Independent auditors’ report to the members of John Lewis Partnership plc (continued) 156 John Lewis Partnership plc Annual Report and Accounts 2016


Area of focus Post-retirement benefit obligation


The Partnership has a post-retirement benefit obligation of £5,140.0m, which is significant in the context of both the overall balance sheet and the results of the Partnership.


The valuation of the pension liability requires a significant level of judgement and technical expertise in making appropriate assumptions. Changes in the key assumptions (including salaries increase, inflation, discount rates and mortality) can have a material impact on the calculation of the liability. As such, this is an area of focus for us.


The obligation has decreased by £161m, driven by an increase in the real discount rate (the net of the discount rate and future RPI) from 0.35% to 0.70%.


Refer to note 6.1 to the financial statements and page 83 of the Audit and Risk Committee report.


Capitalisation of intangible assets


The Partnership develops a substantial amount of software used to operate the systems and technology in the business and it is further developing technology to increase the efficiency and capacity of existing operations. Total additions to computer software in the period were £146m, of which £116m related to capitalised payroll and contractor costs and £30m was external expenditure. Refer to note 3.1.


For the current year, the principal projects relate to: a A new resource management system; a Enhancements to the Partnership’s customer-facing websites; a New ordering systems.


Under IAS 38 ‘Intangible assets’, internally generated software costs cannot be capitalised when they relate to the research phase of projects. Project development costs can be capitalised when certain criteria are met, including demonstrating that the project is expected to be completed and will bring economic benefits to the Partnership.


We continued to focus on this area because material amounts have been capitalised in the year and judgement is required in determining the appropriate accounting treatment for these intangible assets. In particular:


a Determining the amount of time that specifically relates to each project;


aWhether the capitalisation criteria have been met for each project and an asset has been created that will bring benefits to the Partnership; and


a Determining the internal costs, principally salaries, that are attributed to the time spent on each project.


Focussing in particular on the principal projects listed to the left, we performed the following procedures:


aWe assessed managements’ policies and processes for determining the amount of time that specifically relates to each project and did not note any issues;


aWe tested the approval process for projects including the consistent use of asset or project creation forms. In doing so we assessed whether the amounts capitalised relate to time spent on the development phase, as opposed to the research phase of the intangible projects, and we did not identify any material issues;


aWe assessed and challenged the status of significant projects by understanding what the project is for and how it supports the Partnership. We have also confirmed that the amounts capitalised during the year have met the capitalisation criteria. Specifically, we confirmed that the amounts capitalised relate to projects which management expects to finalise and that will bring economic benefits to the Partnership; and


aWe tested the rates used when capitalising internal costs (e.g. payroll) and checked that they appropriately capture relevant costs that are directly related to the staff time spent on developing internally generated intangible assets and exclude other costs. We did not identify any material issues.


Management makes use of external actuaries to determine the judgemental inputs used in valuing the pension liability. Using our own internal actuaries and experience of other companies and of the relevant assumptions, we challenged the reasonableness of these actuarial assumptions, in particular the discount rate and inflation measures.


We noted that the assumptions used by management are within our benchmark ranges and checked that the pension liability calculation methods are appropriate. The methodology is consistent with the prior year. We noted that the calculation of salary increases has been updated to reflect the planned introduction of the National Living Wage.


We tested the membership census data used in the actuarial models, noting that it is consistent with the payroll data held by the Partnership, and we confirmed that there have been no changes to membership terms in the current year.


How our audit addressed the area of focus


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