Marks and Spencer 2016 Annual Report Download - page 84

82
MARKS AND SPENCER GROUP PLC
FINANCIAL STATEMENTS
INDEPENDENT AUDITOR’S REPORT
CONTINUED
OUR ASSESSMENT OF RISKS OF MATERIAL MISSTATEMENT CONTINUED
5 Supplier rebates
RISK DESCRIPTION
As described in the Accounting Policies in
note 1 and note 17 to the Financial
Statements, the Group recognises a
reduction in cost of sales as a result of
amounts receivable from suppliers,
primarily comprising contributions in
relation to promotions in the Food business,
strategic volume moves and some annual
volume-based rebates. The majority of
these contributions tend to be small in unit
value but high in volume and span relatively
short periods of time, although these can
be across the fi nancial year end. There are
a small number of larger arrangements,
which relate to multi-year periods.
Judgement is required in determining the
period over which the reduction in cost of
sales should be recognised, requiring both
a detailed understanding of the contractual
arrangements themselves as well as
complete and accurate source data to
apply the arrangements to.
HOW THE SCOPE OF OUR AUDIT RESPONDED TO THE RISK
We tested that amounts recognised were
accurate and recorded in the correct period
based on the contractual performance
obligations by agreeing a sample to
individual supplier agreements. We also
conducted interviews with a range of
buyers and trading managers. In addition,
we circularised a sample of 28 suppliers to
test whether the arrangements recorded
were complete.
We tested the completeness and accuracy
of the systematic inputs to the calculations
for recording supplier rebates and
discounts by agreement to supporting
evidence, including volume data and
promotion dates.
We performed revenue and margin analysis
to understand detailed trends by product
category in order to identify apparent
anomalies which may indicate potential
rebate income errors. Such anomalies were
investigated to assess whether they were
indicative of a mis-application of contractual
terms or other calculation errors.
We also tested a sample of invoices and
debit notes raised post-year end to test the
completeness and accuracy of accrued
supplier income at 2 April 2016. In addition
we tested the recoverability of the amounts
due at the year end by agreeing the
amounts to subsequent settlement.
Key observations The results of our
testing were satisfactory. We consider the
disclosure given around supplier rebates to
provide an accurate understanding of the
types of rebate income received and the
impact on the statement of fi nancial
position as at 2 April 2016.
6 Retirement benefi ts
RISK DESCRIPTION
As described in the Accounting Policies
in note 1 and in note 11 to the Financial
Statements the Group has a defi ned
benefi t pension plan for its UK employees,
which was closed to new entrants with
e ect from 1 April 2002, and a funded
defi ned benefi t pension scheme in the
Republic of Ireland, where no new benefi ts
have accrued since 31 October 2013.
At 2 April 2016, the Group recorded a net
retirement benefi t asset of £824 million
(2015: £449 million), being the net of
scheme assets of £8,515 million (2015:
£8,597 million), scheme liabilities of £7,682
million (2015: £8,136 million) and unfunded
retirement benefi ts of £9 million (2015: £12
million). The Group net retirement benefi t
asset has shown signifi cant volatility, as the
valuation is sensitive to changes in key
assumptions such as the discount rate,
infl ation and mortality estimates.
The setting of these assumptions is
complex and an area of signifi cant
judgement; changes in any of these
assumptions can lead to a material
movement in the net surplus. The increase/
(decrease) in scheme surplus caused by
a change in each of the key assumptions is
set out below:
2016
£m
2015
£m
A decrease in the discount
rate of 0.25% (90) (70)
A decrease in the infl ation
rate of 0.25% 20 30
A decrease in the average life
expectancy of one year 300 330
HOW THE SCOPE OF OUR AUDIT RESPONDED TO THE RISK
We evaluated the directors’ assessment of
the assumptions made in the valuation of
the scheme liabilities, and evaluated the
information contained within the actuarial
valuation reports for each scheme. We
assessed the design and implementation
of controls in respect of the pension
scheme valuation process.
We tested the membership census data
used in the valuation of the schemes and,
with support from our own actuarial
specialists, we considered the process
applied by the Group’s actuaries, the scope
of the valuation performed and the key
assumptions applied and evaluated their
expertise. We benchmarked and performed
a sensitivity analysis on the key variables in
the valuation model, including:
> Salary increases;
> Infl ation rates;
> Mortality rates; and
> Discount rates.
Key observations From the work
performed above we are satisfi ed that
all assumptions applied in respect of the
valuation of the scheme assets and
liabilities are appropriate.