Independent auditors' report to the members of halfords group plc only
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 year ended 28 March 2014. 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 28 March 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 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 (£150.2m)
Refer to the Audit Committee Report, accounting policy and note 12.
- 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, amongst others, testing the design and effectiveness of controls over identifying slow moving or discontinued products and obtaining an understanding of the Group's process for measuring the amount of provision required. These controls are designed to identify product lines where current sales prices do not exceed cost. The Group also makes provision for product lines where future sales prices are expected to be below current carrying value due to changes in customer tastes and demand. 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 2014/5 and the new product launches therein as well as the level of expected discounting. This included considering the historical accuracy of these plans and the level of discounting activity in previous years compared to the current inventory levels and committed purchases. 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.
We have also considered the adequacy of the Group's disclosures (see accounting policy and note 12) about the degree of estimation involved in arriving at the provision.
Valuation of Goodwill associated with the Nationwide Autocentres acquisition (£69.7 m)
Refer to the Audit Committee Report, accounting policy and note 10.
- 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 difficulties commercially; such as loss of a significant customer, may lead to a risk that the business does not meet the growth projections necessary to support the carrying value of the intangible asset. 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, amongst others, critically assessing the assumptions used around prospective trading levels through discussion with the Group, in light of market information around the size and age of the UK car market and comparison of the historical forecasting accuracy for newly opened Autocentres, given the proportion which have recently been opened. We also assessed the Group's performance against budget in the current and prior periods to evaluate the historical accuracy of forecasts. We used break even analysis to determine the key sensitivities within the budgeting model, which we considered to be the discount rate and the growth rate. Our internal valuation specialists assessed the discount rate, which included an adjustment for forecasting risk, 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 the externally generated Net Promoter Score (NPS) and the operational focus on customer service within the business.
We considered the adequacy of the Group's disclosures (see note 10) 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 £5.0m. This has been determined with reference to a benchmark of Group profit before taxation (of which it represents 6.9%) which we consider to be one of the principal considerations for members of the Company in assessing the financial performance of the Group.
We agreed with the Audit Committee to report to it all corrected and uncorrected misstatements we identified through our audit with a value in excess of £0.3m in addition to other audit misstatements below that threshold that we believe 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 levels 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 does not 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/auditscopeukco2013a, 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.
Greg Watts (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Snow Hill Queensway
21 May 2014