Carphone Warehouse 2015 Annual Report Download - page 79

Dixons Carphone plc Annual Report and Accounts 2014/15
Financial statements
77
Risk How the scope of our audit responded to the risk
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cquisition accounting
The identification and determination of the fair value of
intangible assets arising from the acquisition of Dixons
Retail plc and the recognition of fair value adjustments
through the associated purchase price allocation
process involves complex accounting considerations.
Management engaged external valuation experts in
relation to this process. £3,002 million of intangible
assets, including brand names of £365 million, customer
relationships of £8 million and goodwill of £2,629 million
have been recognised in the period. The intangible asset
identification and valuation process requires
management judgement in respect of estimates of future
cash flows and associated discount rates in addition to
economic lives.
Fair value adjustments, in particular those arising from
property, plant & equipment, pre-existing intangible
assets and property operating leases, require significant
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udgement in relation to fair value at the date of
acquisition, for which management also engaged
external valuation experts.
Further information in relation to this area is discussed in
notes 1u) and 23 to the Group financial statements.
We tested the design and implementation of the controls around
management’s process for both the identification and valuation of
intangible assets and fair value adjustments. We used our internal
valuation specialists to consider and evaluate the appropriateness of
the methodologies applied and to test the inputs to the valuation
models used to determine the value of the intangible assets, including
the discount rates, growth rates and useful economic lives, through
comparing these against industry benchmarks on similar assets and
our understanding of the future prospects of the business. We also
tested the appropriateness of the cash flow projections used in
the valuations.
For the other significant fair value adjustments, we obtained
appropriate support for the adjustments, reviewed any assumptions
against relevant industry and company data to assess the
appropriateness of the adjustments, and utilised internal valuation
specialists where appropriate.
Impairment of goodwill and other intangible assets
The Group has significant acquisition related intangible
assets, including goodwill, (£3,351 million at 2 May 2015
including £2,989 million of goodwill and £362 million of
acquisition intangibles, related to the CPW Europe
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cquisition in the prior year and in the current year the
acquisition of Dixons Retail plc). The Group’s
assessment of impairment of acquisition related
intangible assets, primarily arising from the CPW Europe
and Dixons Retail plc acquisitions, is a judgemental
process which requires estimates concerning the future
cash flows and associated discount rates and growth
rates based on management’s projections of future
business performance and prospects. The key
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udgements and estimates involved are described in
more detail in notes 1l), 1m) and 1u) to the Group
financial statements.
We assessed the assumptions used by management in the
impairment models for goodwill and acquisition related intangible
assets, including the allocation to cash generating units described in
note 9 to the Group financial statements, and more specifically the
cash flow projections, discount rates (utilising the assistance of our
valuation specialists), and long term growth rates used against
historical performance, our understanding of the future prospects of
the business and comparison against market rates and the prevailing
Group cost of capital at the year end. We have audited the mechanics
of the impairment models prepared by management.
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ssets held for sale, discontinued operations and
disposal accounting
The classification and valuation of net assets in the
Phone House operations in the Netherlands, Germany
and Portugal as held for sale at the balance sheet date is
a key area of management judgement. In addition, the
classification of these businesses as discontinued
operations must be carefully considered in line with the
relevant accounting standard. Further information is
included in note 24 to the Group financial statements.
We tested the design and implementation of controls which
management have in place around planned and completed
disposal activities.
We challenged management’s judgement on the classification and
valuation of assets held for sale through understanding the status of
the sales process and reviewing correspondence from purchasers and
prospective purchasers. This included consideration of any relevant
disposal provisions with reference to the sales agreements and
supporting documentation. We also assessed the classification of
disposed businesses and other assets held for sale as discontinued
operations against the relevant criteria in the accounting standard.