1. Our opinion is unmodified
We have audited the financial statements of Severfield plc ("the Company") for the year ended 31 March 2018 which comprise the Consolidated income statement, Consolidated statement of comprehensive income, Consolidated balance sheet, Consolidated statement of changes in equity, Consolidated cash flow statement, Company balance sheet, Company statement of changes in equity and the related notes, including the accounting policies in note 1.
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 March 2018 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;
- the parent Company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 101 Reduced Disclosure Framework; 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.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) ("ISAs (UK)") and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the audit committee.
We were appointed as auditor by the shareholders on 2 September 2015. The period of total uninterrupted engagement is for the three financial years ended 31 March 2018. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard were provided.
|Materiality: Group financial statements as a whole||£1,100,000 (2017: £900,000)|
5.0% (2017: 5.0%) of total Group profit before tax
|Coverage||98% (2017: 98%) of total Group profit before tax|
|Risks of material misstatement||vs 2017|
|Recurring risks||Carrying value of construction contracts balance, and revenue and profit recognition in relation to construction contracts|
|Carrying value of Indian joint venture investment (Group and parent)|
|Carrying value of parent Company's investments in subsidiaries|
2. Key audit matters: our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters, in decreasing order of audit significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.
|The risk||Our response|
Carrying value of construction contracts balance and revenue and profit recognition in relation to construction contracts
Revenue: £274.2m (2017: £262.2m)
Construction contracts: £45.6m (2017: £59.1m)
Refer to the audit committee report, note 1 and note 2 (accounting policies) and note 16 (financial disclosure)
The Group's activities are undertaken via long-term construction contracts.
The carrying value of the construction contract balance as well as the revenue and profit recognised are based on estimates of costs to complete and a level of unagreed variations and judgement as to the recoverability of those variations.
Estimated contract costs, and as a result revenues, can be affected by a variety of uncertainties, including associated customer claims, that depend on the outcome of future events resulting in revisions throughout the contract period.
|Our procedures included:|
- Test of details: Identifying contracts with risk indicators including: low margin or loss making contracts, high values of unagreed variations and large carrying value of amounts receivable on contracts. For these contracts we agreed the year-end construction contract balance to the cash recovered post period end or the work certified to date;
- Test of details: Challenging the Group in respect of construction contract balances in the sample identified, where cash has not been received or work has not been certified post year-end, by obtaining correspondence with the clients to corroborate the position;
- Historical comparisons: Assessing the forecasted cost to complete in the sample identified by understanding contract performance and costs incurred post year-end along with discussions and challenge of management;
- Test of details: Verifying the existence of customer claims to external correspondence and challenging management's assessment of these;
- Historical comparisons: Assessing the forecasting accuracy of contract margins by evaluating initial forecasted margins for a sample of contracts across the portfolio against actual margins achieved;
- Assessing transparency: Assessing the adequacy of the Group's disclosures on revenue recognition and the degree of estimation involved in arriving at the construction contract balance and associated revenue and profit recognition.
- We found the carrying value of construction contracts, and the level of revenue and profit recognition in relation to construction contracts to be acceptable (2017: acceptable).
Carrying value of Indian joint venture investment (Group and parent)
Investment in Indian joint venture (Group): £10.7m (2017: £4.6m)
Investment in Indian joint venture (parent): £18.9m (2017: £13.3m)
Refer to the audit committee report, note 1 and note 2 (accounting policies) and note 14 (financial disclosure)
The carrying value of the investment in the joint venture is at risk of impairment due to its recent performance. The estimated recoverable amount is subjective due to the inherent uncertainty involved in forecasting and discounting future cash flows.
Significant areas of judgement include sales growth rates, operating margins and the discount rate applied to future cash flows.
|Our procedures included:|
- Benchmarking assumptions: We compared the Group's assumptions to externally derived data as well as our own assessments in relation to key inputs such as projected growth and discount rates;
- Sensitivity analysis: Performing sensitivity analysis on key assumptions to understand their impact on headroom;
- Historical comparisons: Assessed actual performed against budget to understand historical budgeting accuracy;
- Assessing transparency: We also assessed whether the Group's disclosures about the sensitivity of the outcome of the impairment assessment to changes in key assumptions reflected the risks inherent in the valuation of the investment in the joint venture.
- We found the Group's assessment of the carrying value of the investment in the Indian joint venture to be acceptable (2017: acceptable).
Carrying value of parent Company's investments in subsidiaries
Refer to accounting policies and financial disclosures.
|Low risk, high value:|
The carrying amount of the parent Company's investments in subsidiaries represents 34% (2017: 35%) of the Company's total assets. Their recoverability is not at a high risk of significant misstatement or subject to significant judgement. However, due to their materiality in the context of the parent Company financial statements, this is considered to be the area that had the greatest effect on our overall parent Company audit.
|Our procedures included:|
- Tests of detail: Comparing the carrying amount of 100% of investments balance with the relevant subsidiaries' draft balance sheet to identify whether their net assets, being an approximation of their minimum recoverable amount, were in excess of their carrying amount and assessing whether those subsidiaries have historically been profit-making;
- Assessing subsidiary audits: Assessing the work performed by the subsidiary audit team on all of those subsidiaries and considering the results of that work, on those subsidiaries' profits and net assets;
- Our sector experience: For the investments where the carrying amount exceeded the net asset value, comparing the carrying amount of the investment with the expected value of the business based on a suitable multiple of the subsidiaries' profit.
- We found the Group's assessment of the recoverability of the investment in subsidiaries to be acceptable.
We continue to perform procedures over the carrying value of goodwill. However, following a continued improvement in the profitability of the entities to which the goodwill relates, we have not assessed this as one of the most significant risks in our current year audit and, therefore, it is not separately identified in our report this year.
3. Our application of materiality and an overview of the scope of our audit
Materiality for the Group financial statements as a whole was set at £1,100,000 (2017: £900,000), determined with reference to a benchmark of total Group profit before tax, of which it represents 5.0% (2017: 5.0% of total Group profit before tax).
Materiality for the parent Company financial statements as a whole was set at £900,000 (2017: £675,000), determined with reference to a benchmark of Company total assets, of which it represents 0.4% (2017: 0.3%).
We reported to the audit committee any corrected or uncorrected identified misstatements exceeding £55,000 (2017: £45,000), in addition to other identified misstatements that warranted reporting on qualitative grounds.
Of the Group's seven (2017: seven) reporting components, we subjected six (2017: six) to full scope audits for Group purposes. For the residual component, we performed analysis at a Group level to re-examine our assessment that there were no significant risks of material misstatement within that component.
The components within the scope of our work accounted for the percentages illustrated opposite.
The Group audit team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group audit team also approved the component materialities ranging from £250,000 to £900,000 (2017: £320,000 to £675,000) having regard to the mix of size and risk profile of the Group across the components. The work on one of the seven components (2017: one of the seven components) was performed by component auditors and the rest, including the audit of the parent Company, was performed by the Group team.
The Group team visited one (2017: one) component location in India (2017: India) to assess audit risk and strategy. Telephone conference meetings were also held with the component audit team. At these meetings, the findings reported to the Group team were discussed in more detail, and any further work required by the Group team was then performed by the component auditor.
Total profit before tax
Total Group profit before tax
Full scope for Group audit purposes 2018
Full scope for Group audit purposes 2017
4. We have nothing to report on going concern
We are required to report to you if:
- we have anything material to add or draw attention to in relation to the directors' statement in note 1 to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Company's use of that basis for a period of at least twelve months from the date of approval of the financial statements; or
- if the related statement under the Listing Rules set out in the financial review and the director's report is materially inconsistent with our audit knowledge.
We have nothing to report in these respects.
5. We have nothing to report on the other information in the annual report
The directors are responsible for the other information presented in the annual report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information.
Strategic report and directors' report
Based solely on our work on the other information:
- we have not identified material misstatements in the strategic report and the directors' report;
- in our opinion the information given in those reports for the financial year is consistent with the financial statements; and
- in our opinion those reports have been prepared in accordance with the Companies Act 2006.
Directors' remuneration report
In our opinion the part of the directors' remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
Disclosures of principal risks and longer-term viability
Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to:
- the directors' confirmation within the financial review 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 and liquidity;
- the principal risks disclosures describing these risks and explaining how they are being managed and mitigated; and
- the directors' explanation in the viability statement of how they have assessed the prospects of the Group, over what period they have done so and why they considered 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.
Under the Listing Rules we are required to review the viability statement. We have nothing to report in this respect.
Corporate governance disclosures
We are required to report to you if:
- we have identified material inconsistencies between the knowledge we acquired during our financial statements 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 position and performance, business model and strategy; or
- the section of the annual report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.
We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the 11 provisions of the UK Corporate Governance Code specified by the Listing Rules for our review.
We have nothing to report in these respects.
6. We have nothing to report on the other matters on which we are required to report by exception
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.
We have nothing to report in these respects.
7. Respective responsibilities
As explained more fully in their statement, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or other irregularities (see below), or error, and to issue our opinion in an auditor's report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
A fuller description of our responsibilities is provided on the FRC's website at www.frc.org.uk/auditorsresponsibilities.
Irregularities – ability to detect
We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our sector experience and through discussion with the other management (as required by auditing standards).
We had regard to laws and regulations in areas that directly affect the financial statements including financial reporting (including related company legislation) and taxation legislation. We considered the extent of compliance with those laws and regulations as part of our procedures on the related financial statement items.
In addition, we considered the impact of laws and regulations in the specific area of health and safety recognising the nature of the Group's activities. With the exception of any known or possible non-compliance, and as required by auditing standards, our work in respect of these was limited to enquiry of the directors and inspection of regulatory and legal correspondence.
We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit. This included communication from the Group to component audit teams of relevant laws and regulations identified at Group level, with a request to report on any indications of potential existence of non-compliance with relevant laws and regulations (irregularities) in these areas, or other areas directly identified by the component team.
As with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls.
8. The purpose of our audit work and to whom we owe our responsibilities
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.
Adrian Stone (Senior statutory auditor)
for and on behalf of KPMG LLP, Statutory Auditor
One Sovereign Square, Sovereign Street
Leeds, LS1 4DA
20 June 2018