Annual Report and Accounts 2016


John Lewis Partnership plc


157


Area of focus Provisions


The financial statements contain several provisions, principally long leave, unredeemed gift vouchers, service guarantee costs and inventory obsolescence. See page 84 of the Audit and Risk Committee Report.


We continued to focus on these areas due to the number and magnitude of potential exposures across the Partnership, and the complexity and judgement inherent in determining the appropriate valuation of the provision for each exposure.


The key assumptions employed in calculating these liabilities relate to:


a Long leave: Actuarial assumptions principally relating to salaries increase, inflation, discount rates, and mortality;


a Unredeemed gift vouchers: Assumption for the amount of vouchers issued which are not expected to be redeemed;


a Service guarantee costs: Assumptions regarding the frequency and cost of future repairs; and


a Inventory obsolescence: Assumptions regarding the future selling price and quantities of aged and slow moving inventory.


How our audit addressed the area of focus


We tested the managements’ policies for calculating these provisions, assessed the appropriateness of the management’s judgements and assumptions applied, and considered the nature and suitability of any historic data used in support of the judgements and assumptions made, in estimating the provisions. In doing so we noted no material issues.


In particular, we focussed on the following key assumptions:


a Long leave: Assessed the actuarial assumptions and noted that those used by management are within our benchmark ranges;


a Unredeemed gift vouchers: Confirmed that the non-redemption rate used by management is based on historical data for gift voucher sales and redemptions;


a Service guarantee costs: Confirmed that the assumptions regarding the frequency and cost of future repairs are based on appropriate historical data, and also take into account appropriate assumptions for future changes in failure rates and cost inflation; and


a Inventory obsolescence: Confirmed that the assumptions in the provision calculation for future selling price are based on historical data for similar items.


We also considered the completeness of provisions, by making inquiries of the General Counsel and Company Secretary and considering events and conditions such as litigation or changes to the Partnership that could give rise to provisions in the year to assess whether management has taken known exposures into account, and the related disclosures. Based on this, we did not identify any material omissions.


Depreciation


The Partnership holds £3,441m of land and buildings on the balance sheet as at 30 January 2016. The level of depreciation recorded against the buildings is dependent upon the useful economic lives and residual values ascribed to each of these assets. See note 3.2 for more details. Management reviews these two judgements annually with support from external property advisers, and during the current year has performed a detailed exercise in order to confirm the processes and policies in place remain appropriate.


In particular, the residual values ascribed reflect the amounts which the Partnership could obtain upon disposal of the assets at the end of their useful economic life. This is an important judgement given (i) the size of these assets on the balance sheet, and (ii) the valuations involve a degree of judgement and estimation in particular for stores where the carrying value is close to residual value.


We have understood and assessed management’s approach to determining and reviewing residual values. We have assessed the inputs to the valuation methodology used, and considered whether there are any alternative valuation approaches as well as the Partnership’s ability to realise this value. We have used our property valuation team in support of these considerations and held discussions with CBRE, the Partnership’s property advisers.


As a result of our work we have concluded that management’s approach to determining and reviewing residual values remains appropriate, and that the current residual values continue to be supported by appropriate valuations.


It’s Your Results


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