Opinions and conclusions arising from our audit
1. Our opinion on the financial statements is unmodified
We have audited the financial statements of Halfords Group plc ("the Group") for the 53 week period ended 3 April 2015. 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 3 April 2015 and of the Group's profit for the 53 week period then ended;
- the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU);
- the parent company financial statements have been properly prepared in accordance with UK Accounting standards; 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.
2. Our assessment of risks of material misstatement
In arriving at our audit opinion above on the financial statements the risks of material misstatement that had the greatest effect on our audit were as follows.
Valuation of Inventory within the Retail division (£147.8 million)
Refer to the Audit Committee Report, accounting policy and note 13.
- The risk – The Group holds a significant amount of inventory across a broad and diverse product range. Changes in consumer tastes and demands may mean that they cannot be sold or sales prices are discounted to less than the current carrying value. Estimating the future demand for, and hence the recoverable amount of, these products is inherently subjective.
- Our response – Our audit procedures in this area included testing the design and effectiveness of controls over identifying slow moving or discontinued products. We critically assessed the Group's provision for those product lines identified as slow moving or potentially slow moving, by obtaining an understanding of the Group's sales and purchasing plans for 2015/6, and the new product launches therein, as well as the level of expected discounting. We compared post year-end sales data to items within the Group's provision and to information provided by Category Managers responsible for each product category, in particular any product ranges that were forecast to be phased out or replaced, which were corroborated with the Group's purchasing plans. In addition, we compared inventory holding at the year end to past, and expected, sales performance to further identify potentially excess inventory lines.
We also considered the adequacy of the Group's disclosures about the degree of estimation involved in arriving at the provision.
Valuation of Goodwill associated with the Nationwide Autocentres acquisition (£69.7 million)
Refer to the Audit Committee Report, accounting policy and note 11.
- The risk – Following the acquisition of Nationwide Autocentres in 2010, the Group has held significant goodwill in the business. The business operates in a competitive market and commercial difficulties; such as loss of a significant customer, changes to market share or changes to the frequency with which customers replace their cars, may lead to a risk that the business does not meet the growth projections necessary to support the carrying value of the goodwill. Due to the inherent uncertainty involved in forecasting these cashflows, this is one of the key judgemental areas that our audit is concentrated on.
- Our response – Our audit procedures included, challenging the assumptions used around prospective trading levels, in light of the historical forecasting accuracy for newly opened Autocentres, given the proportion which have been opened in the past 2-3 years. We assessed the Group's performance against budget in the current and prior periods to evaluate the historical accuracy of overall forecasts. We used breakeven analysis to determine the key sensitivities within the budgeting model, which we considered to be the discount rate and the growth rate. The discount rate was determined by an independent third party. Further, we have critically assessed the various components of discount rate, by benchmarking the rate against external market data and the Group's financial position. We have assessed the continuing improvement in customer retention, a key factor in the growth rate, through reference to the Net Promoter Score (NPS) provided by an independent third party, and through our observation of a recent increase in customer-centric initiatives around the Group.
We considered the adequacy of the Group's disclosures about the sensitivity of the outcome of the impairment assessment to changes in key assumptions.
3. Our application of materiality and an overview of the scope of our audit
The materiality for the Group financial statements as a whole was set at £4.0 million (FY14: £5.0 million), determined with reference to a benchmark of Group profit before tax, of which it represents 5.0% (FY14: 6.9%), a reduction from the prior period to ensure consistency with the industry peer group and other listed companies.
We report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £0.2 million in addition to other identified misstatements that warranted reporting on qualitative grounds.
The Group audit team performed the audit of the Group as if it was a single aggregated set of financial information. The audit was performed using the materiality set out above and covered 100% of total Group revenue, Group profit before taxation, and total Group assets.
4. Our opinion on other matters prescribed by the Companies Act 2006 is unmodified
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.
5. We have nothing to report in respect of the matters on which we are required to report by exception
Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other information in the annual report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading.
In particular, we are required to report to you if:
- we have identified material inconsistencies between the knowledge we acquired during our audit and the directors' statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's performance, business model and strategy; or
- the Audit Committee report appropriately address matters communicated by us to the Audit and Risk Committee.
Under the Companies Act 2006 we are required to report to you if, in our opinion:
- 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 and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns; or
- certain disclosures of directors' remuneration specified by law are not made; or
- we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
We have nothing to report in respect of the above responsibilities.
Scope of report and responsibilities
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. A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at www.frc.org.uk/auditscopeukprivate. This report is made solely to the company's members as a body and is subject to important explanations and disclaimers regarding our responsibilities, published on our website at www.kpmg.com/uk/auditscopeukco2014a, which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions.
Peter Meehan (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Snow Hill Queensway
4 June 2015