Opinion on financial statements of sig plc

In our opinion:

  • the financial statements give a true and fair view of the state of the Group's and of the parent Company's affairs as at 31 December 2014 and of the Group's profit 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 parent 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.

The financial statements comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated and Company Balance Sheets, the Consolidated Cash Flow Statement, the Consolidated Statement of Changes in Equity, the Statements of Significant Accounting Policies, the Critical Accounting Judgments and Key Sources of Estimation Uncertainty and the related Group Notes 1 to 31 and the related Company Notes 1 to 13. 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 parent Company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).

Going concern

As required by the Listing Rules we have reviewed the Directors' statement contained within the Strategic Review in Treasury Risk Management that the Group is a going concern. We confirm that:

  • we have concluded that the Directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate; and
  • we have not identified any material uncertainties related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern.

However, because all future events or conditions cannot be predicted, this statement is not a guarantee as to the Group's ability to continue as a going concern.

Our assessment of risks of material misstatement

The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team:

RiskHow the scope of our audit responded to the risk

The recognition and measurement of supplier rebate income

Rebate income earned by the Group is significant to the Group's result and affects the recorded value of cost of sales, trade payables and inventory. Further explanation is given in Critical Accounting Judgments and Key Sources of Estimation Uncertainty. This sets out that in some cases, rebate calculations are complex and judgmental especially where they are linked to volume or other thresholds and are in respect of non-coterminous trading periods.

The consideration made by the Audit Committee is set out in Financial Reporting and Significant Accounting Matters.

We carried out testing of the design and implementation of key controls related to the recognition of supplier rebate income where income is significant. We discussed significant rebate contracts with the commercial managers to understand the complexities and judgments that may exist over income recognition.

We circularised suppliers in business units where rebate income is significant to confirm a sample of amounts receivable (including high value balances). Where supplier circularisation was not returned we reviewed further correspondence between the Group and the supplier to verify the position taken. We also considered post year end recoveries against receivables.

We reperformed a sample of management's calculations of rebate income, agreeing volumes to purchasing records and correspondence from suppliers where available or to other available documentation, agreeing the rebate percentages applied to signed contract where available or to other evidence. We compared rebate income earned by supplier against historical rates achieved/previous estimation accuracy to identify significant movements for further testing or enquiries.

We assessed whether the income recognition policies and estimates were appropriate particularly when there were non-coterminous trading periods.

We compared the level of rebate deferred against stock against the change in income earned in the year.

The assessment of the carrying value of goodwill and intangible assets

The goodwill and intangible assets of £468.8m represent 34% of total assets and 71% of non-current assets and therefore the judgments over the carrying value are significant.

Management's judgments in relation to the financial performance of the business units, discount rates and perpetuity growth rates are subjective and are described in the Critical Accounting Judgments and Key Sources of Estimation Uncertainty and Note 12 to the financial statements.

We challenged and performed sensitivities on management's assumptions used in the impairment model for goodwill and intangible assets, including specifically the cash flow projections, changes to the discount rates applied and perpetuity rates used. We have compared these to industry forecasts, the Group's historical performance, budgeting accuracy, benchmarking against comparator groups and our understanding of the future prospects of the business. We tested the integrity of the model.

Particular focus has been given to Larivière given its carrying value of goodwill of £153.6m and the difficult trading conditions in France resulting in a greater level of verification of the growth rates applied and additional sensitivity analysis over the trading performance and judgments taken.

The recognition and presentation of Other items in the Consolidated Income Statement

The Group has consistently used a three column approach for the presentation of the Consolidated Income Statement to separately identify certain income/costs which are non-underlying in nature. This includes certain costs relating to a significant restructuring programme. The inappropriate or inconsistent inclusion of income/costs within other items could distort the underlying profit disclosed. The Group's definition for separate presentation within "Other items" is set out in the Statement of Significant Accounting Policies. The net loss associated with "Other items" is £59.1m and reduces the Group's underlying profit before tax by 60%.

We assessed the nature of the income/costs included in Other items and challenged whether they met the Group's definition for separate presentation. Where income/costs have been presented as Other items, we obtained evidence that enabled us to assess whether this presentation is appropriate. We performed detailed substantive testing for a sample of the costs/income by verifying these against supporting invoices, agreements and other records as appropriate. Particular focus has been given to restructuring costs of £9.2m as set out in Note 2 to determine whether they arise from significant restructuring and changing the shape of the business rather than minor changes to the Group's structure.

The recognition and measurement of provisions for trade receivables

Trade receivables represent 50% of the Group's current assets and the judgments regarding aged or impaired receivables are significant and is subjective with respect to the trading conditions in some of the countries in which the Group operates.

Further explanation is given in Critical Accounting Judgments and Key Sources of Estimation Uncertainty.

We challenged the appropriateness of management's assumptions and estimates in relation to the provisions for trade receivables. In assessing completeness and accuracy we have reviewed evidence of customer disputes and whether this indicates that a provision is required. We have tested the ageing of the ledgers through agreement of ageing date to proof of customer delivery and recalculated the provision based upon this. We have assessed the appropriateness of provisions by considering subsequent cash receipts and past payment practices.

Last year our report included one other risk which is not included in our report this year: the recognition and measurement of provisions for inventory, as the determination of the provision is largely mechanical in nature and the judgments involved are consistently applied.

The description of risks above should be read in conjunction with the significant issues considered by the Audit Committee discussed in Financial Reporting and Significant Accounting Matters.

Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not to express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any of the risks described above, and we do not express an opinion on these individual matters.

Our application of materiality

We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.

We determined planning materiality for the Group at £5 million, which is approximately 5% of underlying pre-tax profit (as defined in the Consolidated Income Statement) and below 1% of equity. This is a change of approach from 2013, where we used a materiality of £6m which was around 6% of underlying pre-tax profit. We have changed the percentage applied to align more closely with those of other comparable companies that share a common risk profile. We use underlying pre-tax profit to exclude the effect of volatility from our determination and because it represents one of the primary KPIs referred to both internally and externally. The audit of Other items is treated as a significant risk as set out above.

We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £100,000 (2013: £120,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.

An overview of the scope of our audit

The Group audit and audit of the consolidation is performed at the Group's head office in Sheffield. The accounting records of the trading businesses within the Group are spread across the countries in which the Group operates. We perform audit work in each of the 8 principal countries of operation.

Full scope audits were performed for the principal business units covering 83% of the Group's total assets, 91% of revenue and 89% of operating profit. A further 10% of the Group's total assets, 8% of revenue and 9% operating profit were subject to specified audit procedures where the extent of our testing was based on our assessment of the risks of material misstatement and of the materiality of the Group's operations at those locations. They were also selected to provide an appropriate basis for undertaking audit work to address the risks of material misstatement identified above. Our full scope audits and the specified audit procedures were executed at levels of materiality applicable to each individual entity which were lower than Group materiality.

The Group audit team continued to follow a programme of planned visits that has been designed so that a senior member of the Group audit team visits each of the locations where the Group audit scope was focused at least once every two years and the most significant of them at least once a year including attendance at the close meetings. The Group audit team attend the close meetings of other in-scope businesses via conference call.

Opinion on other matters prescribed by the companies act 2006

In our opinion:

  • the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
  • 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.

Matters on which we are required to report by exception

Adequacy of explanations received and accounting records

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 parent Company, or returns adequate for our audit have not been received from branches not visited by us; or
  • the parent Company financial statements are not in agreement with the accounting records and returns.

We have nothing to report in respect of these matters.

Directors' remuneration

Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors' remuneration have not been made or the part of the Directors' Remuneration Report to be audited is not in agreement with the accounting records and returns. We have nothing to report arising from these matters.

Corporate Governance Statement

Under the Listing Rules we are also required to review the part of the Corporate Governance Statement relating to the Company's compliance with ten provisions of the UK Corporate Governance Code. We have nothing to report arising from our review.

Our duty to read other information in the Annual Report

Under International Standards on Auditing (UK and 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 acquired in the course of performing our audit; or
  • otherwise misleading.

In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the Directors' statement that they consider the Annual Report is fair, balanced and understandable and whether the Annual Report appropriately discloses those matters that we communicated to the Audit Committee which we consider should have been disclosed. We confirm that we have not identified any such inconsistencies or misleading statements.

Respective responsibilities of directors and auditor

As explained more fully in the Directors' Responsibilities Statement, 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 International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors. We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team and independent partner reviews.

This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Scope of the audit of the financial statements

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 parent 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. 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.

Simon Manning (Senior statutory auditor)

for and on behalf of Deloitte LLP

Chartered Accountants and Statutory Auditor

Leeds, UK

11 March 2015