Marks and Spencer 2016 Annual Report Download - page 82

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MARKS AND SPENCER GROUP PLC
FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT
CONTINUED
OUR ASSESSMENT OF RISKS OF MATERIAL MISSTATEMENT CONTINUED
2 Impairment of property,
plant and equipment (PP&E)
and intangible assets
RISK DESCRIPTION
As described in the Accounting Policies
in note 1 and in notes 14 and 15 to the
Financial Statements, the Group held
£5,027 million (2015: £5,031 million) of
property, plant and equipment and
£803 million (2015: £858 million) of
intangible assets at 2 April 2016.
There is a risk that the carrying value
of these assets may be higher than the
recoverable amount, particularly in light
of recent trading performance in certain
parts of the Group. Management has
performed an assessment of indicators of
impairment for PP&E and a full impairment
review for goodwill and brand intangibles.
As a result, an impairment charge of £160
million has been recorded.
When a review for impairment is
conducted, the recoverable amount
is determined based on value in use
calculations which rely on the directors’
assumptions and estimates of future
trading performance.
The key assumptions applied by the
directors in the impairment reviews are:
> Country-specifi c discount rates;
> Future revenue growth;
> Trading margin; and
> Store costs, including rent, sta payroll
costs and general operating costs.
The directors consider that each retail
store constitutes its own cash generating
unit (‘CGU’), with the exception of the
outlet stores, which are used to clear old
season general merchandise stock at
a discount, and certain strategic stores.
The outlet stores are considered to
represent one CGU in aggregate and
strategic stores are evaluated as part
of a country-wide impairment review.
The Group’s accounting policy sets out
a relevant shelter period for new stores
to be taken into account when assessing
indicators of impairment during initial
years of trading to enable the store to
establish itself in the market.
HOW THE SCOPE OF OUR AUDIT RESPONDED TO THE RISK
We considered the appropriateness of
the methodology applied by the directors
in calculating the impairment charges, and
the judgements applied in determining
the CGUs of the business. In addition, we
assessed the design and implementation
of controls in respect of the impairment
review process and considered the
adequacy of disclosures made in the
Financial Statements.
We assessed the impairment models
and calculations by:
> Checking the mechanical accuracy
of the impairment models;
> Assessing the discount rates applied
to the impairment reviews for each
country with support from our internal
valuations specialist and comparing the
rates to our internal benchmark data;
> Comparing forecast growth rates
to economic data; and
> Evaluating the information included
in the impairment models through
our knowledge of the business gained
through reviewing trading plans,
strategic initiatives, and meeting
with senior trading managers from
key categories and our retail
industry knowledge.
We assessed the appropriateness of the
shelter period for each store opened within
that time frame, and compared the original
investment case for the store against its
current trading performance. Where stores
were trading signifi cantly below the
original case, we considered the evidence
available to support future improvements
in performance, specifi cally by assessing
the trading plans and actions being taken
on an individual store basis.
Key observations We assessed the
level of impairment recorded in respect
of the international business and are
satisfi ed that the judgements applied
by management are appropriate. We
specifi cally assessed the impairment
calculations of international goodwill and
brand intangibles and concluded that the
level of impairments recorded in the year
are appropriate.
For the UK store assets, we concluded that
the assumptions applied in the impairment
calculations were appropriate, including
the assumptions applied to new store
shelter periods, and no additional
impairments were identifi ed from the
work performed above.
Intangible assets
PP&E
Retirement benefit asset
Other assets
803
5,027
851
334
Non-current asset analysis (£m) Intangibles
Current
year
Impairment
£m
Closing
value £m
Goodwill & Brand –
per una – £88m
Goodwill –Czech £16m –
Goodwill – India – £7m
Goodwill – Hungary £3m –
Goodwill – UK – £6m
Brands – M&S Mode and
other £32m –
Computer software £49m £702m
Total intangibles £100m £803m
PP&E
Land and buildings £30m £2,595m
Fixtures, fi tting &
equipment £28m £2,363m
PP&E under construction £2m £69m
Total PP&E £60m £5,027m