million.
Clarity and completeness of reporting
GKN Driveline and GKN Aerospace operate in highly competitive markets on a global scale. They compete for long-term contracts on large platforms of a relatively small number of key customers. Contracts, commercial transactions and commercial claims can be complex and can require judgement as to accounting treatment and the estimation of potential liabilities.