Independent auditors’ report to the members of John Lewis Partnership plc (continued) John Lewis Partnership plc Annual Report and Accounts 2015


172


Area of focus Post-retirement benefit obligation


The Partnership has a net post-retirement benefit obligation of £1,260 million, which is significant in the context of both the overall balance sheet and the results of the Partnership.


The net deficit has increased in the year, despite a one-off contribution of £294m, principally due to a decrease in the real discount rate (the net of the discount rate and future RPI) from 1.1% to 0.35%.


The valuation of the pension liability also requires significant levels 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.


Refer to note 23 to the financial statements and page 105 of the Audit and Risk Committee report.


Capitalisation of intangible assets


Total additions to computer software in the period were £145 million, of which £100 million related to internally generated costs and £45 million was external expenditure. Refer to note 10. We focussed on this area because material amounts have been capitalised in the year, particularly in relation to internally developed software. The principal projects relate to:


a Enhancements to the Partnership’s customer-facing websites; a A new warehouse management system; and a New ordering and enterprise resource management systems.


Under accounting standards, 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.


As such, judgement is required in determining the appropriate accounting treatment. In particular:


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


a Whether 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:


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


a We 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 intangible projects, and we did not identify any material issues;


a We assessed and challenged the status of significant projects and confirmed that the amounts capitalised during the year have met the capitalisation criteria. Specifically, we checked that the amounts capitalised relate to projects which management expects to finalise and that will bring economic benefits to the Partnership; and


a We tested the rates used when capitalising internal costs and checked that they appropriately capture relevant costs that are directly related to the staff time spent on internally generated intangible assets.


Management makes use of external actuaries to support the judgements involved in valuing the pension liability. Using our 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 the Directors are within our benchmark ranges and checked that the pension liability calculation methods are appropriate and consistent with the prior year.


We tested that the membership census data used in the actuarial models is consistent with the payroll data held by the Partnership, and tested significant changes to the post-retirement benefit obligation including the one-off contribution made during the year.


How our audit addressed the area of focus


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