1. Our opinion is unmodified
We have audited the financial statements of Severfield plc ('the Company') for the year ended 31 March 2020 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 par ent Company's affairs as at 31 March 2020 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.
- 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 five financial years ended 31 March 2020. 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.
Group financial statements as a whole
|£1.3m (2019: £1.2m)|
4.9% (2019: 4.9%) of profit before tax
|Coverage||96% (2019: 97%) of Group profit before tax|
|Key audit matters||vs 2019|
|Event driven||Going concern|
|Recurring risk||Carrying value of construction contract assets, and revenue and profit recognition in relation to construction contracts|
|Event driven||Valuation of intangible assets and contingent consideration for Harry Peers|
|Recurring risks||The impact of uncertainties due to the UK exiting the European Union on our audit|
|Carrying value of parent Company's investments in subsidiaries, joint ventures and associates|
2. Key audit matters: including our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgement, 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 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|
Refer to (operating performance), (financial performance), (viability statement), (principal risks), (audit committee report) and (significant accounting policies).
The financial statements explain how the Board has formed a judgement that it is appropriate to adopt the going concern basis of preparation for the Group and parent Company.
That judgement is based on an evaluation of the inherent risks to the Group's business model and how those risks might affect the Group's financial resources or ability to continue operations over a period of at least a year from the date of approval of the financial statements.
The risks most likely to adversely affect the Group's available financial resources over this period were:
- Economic downturn resulting in significant market deterioration reducing forward orders and profitability.
There are also less predictable but realistic second order impacts, such as :
- A second incidence of construction site closures resulting from COVID-19, causing delays in project completion, and associated revenue and cash flow.
- The risk of COVID-19 to the supply chain, which could have a significant impact on operations.
The risk for our audit was whether or not those risks were such that they amounted to a material uncertainty that may have cast significant doubt about the ability to continue as a going concern. Had they been such, then that fact would have been required to have been disclosed.
|Our procedures included:|
- Funding assessment: Inspected confirmation of the Group's committed level of financing and related covenant requirements.
- Historical comparisons: We considered the Group's historical budgeting accuracy, by assessing actual performance against budget.
- Sensitivity analysis: We considered sensitivities over the level of available financial resources indicated by the Group's financial forecasts taking account of reasonably possible (but not unrealistic) adverse effects that could arise from these risks individually and collectively.
- Sensitivity analysis: We assessed management's base-case forecast to ensure consideration had been given to the impact of COVID-19, and that this impact was included in projections of the Group's financial resources.
- Benchmarking assumptions: We benchmarked the assumptions behind the cash flow forecasts to third party evidence, such as sector-specific, as well as UK-wide economic forecasts, to assess downside assumptions.
- Evaluating directors' intent: We evaluated the achievability of the actions the directors consider they would take to improve the position should the risks materialise.
- Assessing transparency: We assessed the completeness and accuracy of the matters covered in the going concern disclosure by comparing disclosures to risks identified, and sensitivities applied.
- We found the going concern disclosure without any material uncertainty to be acceptable.
|Carrying value of construction contract assets, and revenue and profit recognition in relation to construction contracts|
Revenue: £327.4m (2019: £274.9m)
Construction contract assets: £29.1m (2019: £28.4m)
Refer to (audit committee report), (accounting policies, judgements and estimates) and note 17 (construction contracts).
The Group's activities are undertaken via long-term construction contracts.
The carrying value of the construction contract assets, as well as the revenue and profit recognised, are based on an input measure (being costs incurred to date as a proportion of estimated total contract costs) and estimates of total contract consideration (being agreed contract consideration plus elements of variable consideration such as instances where the value of variations is currently unagreed).
Estimated total 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. These uncertainties have increased as a result of COVID-19.
The effect of these matters is that, as part of our risk assessment for audit planning purposes, we determined that the carrying value of contract assets, revenue and profit recognised on construction contracts has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount.
|Our procedures included:|
- Our sector experience: Identifying high risk contracts with risk indicators including: low margin or loss making contracts with significant costs to complete estimates, uncertainty over variable consideration, significant disputes with customers, and large carrying value of contract assets, engaging our own major projects advisory specialists.
- Tests of detail: For the high risk contracts identified, agreeing uncertain variable consideration to post-year-end cash, post-year-end certification, or customer agreed variation schedules. Involving our own specialists to assess the position taken and assist in challenging management on the appropriateness of including such items in the value of contract revenue where such evidence was not available.
- Our sector experience: Assessing forecasted costs to complete in the sample of high risk contracts identified by understanding contract performance and costs incurred post year-end, along with discussions and challenge of management's costs to complete estimates against original budgets and current run rates, including consideration of COVID-19 related impacts.
- Tests of detail: Assessing the accuracy of costs incurred to date through sample testing, including an assessment of whether the cost sampled was allocated to the appropriate contract.
- Tests of detail: Verifying the existence of contract claims against the Group to external correspondence and challenging management's assessment of these, involving our own specialists to challenge the position taken.
- Historical comparisons: Assessing the forecasting accuracy of contract revenue and costs 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 assets and associated revenue and profit recognition.
- We found the carrying value of construction contract assets, and the level of revenue and profit recognition in relation to construction contracts to be acceptable (2019: acceptable).
|Valuation of intangible assets identified and contingent consideration in relation to Harry Peers acquisition|
Intangible Assets: £7.4m (net of in year amortisation of £1.4m).
Contingent Consideration: £6.3m (including unwind of discount of £0.5m)
Refer to (operating performance), (financial performance), (audit committee report), (accounting policies, judgements and estimates and note 21 (business combinations).
On 01 October 2019 the Group acquired Harry Peers & Co Limited ('Harry Peers') for a total net cash consideration of £24.7m, of which £18.9m was net cash consideration, and £5.8m was the fair value of contingent consideration, which has a maximum potential payment of £7m depending on performance. In accounting for the acquisition, the Group needs to ensure all identifiable assets are recognised at their acquisition-date fair values.
The valuation of intangible assets and contingent consideration requires a significant degree of judgement with estimates including the trading performance of Harry Peers, the timing of future cash flows and the discount rate applied.
The effect of these matters is that, as part of our risk assessment, we determined that valuation of intangible assets identified and contingent consideration in relation to Harry Peers acquisition has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole.
|Our procedures included:|
- Our sector experience: Evaluating assumptions used, in particular those relating to forecast revenue and EBITDA performance, and customer attrition rates, engaging our own valuation specialists to evaluate assumptions such as the discount rate used.
- Methodology choice: Using our own valuation specialists to assess the methodology used in valuing the intangible assets recognised, such as the brand and customer list intangible assets.
- Tests of detail: Corroborating management's calculations to supporting documentation such as Sale Purchase Agreement, and supporting documentation relating to the balance sheet on acquisition.
- Sensitivity analysis: We performed our own analysis to assess the sensitivity of the valuation of intangible assets to changes in the key assumptions, noted above.
- Historical comparisons: Evaluating how management's assumptions for future performance at acquisition date compared to actual performance, both prior to acquisition and since.
- Assessing transparency: Assessing the adequacy of the Group's disclosures in respect of the identification and valuation of acquisition related intangible assets.
- We found the valuation of the intangible assets and contingent consideration recognised on acquisition of Harry Peers, and the related recognition of goodwill on acquisition to be acceptable.
|The impact of uncertainties due to the UK exiting the European Union on our audit|
Refer to (financial performance), (viability statement), (principal risks) and (corporate governance report).
|Unprecedented levels of uncertainty|
All audits assess and challenge the reasonableness of estimates, in particular as described in the carrying value of construction contract assets and revenue and profit recognised on construction contracts below, and related disclosures and the appropriateness of the going concern basis of preparation of the financial statements (see below). All of these depend on assessments of the future economic environment and the Group's future prospects and performance.
In addition, we are required to consider the other information presented in the annual report including the principal risks disclosure and the viability statement and to consider the directors' statement 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.
Brexit is one of the most significant economic events for the UK and its effects are subject to unprecedented levels of uncertainty of consequences, with the full range of possible effects unknown.
|We developed a standardised firm-wide approach to the consideration of the uncertainties arising from Brexit in planning and performing our audits. Our procedures included:|
- Our Brexit knowledge: We considered the directors' assessment of Brexit-related sources of risk for the Group's business and financial resources compared with our own understanding of the risks. We considered the directors' plans to take action to mitigate the risks.
- Sensitivity analysis: When addressing the carrying value of construction contract assets and revenue and profit recognised on construction contracts and other audit areas that depend on forecasts (including going concern, see below), we compared the directors' analysis to our assessment of the full range of reasonably possible scenarios resulting from Brexit uncertainty and, where forecast cash flows are required to be discounted, considered adjustments to discount rates for the level of remaining uncertainty.
- Assessing transparency: As well as assessing individual disclosures as part of our procedures on the carrying value of construction contract assets and revenue and profit recognised on construction contracts, we considered all of the Brexit related disclosures together, including those in the strategic report, comparing the overall picture against our understanding of the risks.
- As reported under the carrying value of construction contract assets and revenue and profit recognised on construction contracts, we found resulting estimates and related disclosures of construction contacts and disclosures in relation to going concern to be acceptable (2019: acceptable). However, no audit should be expected to predict the unknowable factors or all possible future implications for a company and this is particularly the case in relation to Brexit.
|Carrying value of parent Company's investments in subsidiaries and joint ventures|
£128.8m (2019: £104.1m)
Refer to (accounting policy) and (financial disclosures).
|Low risk, high value:|
The carrying amount of the parent Company's investments in subsidiaries and joint ventures represents 51% (2019: 47%) 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 the investments balance with the relevant subsidiaries' and joint ventures' draft balance sheets 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 and joint ventures have historically been profit-making.
- Assessing subsidiary and joint venture audits: Assessing the work performed by the subsidiary and joint venture audit teams on all of those subsidiaries and joint ventures and considering the results of that work, on those subsidiaries' and joint ventures' 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' and joint ventures' profit.
- We found the Group's assessment of the recoverability of the investment in subsidiaries and joint ventures to be acceptable (2019: acceptable)
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 £1,335,000 (2019: £1,200,000), determined with reference to a benchmark of Group profit before tax (normalised to exclude this year's costs relating to the acquisition of Harry Peers as disclosed in note 5, of £1,387,000), of which it represents 4.9 per cent (2019: 4.9 per cent).
Materiality for the parent Company financial statements as a whole was set at £900,000 (2019: £900,000), determined with reference to a benchmark of Company total assets, of which it represents 0.4 per cent (2019: 0.4 per cent).
We reported to the Audit Committee any corrected or uncorrected identified misstatements exceeding £66,750, in addition to other identified misstatements that warranted reporting on qualitative grounds.
Of the Group's ten (2019: nine) reporting components, we subjected seven (2019: six) to full scope audits for Group purposes.
The components within the scope of our work accounted for the percentages illustrated below.
The remaining six per cent of total Group revenue, four per cent of Group profit before tax and two per cent of total Group assets is represented by three reporting components, none of which individually represented more than three per cent of any of total Group revenue, Group profit before tax or total Group assets. For these residual components, we performed analysis at an aggregated group level to re-examine our assessment that there were no significant risks of material misstatement within these.
The Group 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 team approved the component materialities, which ranged from £400,000 to £950,000 (2019: £400,000-£900,000), having regard to the mix of size and risk profile of the Group across the components. The work on one of the ten components (2019: one of the nine 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 held video and telephone conference meetings with one (2019: one) component location in India (2019: India). 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. The Group team also reviewed the audit file of the component auditor. The group team performed procedures on the items excluded from normalised group profit before tax.
4. We have nothing to report on going concern
The Directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Company or the Group or to cease their operations, and as they have concluded that the Company's and the Group's financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the financial statements ('the going concern period').
Our responsibility is to conclude on the appropriateness of the Directors' conclusions and, had there been a material uncertainty related to going concern, to make reference to that in this audit report. However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of reference to a material uncertainty in this auditor's report is not a guarantee that the Group and the Company will continue in operation.
We identified going concern as a key audit matter (see section 2 of this report). Based on the work described in our response to that key audit matter, 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
- the related statement under the Listing Rules 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 viability statement (Our financial performance) 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.
Our work is limited to assessing these matters in the context of only the knowledge acquired during our financial statements audit. As we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of anything to report on these statements is not a guarantee as to the Group's and Company's longer-term viability.
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 set out in Directors' responsibilities statements, 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 general commercial and sector experience, through discussion with the directors and other management (as required by auditing standards), and discussed with the directors and other management the policies and procedures regarding compliance with laws and regulations. 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.
The potential effect of these laws and regulations on the financial statements varies considerably.
Firstly, the Group is subject to laws and regulations that directly affect the financial statements including financial reporting legislation (including related companies legislation), distributable profits and taxation legislation, and we assessed the extent of compliance with these laws and regulations as part of our procedures on the related financial statement items.
Secondly, the Group is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation. We identified the following areas as those most likely to have such an effect: health and safety, employment law. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and other management and inspection of regulatory and legal correspondence, if any. These limited procedures did not identify actual or suspected non-compliance.
Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the financial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further removed non-compliance with laws and regulations (irregularities) is from the events and transactions reflected in the financial statements, the less likely the inherently limited procedures required by auditing standards would identify it. In addition, 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. We are not responsible for preventing non-compliance and cannot be expected to detect non-compliance with all laws and regulations.
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.
David Morritt (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor
One Sovereign Square
17 June 2020