The preparation of financial statements in conformity with Adopted IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported annual amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates, although, unless otherwise stated, management do not consider that the range of possible outcomes for each estimate or judgement would result in a material adjustment to the relevant balance sheet carrying value.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
The Group believes the principal accounting estimates, assumptions and uncertainties employed in the preparation of these financial statements are:
- Recoverable amount of goodwill (note 12)
IAS36 Impairment of Assets seeks to ensure that the carrying amount of goodwill is not held at an amount greater than its recoverable amount. The recoverable amount is determined as the higher of fair value less costs to sell and value in use. Management use the value in use model to determine whether goodwill is recoverable. This involves estimating the future performance of a cash generating unit (CGU) that goodwill has been allocated to. The key estimates used in determining the future performance of a CGU are: revenue growth rate, discount rate and terminal EBIT margin. To determine the revenue growth rate and terminal EBIT margin management considers the historic performance of the business, nominal GDP rates in the country of operation and any known or expected changes to occur to existing operations. To calculate an appropriate discount rate, management consider external sources of data based on current market conditions. The assumptions used for each significant CGU relating to these key estimates, including changes to the assumptions applied in previous years, are disclosed in note 12.
Note 12 also discloses if a reasonable possible change in a key assumption would cause the carrying amount of goodwill to exceed its recoverable amount for a CGU. From the impairment tests conducted on PSEP, management have identified that if the sales growth was not achieved, it is possible an impairment of £0.3m would need to be recognised. Further details behind the assumptions to arrive at the £0.3m impairment are disclosed in the note.
Inventories are stated at the lower of cost and net realisable value with a provision being made for obsolete and slow moving items. Initially, management makes a judgement on whether an item of inventory should be classified as standard or customer specific. This classification then determines when a provision is recognised. Management then estimates the net realisable value of the stock for each individual classification. A provision is made earlier for customer specific stock (compared to standard) because it carries a greater risk of becoming obsolete or slow moving given the fastenings are designed specifically for an individual customer. The amount of write downs recognised as an expense in the period relating to this estimate is detailed in note 17.
- Fair values for IFRS2 charge (note 22)
Accounting standards require fair values to be measured for each share based payment scheme and the cost is recognised in the financial statements over the relevant vesting periods. IFRS2 Share-Based Payments is very prescriptive in determining whether an award is equity or cash settled so there is little judgement for management to make here. Judgement is then used to determine which valuation model is appropriate to calculate the fair value and then subsequently the estimates are determined based on the inputs required for each model. These calculations are complex and therefore the Directors use external advisors to determine which is the most appropriate valuation model and subsequently the estimates required. The valuation model used for the Board deferred equity bonus and senior management deferred bonus schemes is the Discounted Dividend model which uses the expected annual dividend as its key estimate. The valuation model used for the SAYE scheme is the Black Scholes model. The key estimates used in this model are: expected volatility, expected life and expected annual dividend. The figures used for these key estimates are disclosed in note 22. Crossing both models there is also an estimate made for the lapse rate to arrive at the number of awards expected to vest. The lapse rate for the Board deferred equity bonus shares is 0% and for the senior management deferred bonus and SAYE schemes it is 3%. A higher lapse rate during the vesting period will reduce the IFRS2 expense - a lower lapse rate will increase the expense.
Since the fair values for the equity settled awards are only calculated at the grant date, the estimates used in the calculation will not be updated (except for the number of awards expected to vest). Also, they do not result in an asset or liability being recognised, instead the credit goes direct to equity. The fair value for the cash settled awards are required to be re-measured at each reporting date and therefore the estimates will be updated. The carrying amount of the liability at the period end was £16,412 (2016: £nil).
To arrive at the amounts recognised in the balance sheet the Directors are required to estimate certain decisions that are still pending from tax authorities. The pending decisions relate to potential tax exposures from open enquiries. The Directors use external tax advisors to arrive at their decisions regarding these estimates. The final position taken by a tax authority could differ from the estimates made by the Directors which could impact the liability recognised on the balance sheet which is £1.2m (2016: £1.2m). As explained in note 9 the open enquiries are expected to be settled within a year. The amount provided is at the upper end of the range of possible outcomes and we do not anticipate the final settlement significantly exceeding the amount recognised.