Annual Report and Accounts 2016


John Lewis Partnership plc


155


Area of focus Supplier income


As described in the accounting policies section on page 125 and the Audit and Risk Committee report on page 84, the Partnership receives income from suppliers based on two principal streams: volume rebates and marketing rebates.


This remains an area of focus for several reasons. Firstly the complexities of the calculation and judgements involved, for example forecasting expected future sales volumes in order to determine whether volume based rebates revenue recognition criteria will be met. Secondly, the quantum of income recorded under these arrangements and its significance in relation to the result for the period. Finally, the process for maintaining records and calculating rebate income requires significant manual input because of the way in which such agreements are made. It is also an area of heightened focus in the context of retail industry practices.


Supplier income is recorded against cost of sales in the income statement and the conditions to determine the recognition of such income can vary, such as suppliers offering rebates for specific promotions or rebates recognised based on selling product volumes over certain thresholds throughout the year. The majority of rebates are settled during the year by being netted against payments made to suppliers.


The complexities and judgement involved in these calculations and the scope for human error mean there is an increased risk of incorrect income recognition or income recognition that is not in compliance with supplier agreements and of incorrect amounts of revenue being recognised in the year.


Impairment of property, plant and equipment


For each cash generating unit (‘CGU’), which is defined as a store, management assesses on an annual basis whether there are any impairment triggers that would indicate that the CGU amount is not recoverable. For stores where triggers are identified, the value in use is compared to the carrying value and an impairment charge is recorded where the carrying value exceeds the value in use.


In the current year, trading conditions have continued to be challenging for both John Lewis and Waitrose, reflecting the competitive nature of the industry and sluggish consumer spending. As a result, more CGUs triggered for impairment than in the prior year with 12 stores triggering for impairment review in John Lewis and 60 branches triggering for impairment review in Waitrose.


For each of these CGUs the value in use was compared to the carrying value, which resulted in an impairment charge of £5.7m in relation to several Waitrose branches, principally in the core, non-convenience estate. See note 3.2 and page 83 of the Audit and Risk Committee report for more details.


We continue to focus on impairment because of the materiality of the store portfolio and because of the judgements required in determining whether there have been any impairments. In addition, where triggers were identified for certain CGUs, calculating the value in use of those CGUs involves subjective judgements and estimates by management, particularly regarding short- and long-term growth rates and operating margins.


We tested the managements’ assessment of impairment triggers and were satisfied that it appropriately took into account both internal and external impairment indicators, including the trading performance of each store and branch, and competitor activity. Impairment triggers were identified for some John Lewis and Waitrose stores.


Where impairment triggers were identified we tested the value in use models, including considering the revenue and profit assumptions included within forecasts. No issues were noted.


aWe challenged managements’ key assumptions, in particular the long-term strategic growth rate, by comparing the assumptions to recent results both for the Partnership and the retail sector as a whole. We were satisfied with management’s rationale for adopting a slightly higher long-term growth rate than the industry average, based on the Partnership’s recent outperformance of the industry.


aWe performed sensitivity analysis around the key assumptions in the value in use calculations being the discount rate and long-term growth rates of the cash flow forecasts to ascertain the extent of change in those assumptions that either individually or collectively would be required for the relevant asset to be materially impaired.


aWe then considered the likelihood of such movement arising in those key assumptions arising based on our knowledge of the Partnership and of the retail industry amongst other factors. As a result of our work we determined the impairment charge to be appropriate.


We agreed the rebate income recognised by the Partnership, covering all types of rebates, to the underlying agreements from a range of different suppliers at both John Lewis and Waitrose. In particular, we verified whether the rebate income had been calculated correctly and recognised in the correct period, based on the supplier contracts and invoices. No material exceptions were noted in this testing.


We also performed a detailed analysis of the rebate income in the year, analysing income by supplier year on year and comparing movements to trends in revenue and gross margin. We did not identify any unusual trends in the rebate income recognised in the year.


For a sample of rebates, we also confirmed the amount and timing directly with the supplier. This testing did not identify any issues.


We tested management’s process for ensuring the existence and accuracy of the year-end accrued income balance for supplier rebates of £7.8m (see note 4.2). This process involved testing rebates raised and cancelled after the year-end. We did not note any material amounts that were not recorded in the correct period.


How our audit addressed the area of focus


It’s Your Results


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