Marks and Spencer 2016 Annual Report Download - page 83

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ANNUAL REPORT AND FINANCIAL STATEMENTS 2016
OUR BUSINESSOUR PERFORMANCEFINANCIAL STATEMENTS GOVERNANCE
OUR ASSESSMENT OF RISKS OF MATERIAL MISSTATEMENT CONTINUED
3 Inventory valuation and
provisions
RISK DESCRIPTION
At 2 April 2016, the Group held inventories
of £800 million (2015: £798 million).
As described in the Accounting Policies
in note 1 to the Financial Statements,
inventories are carried at the lower of
cost and net realisable value. As a result,
the directors apply judgement in
determining the appropriate provisions
for obsolete stock based upon a detailed
analysis of old season inventory, net
realisable value below cost based upon
plans for inventory to go into sale and
stock loss based upon the run rate from
recent inventory counts.
HOW THE SCOPE OF OUR AUDIT RESPONDED TO THE RISK
We obtained assurance over the
appropriateness of management’s
assumptions applied in calculating the
value of the inventory provisions by:
> Checking the e ectiveness of key
inventory controls operating across
the UK business, including those at 13
distribution centres and 18 retail stores;
> Attending inventory counts at 13
distribution centres and 13 retail stores;
> Checking for a sample of individual
products that invoiced costs have
been correctly recorded and that the
allocation of directly attributable costs
has been correctly calculated;
> Comparing the net realisable value,
obtained through a detailed review of
sales subsequent to the year-end using
audit analytics, to the cost price of
inventories to check for completeness
of the associated provision;
> Performing audit analytics on
stock holding and movement data to
identify product lines with indicators
of low stock turn or signifi cant levels
of aged stock; and
> Meeting with buyers to validate the
assumptions applied by management
compared to the current purchasing
strategy and ranging plans.
We evaluated consumer trends identifi ed
through benchmarking and external
market data to challenge the assumptions
underlying sales forecasts by category
to assess the completeness of provisions
for obsolescence.
Key observations The results of
our testing were satisfactory and
we concur that the level of inventory
provisions is appropriate.
4 Revenue recognition – gift cards,
loyalty schemes and returns
RISK DESCRIPTION
As described in the Accounting Policies
in note 1 to the Financial Statements, the
Group’s revenue recognition policies
require the directors to make a number
of assumptions in determining the
reported revenue for the period. The key
assumptions are:
> Gift cards, vouchers and loyalty
schemes – the directors apply an
expected redemption rate to the total
value of gift cards, vouchers and loyalty
points in issue based on historic trends.
> Returns – customers are entitled to
return products up to 35 days after
purchase, giving rise to a risk that sales
recognised during the period will be
reversed in the next fi nancial period.
The directors apply judgement in
determining the provision required
for returns based on actual sales data
and recent product return rates.
Returns from online sales are
commonly at a higher level than
traditional store retailing, resulting
in this judgement becoming more
signifi cant in determining the level
of provision required.
HOW THE SCOPE OF OUR AUDIT RESPONDED TO THE RISK
We considered each revenue-impacting
provision individually, and assessed the
appropriateness of the assumptions and
judgements applied. We assessed the
design and implementation of controls in
respect of these revenue judgements, in
addition to testing the e ectiveness of
key revenue controls operating across the
UK business.
For the key assumptions used in the gift
card and voucher, and loyalty scheme
provisions, we assessed the historic rates
of redemption and compared these to the
directors’ judgements.
We assessed the appropriateness of the
methodology applied in calculating the
returns provision, and compared the
calculated provision to the actual level of
returns recorded subsequent to the
period end.
Key observations We are satisfi ed that the
key assumptions applied in calculating the
returns, gift card, voucher and loyalty
scheme provisions are appropriate.