How our audit addressed the area of focus

Transcription

1 Financial statements Independent auditors report to the members of Ladbrokes plc Report on the financial statements Our opinion In our opinion: Ladbrokes plc s Group financial statements and Company financial statements (the financial statements ) give a true and fair view of the state of the Group s and of the Company s affairs as at 31 December 2015 and of the Group s profit and cash flows for the year then ended; the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards ( IFRSs ) as adopted by the European Union; the Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. What we have audited The financial statements, included within the Annual Report and Accounts (the Annual Report ), comprise: the consolidated balance sheet as at 31 December 2015; the Company balance sheet as at 31 December 2015; the consolidated income statement and consolidated statement of comprehensive income for the year then ended; the consolidated statement of cash flows for the year then ended; the consolidated statement of changes in equity for the year then ended; and the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the Company financial statements is United Kingdom Accounting Standards, comprising FRS 101 Reduced Disclosure Framework, and applicable law (United Kingdom Generally Accepted Accounting Practice). Our audit approach Overview Overall group materiality: 4.7 million which represents 5% of average profit before tax and exceptional items over the previous three years (2014: 5.7 million). We conducted full scope audits at five reporting units: UK Retail, UK Digital, Australia and two reporting units included within Corporate costs. Specific audit procedures on revenue and receivables were performed on the High Rollers reportable segment. Our audit scope addressed over 80% of the Group s revenue and profit before tax and exceptional items. Impairment assessments for: Goodwill, and retail licence intangible assets and property, plant and equipment ( PPE ). Compliance with laws and regulations given the developing nature of the digital gaming sector. Accounting for the fair value of contingent consideration relating to business combinations made in 2013 (Playtech and Betdaq). Recognition and disclosure of tax losses and the provision for uncertain tax positions. Nature and presentation of exceptional items. 76 ladbrokesplc.com

2 The scope of our audit and our areas of focus We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) ( ISAs (UK & Ireland) ). We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud. The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as areas of focus in the table below. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the financial statements as a whole, and any comments we make on the results of our procedures should be read in this context. This is not a complete list of all risks identified by our audit. Area of focus Impairment assessments for: Goodwill, retail licence intangible assets and property, plant and equipment ( PPE ); Refer to page 46 (Audit Committee Report), note 4 (Summary of significant accounting policies), note 14 (Impairment testing of goodwill and indefinite life intangible assets). IAS 36 Impairment of Assets requires that Goodwill and other indefinite lived intangible assets are subject to an impairment review at least annually, or more frequently when there is evidence of a trigger event. IAS 36 also requires a number of specific disclosures in respect of the impairment assessment. A new Strategy was announced during the first half of the year, which included a reassessment of the prospects of the Group, in particular the cash generating units that make up the Retail segments, together with a plan for greater investment in the shorter term. The impairment reviews performed by management did not identify any impairment in respect of goodwill, but did result in an impairment charge of 53.2m in respect of retail licence intangible assets and PPE which was recorded in the first half of the year and reported in the interim results to 30 June Goodwill The Group has goodwill of million including amounts relating to the business combinations of Playtech ( 34.9 million) and Betdaq ( 31.5 million) and Gaming Investments Pty Ltd ( 19.4 million). Whilst the annual impairment review of goodwill performed by management as at 31 December 2015 supported the carrying values above, we focused on this area as the preparation of these assessments involve a significant degree of judgement and the results are sensitive to changes in the future forecasts of cash flows and other assumptions such as growth and discount rates. How our audit addressed the area of focus In respect of each impairment assessment, over goodwill and retail licence intangible assets and PPE, a key component of our work was to consider the budgets and cash flow forecasts prepared by management, as outlined below. This was then supplemented by specific procedures in relation to the goodwill assessments and in relation to retail licence intangible assets and PPE. Procedures on budgets and cash flow forecasts: We obtained the annual impairment assessments performed by management in respect of goodwill and agreed the cash flow forecasts therein to the latest Board approved budgets and plans as at 31 December We evaluated the assumptions in the forecasts and plans and considered the evidence in support of them, principally in relation to historical trends and actual performance in This included considering trends in gross win and margins and changes to the cost base (such as Machine Game Duty and marketing costs) and whether the expected growth in Digital were appropriately reflected as relevant. Our work did not highlight any material issues. We also compared the actual results for each cash generating unit for the year ended 31 December 2015 and the latest Board approved budgets and plans to the forecasts prepared with the new Strategy prior to June 2015 and found management s forecasting ability to be reliable for the purposes of the impairment assessments. We also considered the discount rates used in the goodwill and retail licence intangible assets and PPE impairment assessments by comparing them to the cost of capital for the Group. We found these to be consistent and in line with our expectations. In addition to testing the results of the impairment assessments performed by management and whether the amount of any impairment charge identified was appropriate, we also considered the disclosures given in the Annual Report and found that these satisfied the requirements of IAS 36. For the goodwill impairment reviews showing headroom and not giving rise to impairments, we also performed sensitivity analysis on the level of cash flows, the discount and growth used in the impairment assessments and concurred with management s conclusion that a material change in these assumptions would be required to trigger an impairment charge. Ladbrokes plc Annual Report and Accounts

3 Financial statements Independent auditors report to the members of Ladbrokes plc continued Area of focus Retail licence intangible assets and PPE As noted above, an impairment assessment was performed for the Retail cash generating units in mid 2015 following the announcement of the new Strategy. As a result, management determined that an impairment charge of 53.2 million was required to reduce the value of these assets to their recoverable amount. As at 31 December 2015 the Group has retail licence intangible assets with an indefinite life of million following the impairment noted above. We focused on the UK Retail, Northern Ireland and Republic of Ireland cash generating units in particular as these comprise the majority of the Group s Retail licence intangible assets and PPE balances. Our focus was on the sufficiency of the impairment charge of 53.2 million recorded in the interim results for the six months ended 30 June 2015 and whether an additional impairment charge was required at the year end. Compliance with laws and regulations given the developing nature of the digital gaming sector The international legal and licencing framework for digital gaming is territory specific. Regulations are developing and this evolving environment makes compliance an increasingly complex area with territory specific regulations, responsible gambling and antimoney laundering obligations. Given the potential for litigation and licence withdrawal, the risk of non-compliance with digital gaming laws and licence regulations could give rise to material fines, penalties, legal claims or market exclusion. How our audit addressed the area of focus We obtained the impairment assessments for retail licence intangible assets and PPE prepared by management at the interim stage and agreed the forecasts to the latest Board approved plans at that time and performed procedures consistent with those described above. We evaluated management s determination of individual cash generating units either at a shop or group of shops level and evaluated the evidence of player activity in support of grouping where relevant. We found the basis for the grouping to be supported. We understood the basis of preparation of shop (or group of shops) forecasts compared to the overall Retail forecasts and found them to be consistent. Having considered the above we found the impairment charge of 53.2m recorded at the interim stage to be appropriate. We also compared the actual results of UK Retail, Northern Ireland and Republic of Ireland for the year ended 2015 and the budgets for 2016 to the previous forecasts and plans under the Strategy announced in mid 2015 and found that they were consistent and that management s forecasts were reliable for the purposes of the impairment assessments and that, accordingly, there was no indication that further impairments were required at 31 December We also performed sensitivity analysis on the level of cash flows, the discount and growth used in the impairment assessments and we concurred with management s conclusion that a reasonably possible change in these could trigger impairment charges in the future. We evaluated the controls and risk management processes in operation in respect of compliance with digital licencing regulations responsible gambling and anti-money laundering obligations covering player registration controls, customer deposits and withdrawals. We assessed how the management monitor legal and regulatory developments and their assessment of the potential impact on the business. We also read the Group s reports on litigation matters provided by management. We discussed each of the material cases noted in the reports to determine the Group s assessment of the likelihood and magnitude of any liability that may arise. Our work included testing to assess the completeness of the matters in the Group s litigation reports in order to assess the appropriateness of the provisions recorded by management. We also read, where required, external legal or regulatory advice sought by the Group. Whilst acknowledging that this is a judgemental area, we found that the Group had an appropriate basis of accounting for these matters in the financial statements. 78 ladbrokesplc.com

4 Area of focus Accounting for the fair value of contingent consideration relating to business combinations made in 2013 (Playtech and Betdaq) The Group is required to fair value the contingent consideration associated with the business combinations of Playtech and Betdaq made in 2013 at each balance sheet date. At 31 December 2015 the total contingent consideration was 32.3 million with a fair value movement of 0.2 million recognised in the income statement for the year. This is determined through a cash flow forecast model. The inputs to these models are subject to judgement regarding the determination of EBITDA forecasts, discount rates and a multiple specific to the Ladbrokes share price. Recognition and disclosure of tax losses and the provision for uncertain tax positions. Refer to page 46 (Audit Committee Report), note 4 (Summary of Significant Accounting Policies) and note 10 (Income tax expense) The Group s total tax credit of 48.3 million for the year reflects the recognition and use of previously unrecognised tax losses. This includes 35.6 million relating to mainly UK adjustments in respect of prior years, a further 18.4 million in respect of tax losses utilised during the year, offset by a number of individually immaterial items. The Group also has unresolved tax positions in the UK, the valuation of which is a judgemental area. There is significant judgement applied in determining the Group s deferred tax assets relating to tax losses, in terms of both recognition and disclosure. How our audit addressed the area of focus We obtained the Playtech and Betdaq contingent consideration models prepared by management. We assessed the appropriateness of the models by testing the integrity, comparing the data in the models to the relevant agreements and testing key inputs to third party sources and publically available information where appropriate. The key inputs we focused on were the forecast results for each business, the probability range associated with future EBITDA forecasts and the discount rate. We compared the forecast results with the latest Board approved budgets and considered the results of the testing performed on the same forecasts for the impairment area of focus above. The nature of the valuation of the contingent consideration results in a number of scenarios where a reasonably probable change in the assumptions may materially impact the fair value. We therefore considered management s proposed disclosures with regard to the impact of changes in assumptions and found them to be reasonable in light of our procedures. We considered the overall tax figures recorded in the financial statements and the related disclosures in the context of the Group s Board approved tax strategy. With regard to adjustments in respect of prior years we read and understood the Group s correspondence with HMRC and considered the advice received by the Group from its third party advisers to assess the appropriateness of the related amounts and disclosures in the financial statements. We assessed whether there was evidence to determine that additional deferred tax assets should be recognised or disclosed, taking into account forecast profits and the Board s approved tax strategy. We also assessed the key judgements with respect to open positions and settlements and read correspondence with the taxation authorities. We obtained evidence to support the provisions and consider these to reflect management s best estimates. We found that the overall position adopted in the financial statements and the related disclosures in respect of tax was reasonable. Ladbrokes plc Annual Report and Accounts

5 Financial statements Independent auditors report to the members of Ladbrokes plc continued Area of focus Nature and presentation of exceptional items Refer to page 46 (Audit Committee Report), note 2 (Basis of Preparation) and note 6 (Exceptional items) The financial statements include certain items which are disclosed as exceptional. The most significant of these exceptional charges are: Impairment loss of 58.3 million; Loss on shop closures of 19.8 million; and Corporate transaction costs of 17.6 million Total exceptional items amounted to 99.0 million. We focused on this area because exceptional items are not defined by IFRSs and it therefore requires judgement regarding their size and nature by management to identify such items. Consistency in identifying and disclosing items as exceptional is important to maintain comparability of the results year on year. How our audit addressed the area of focus We assessed the appropriateness and application of the Group s accounting policy in respect of those items classified as exceptional in nature. We tested the presentation of the exceptional items in the financial statements by assessing whether the classification was in line with the Group s accounting policy on exceptional items set out in note 2 of the financial statements and whether, in our view it was reasonable for these items to be separately disclosed as exceptional. We also tested the nature of costs included to supporting documentation on a sample basis. We found that the Group s accounting policy had been followed, and that the costs disclosed were appropriate for inclusion. How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the Group, the accounting processes and controls, and the industry in which the Group operates. The Group is structured into five reportable segments being UK Retail, European Retail, Digital, Core Telephone Betting and High Rollers. The Consolidated financial statements are a consolidation of reporting units that make up the five reportable segments and Corporate costs. We identified five of the Group s reporting units (UK Retail, UK Digital, Australia and two reporting units included within Corporate costs) that required an audit of their complete financial information, due to their size or risk characteristics. In addition we performed specified audit procedures on revenue and receivables in the High Rollers reportable segment due to risk of fraud in revenue recognition. All work was undertaken by the Group engagement team with the exception of Australia for which a component PwC audit team performed the audit work under the instruction and direction of the Group engagement team. Our audit scope addressed over 80% of the Group s revenue and profit before tax and exceptional items. The Group consolidation and a number of other areas were audited centrally. This included tax, share-based payments and pensions. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: materiality for the financial statements as a whole as follows: Overall Group materiality 4.7 million (2014: 5.7 million). How we determined it 5% of average profit before tax and exceptional items over the previous three years. Rationale for benchmark applied We applied this benchmark because, in our view, profit before tax and exceptional items is the metric against which the performance of the Group is most commonly measured and because in our view this is the most relevant measure of recurring performance. For the current year, our materiality calculation was based on average profit before tax and exceptional items over the previous three years as the Group s new Strategy includes significant additional marketing spend which impacts profitability in the shorter term. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above 250,000 (2014: 300,000) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. 80 ladbrokesplc.com

6 Going concern Under the Listing Rules we are required to review the directors statement, set out on page 73, in relation to going concern. We have nothing to report having performed our review. Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to the directors statement about whether they considered it appropriate to adopt the going concern basis in preparing the financial statements. We have nothing material to add or to draw attention to. As noted in the directors statement, the directors have concluded that it is appropriate to adopt the going concern basis in preparing the financial statements. The going concern basis presumes that the Group and Company have adequate resources to remain in operation, and that the directors intend them to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the directors use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group s and Company s ability to continue as a going concern. Other required reporting Consistency of other information Companies Act 2006 opinion In our opinion, the information given in the Strategic Report and the Directors Report for the financial year for which the financial statements are prepared is consistent with the financial statements. ISAs (UK & Ireland) reporting Under ISAs (UK & Ireland) we are required to report to you if, in our opinion: information in the Annual Report is: materially inconsistent with the information in the audited financial statements; or apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group and Company acquired in the course of performing our audit; or otherwise misleading. the statement given by the directors on page 75, in accordance with provision C.1.1 of the UK Corporate Governance Code (the Code ), that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group s and Company s performance, business model and strategy is materially inconsistent with our knowledge of the Group and Company acquired in the course of performing our audit. the section of the Annual Report on page 46, as required by provision C.3.8 of the Code, describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. We have no exceptions to report. We have no exceptions to report. We have no exceptions to report. Ladbrokes plc Annual Report and Accounts

7 Financial statements Independent auditors report to the members of Ladbrokes plc continued The directors assessment of the prospects of the group and of the principal risks that would threaten the solvency or liquidity of the group Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to: the directors confirmation on page 42 of the Annual Report, in accordance with provision C.2.1 of the Code, that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. We have nothing material to add or to draw attention to. the disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated. the directors explanation on page 30 of the Annual Report, in accordance with provision C.2.2 of the Code, as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. We have nothing material to add or to draw attention to. We have nothing material to add or to draw attention to. Under the Listing Rules we are required to review the directors statement that they have carried out a robust assessment of the principal risks facing the Group and the directors statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the directors process supporting their statements; checking that the statements are in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit. We have nothing to report having performed our review. Adequacy of accounting records and information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion: we have not received all the information and explanations we require for our audit; or adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or the Company financial statements and the part of the Directors Remuneration Report to be audited are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Directors remuneration Directors remuneration report - Companies Act 2006 opinion In our opinion, the part of the Directors Remuneration Report to be audited has been properly prepared in accordance with the Companies Act Other Companies Act 2006 reporting Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors remuneration specified by law are not made. We have no exceptions to report arising from this responsibility. Corporate governance statement Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to ten further provisions of the Code. We have nothing to report having performed our review. Responsibilities for the financial statements and the audit Our responsibilities and those of the directors As explained more fully in the Statement of Directors Responsibilities set out on page 75, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. 82 ladbrokesplc.com

8 What an audit of financial statements involves An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group s and the Company s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. We primarily focus our work in these areas by assessing the directors judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Stuart Newman (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 22 February 2016 Ladbrokes plc Annual Report and Accounts