55 Finsbury Food Group Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
Estimates The Group is required to make estimates and assumptions concerning the future. These are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates will, by definition, seldom equal the related actual results. Accounting estimates have been required for the production of these Financial Statements. The following are those that are deemed to require the most complex assumptions about matters that have the most significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
• Defined Benefit Pension Scheme valuation The Group has one legacy Defined Pension Scheme that was closed to future accrual in May 2010. The net deficit or surplus is the difference between the plan assets and plan liabilities at the period end date. The valuation of the assets and liabilities is based on a number of assumptions. The assets are based on market value at the period end date, the liabilities are based on actuarial assumptions such as discount, inflation and mortality rates. The valuation is sensitive to changes in actuarial assumptions, whereby modest changes can have a material impact on the valuation. The risks include economic risks (such as interest rate risk and inflation risk) and demographic risks (for example members living longer than expected). The Group accounts for defined benefit pension based on advice provided by the Scheme’s actuary in accordance with IAS 19 (revised) ‘Employee Benefits’, with independent actuaries being used to calculate the costs, assets and liabilities to be recognised in relation to the Scheme. The present value of the defined benefit obligation, the current service cost and past service costs are calculated by these actuaries using the projected unit credit method, further detail can be found in Note 14. The valuation is prepared on a consistent basis and the assumptions are compared to prior periods and market conditions. The assumptions are audited annually by a team of technical experts to assess whether the assumptions used are within an acceptable range.
• Acquisition A team of independent advisers are used throughout the acquisition process. External advisers are appointed to carry out specific extensive financial modelling work, legal and tax due diligence. An extensive valuation model provided by professional advisers is used in the calculation of the fair value of intangible asset. The assumptions are audited to assess whether the assumptions used are reasonable.
• Investments (including goodwill and intangibles) The Group holds goodwill and intangibles and the Parent Company holds investments in the respective balance sheets. On an annual basis (more frequently if there are indications of impairment due to changes in market environment or changes that may affect the carrying value), the carrying values are tested for impairment, there is a risk that an impairment may not be correctly identified.
• Impairment Detailed impairment models are prepared for each cash generating unit, detailed budgets and strategic forecasts are used as a basis for the modelling. Budgets and forecasts are sense checked during various rounds of internal management reviews. Sensitivities are applied to the discount rates used and the assumptions and results are reviewed by the Audit Committee and audited annually by external auditors. Impairment testing involves significant judgement as to whether the carrying value of each asset can be supported by the net present value of estimated future cash flows derived from such asset using cash flow projections which have been discounted at an appropriate rate. The key areas are:
– Discount rates – Future revenue and costs – Long term growth rates
Further detail can be found under the significant accounting policy for intangible assets and goodwill and in Note 11.
• Provisions The Group recognises provisions where an obligation exists at the period end date and a reliable estimate can be made. Provisions relating to the exit of the Grain D’Or leased site have been recognised in these Financial Statements. The provision relates mainly to lease costs and dilapidations. External advisers are working with a team of internal individuals during lease negotiations with the landlord, dilapidation work is progressing and the marketing of the newly refurbished properties has commenced. There are many areas of estimation, specifically around ongoing lease costs, occupancy rates and timing of occupancy. The level of provision has been based on the latest information available regarding the current state of property condition and progress on lease cost negotiations. A smaller provision exists for pension augmentation and relates to a contractual liability for pension augmentation that has been valued by the pension Scheme actuaries. See Note 14 for further details.
• Taxation Significant judgement is exercised by management in determining the amounts to be provided for both current and deferred tax. The final tax determination of certain transactions is often uncertain and may not be known for some time in the future. The appointment of external tax advisers to calculate the provisions during the year end process will focus expertise in this area and provide an independent technical interface with the auditors. The tax position is reviewed and assumptions are challenged by the external auditors and the actual tax charge is clearly reconciled to the theoretical tax charge in the Annual Report disclosures to ensure that variances are visible and understood. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised. The deferred tax asset recognised for losses relate to acquired businesses. Based on current and forecast levels of profitability, the losses are expected to be utilised within 2 years.
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