The most significant business combination during the year related to Penton, which was acquired on 2 November 2016 for consideration of approximately £1.3 billion. During 2016, the Group also completed eight additional business combinations for a consideration of approximately £93 million (see Note 18) and 22 asset acquisitions for consideration of approximately £55 million.

Accounting for business combinations and asset acquisitions can be complex and often requires judgements to be applied and assumptions to be used when assessing the consideration paid, the fair value of assets and liabilities acquired, the identification and valuation of acquired intangible assets and any associated goodwill that arises (see above risk).

Management commissions independent valuation experts to assist with the identification and valuation of separate intangible assets for acquisitions involving consideration at or above £50 million.

In Note 3 the Identification of intangible assets acquired in business combinations is identified as a critical judgement with the valuation and asset lives of separately identifiable intangible assets noted as a key source of estimation uncertainty.

We reconfirmed our understanding of the design and implementation of controls relating to business combinations, and then for each material business combination and asset acquisition, we reviewed and challenged the acquisition accounting applied by management. This included:

• review of the underlying sale and purchase agreement;
• testing the validity and completeness of consideration to the underlying agreements and consideration paid;
• reviewing the terms of the acquisition to assess whether components of compensation and remuneration, if any, had been correctly identified and whether acquisition costs had been expensed as required by accounting standards;
• auditing the acquisition date balance sheet and resultant fair value movements;
• engaging Deloitte internal valuations specialists to review and challenge the independent valuation expert’s report utilized by management. This included assessing the intangible assets identified, the basis for their valuation, and benchmarking the reasonableness of the key valuation assumptions, such as discount rates, useful economic lives and growth rates; and
• evaluating management’s resultant assumptions and methodology supporting the fair values of acquired intangible assets.

We reported to the Audit Committee that the audit response procedures were performed satisfactorily and we did not identify any material exceptions as a result of performing our audit procedures. We note that the fair value amounts disclosed within Note 18 are provisional and are subject to finalization within the relevant 12 month measurement period from the acquisition as permitted by IFRS 3 Business Combinations.

These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our conclusions and observations thereon, we do not provide a separate opinion on these matters.

The specific nature of the risk of material misstatement in revenue recognition varies across the Group’s operating divisions. The Group’s revenue recognition accounting policies are disclosed in Note 2 to the Consolidated Financial Statements with an analysis by revenue stream and by segment in Notes 5 and 6 respectively.

In respect of the Global Exhibitions and Knowledge & Networking Divisions, customers are generally billed in advance and the key risk in revenue recognition is that revenue from events and conferences might be recognised in the wrong period, particularly for events held close to year end.

In respect of both the Academic Publishing and Business Intelligence Divisions, we identified the risk that the deferral and release of subscription revenues did not appropriately match the subscription period in customer contracts.

In Academic Publishing, we also identified a key risk relating to sales cut-off, being the sale and recording of revenue from physical book and e-book sales in the period around the year end.

In respect of Penton, we also identified the risk that revenue relating to events and conferences spanning the acquisition date may have included revenue which was earned prior to the acquisition date, and that revenue relating to 2017 may have inadvertently been recognised in 2016.

In addition, auditing standards identify revenue recognition as a presumed area of potentially fraudulent management manipulation.

We confirmed our understanding of each of the Divisions’ business models to ensure that we understood the customer contracts and the sales process.

We then confirmed our understanding of the design and implementation of controls and where applicable, such as in the European shared services centre, tested the operating effectiveness of these controls by performing sample transaction walkthroughs of the revenue recording process, from order processing to invoice production through to cash collection.

This enabled us to design and perform substantive audit procedures to respond to each of the specific risks of material misstatement we identified.

The substantive audit procedures we performed across the entities within our audit scope included:

• for a sample of transactions, obtaining invoices, payments, exhibitor contracts and evidence of event occurrence to determine whether revenue was recognised at the appropriate time, including, for Penton, substantively testing revenue recognised between the acquisition date and year end;
• performing a trend analysis of revenue over the course of the year, plotting revenue against the calendar of events and verifying whether these events had occurred to third party sources;
• for a sample of transactions relating to print or e-book sales and exhibitions or conferences occurring close to the year end, examining supporting documentation to determine whether revenue recognition criteria had been met and whether the revenue had been appropriately recognised in the period or deferred at the period end; and
• for a sample of subscription transactions, obtaining and reviewing the relevant order confirmations and contracts to validate whether revenue was properly allocated across the term of the contract in the correct accounting period.

We reported to the Audit Committee that the audit response procedures were performed satisfactorily and we did not identify any material exceptions as a result of performing our audit procedures.

As the Group has expanded through acquisition it has recognized goodwill and intangible assets. At 31 December 2016, total goodwill and intangible assets were stated at £2,724 million and £1,755 million, respectively

Where goodwill exists, the accounting standards require that management perform an annual impairment test, to compare the recoverable amount (normally based on a “value in use” approach, an accounting term for the estimated net present value to the current owner) against the balance sheet carrying value of each cash generating unit (“CGU”). This same impairment test is required for intangible assets where indicators of potential impairment have been identified.

To perform its impairment review, management prepares forecasts for five years, using the budget for year one, the strategic plan for years two and three, and forecast growth rates for years four and five and then applying a terminal value beyond year five, using growth factors and discount rates in respect of each cash generating unit. The selection of the growth rates and the discount rate assumptions applied requires judgement and is fundamental to this audit risk.

Management discusses the policies and processes in Notes 2, and 16 to the Consolidated Financial Statements, and Impairment of assets is identified as a critical accounting judgement in Note 3. Management engages independent valuers to assist in deriving appropriate discount rates to be used.

In 2016, based on this methodology, impairment charges of £67.7 million have been recognized (2015: £13.9 million) (see Note 8 to the Consolidated Financial Statements), £31.1 million relating to Global Exhibitions and £36.6 million relating to Knowledge & Networking.

We audited the assumptions used in management’s impairment testing of goodwill and other intangible assets. This included:

• considering the process by which management had prepared its forecasts and identified each CGU;
• testing the design and implementation of controls relating to the impairment review process undertaken by management;
• assessing recent forecasting accuracy against actual performance, including, for Penton, assessing actual performance since acquisition to confirm management’s view that no impairment indicators were identifiable;
• determining whether the 2017 budgets for each CGU were consistent with the budgets as adopted by management and approved by the Board of Directors;
• determining whether the projections for 2018 and 2019 (as included in management’s three year plan), and for 2020 and 2021 were in line with our understanding of trends in the business and how they compared to external sources of information;
• determining whether the growth rates selected by management to compute the terminal values of each CGU were in line with the requirements of the accounting standards, which require consideration of long-term economic growth rates for relevant territories;
• reviewing the models used in the impairment tests for mechanical accuracy (i.e. with respect to the use of formulae) and checking that the impairment loss recorded was mechanically accurate based on the assumptions used;
• involving our internal valuation specialists to assess the appropriateness of the key components of the discount rate calculation; and
• considering the reasonableness of sensitivities applied by management and performing further sensitivity analyses on the impairment models.

We reported to the Audit Committee that the audit response procedures were performed satisfactorily and we did not identify any material exceptions as a result of performing our audit procedures.

The Group is subject to tax in numerous jurisdictions. Its complex organization and operational structure give rise to potential tax exposures that require management to exercise judgement in making determinations as to the amount of tax that is payable.

The Group reports cross-border transactions undertaken between subsidiaries on an arm’s-length basis in tax returns in accordance with Organization for Economic Co-operation and Development (OECD) guidelines. However, transfer pricing relies on the exercise of judgement and it is frequently possible for there to be a range of legitimate and reasonable views.

The Group is subject to tax authority audits as a matter of routine and has a number of open tax enquiries.

As a result, it has recognized a number of provisions against uncertain tax positions, the valuation of which requires significant judgement.

We focused on this area due to the significance of the balance and the subjectivity in determining the quantification of the provision and the judgement around the trigger for recognition or release. There is a risk that the tax provisions may be incorrectly quantified, impacting the provision and the effective tax rate.

Procedures on the uncertain tax positions were performed centrally by the Group team supported by overseas team including specialists:

• We assessed the processes and tested controls over the tax provisioning process.
• We met with tax management to understand the Group cross-border transactions, status of all significant provisions, and any changes to management’s judgements in the year.
• We read correspondence with tax authorities and external advisors to inform our assessment of recorded estimates and evaluate the completeness of the provisions recorded.
• We evaluated management’s methodology to record or release provisions following tax audits, settlements and the expiry of timeframes.
• We tested the calculation of the year end provisions by inspecting underlying documentation and supporting schedules.

We concluded that management’s judgements in relation to the extent of provisions for uncertain tax positions are appropriate.

The Group capitalized internally developed intangible assets of £280 million in the current year. The capitalization of costs related to the development of new products and business infrastructure, together with the useful economic lives applied to the resulting assets, requires the exercise of judgement.

We focused on this area as the Group has invested significantly in a number of projects across the business. It is inherently judgmental with respect to technical feasibility, intention and ability to complete the intangible asset, ability to use or sell the asset, generation of future economic benefits and the ability to measure the costs reliably. This results in a risk that expenditures may be inappropriately capitalized.

We performed procedures in each business area with material additions in the year:

• We assessed the processes and tested controls for the capitalization of internally generated intangible assets and identification of indicators of impairment.
• We assessed the accounting policy and methodology for capitalization of expenditures.
• We evaluated the accuracy and valuation of amounts capitalized to assess that costs are directly attributable and necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management.
• When new systems were brought into use, we tested that the allocation of costs and commencement of amortization for each geography were appropriate and assessed management’s determination of useful economic life.

We did not identify any evidence of material misstatement in the capitalization of internally developed intangible assets.

The Group earns revenue from a variety of sources among the different business areas, including annual subscriptions, transactional usage and exhibition fees. The nature of the risk associated with the accurate recording of revenue varies.

We recognise that revenue is a key metric upon which the Group is judged, that the Group has annual internal targets, and that the Group has incentive schemes that are partially impacted by revenue growth.

We have determined that there is a risk in relation to each of the business areas reflective of the opportunity to commit fraud in the respective revenue streams. These key risks include the recognition of revenue in the incorrect period and manual adjustments or override of controls by management.

At each full scope and specific scope audit location with significant revenue streams, we performed procedures to address the specific risk in each business area.

• We assessed the processes and tested controls over each significant revenue stream.
• We evaluated the appropriateness of journal entries impacting revenue, as well as other adjustments made in the preparation of the financial statements. We considered unusual journals such as those posted outside of expected days, or by unexpected individuals. We also evaluated management’s controls over such adjustments.
• We inspected a sample of contracts to check that revenue recognition was in accordance with the contract terms and the group’s revenue recognition policies.
• For revenue streams which have judgmental elements, we evaluated management’s assumptions.

We focused on this area due the size of the goodwill balance of £6,392 million and intangible assets net book amount of £3,604 million at 31 December and because the Directors’ assessment of the value in use of the Group’s Cash Generating Units (‘CGU’) involves judgement about the future results of the Group and the discount rates applied to cash flow forecasts.

We assessed the key information used in determining the valuation including the weighted average cost of capital, cash flow forecasts and the implicit growth, including specialist support as necessary. We also conducted a sensitivity analysis to understand by how much these projections would need to change for there to be an impairment.

We assessed management’s consideration as to whether indicators of impairment existed based on the ongoing business rationale, including the stage of completion for internally developed intangible assets. Where indicators were present for intangible assets, we focused on the key judgements around the expected cash flows, or future benefits as compared to the current and future development costs where applicable.

We noted the assumptions relating to the impairment models fell within acceptable ranges.

We agree with management’s conclusion that no impairment of goodwill or intangible assets is required in the year.

The Group has many IT systems which are vital to the ongoing operations and to the integrity of the financial reporting process. Due to the global nature of the Group and its operations, the applications, associated infrastructure and IT processes which support significant business and financial processes are spread across a number of locations. These are delivered by a mix of in-house teams and third party support providers who may reside in different countries from the physical location of the IT infrastructure or the location of the RELX business users. Building our understanding of the IT environment including interfaces between them was an area of audit focus.

We utilised IT auditors to support our evaluation of the design and operation of IT controls to address the Group’s control objectives and financial reporting risks.

• We made inquiries of management to understand the IT environment and walked through the financial processes end-to-end in order to understand where IT systems were integral to the Group accounting processes.
• We performed data analytic procedures in certain locations and business areas to understand the flow of transactions and perform specific test procedures.
• We tested the IT general controls environment for the key applications.
• Where appropriate, we received reports from the service auditors of the outsourced systems and evaluated the adequacy of the work performed and followed up on matters arising, performing further procedures as necessary.
• Where required, we tested compensating controls or performed alternative procedures to complement the controls based audit approach.

Initial audit engagements involve a number of considerations not associated with recurring audits. Compared to the ongoing audit process in future years, these procedures are either incremental in nature or accelerated as compared to the recurring audit cycle.

Given this is our first year as the Group’s auditors there is a risk of inappropriate reliance on opening balances and inconsistent application of accounting principles. In addition, there is a risk of an inappropriate audit approach resulting from incomplete or incorrect information about the Group and its global operations.

At the beginning of our audit, we developed a transition plan which included among other things:

• Knowledge sharing with the Audit Committee, Group Financial Reporting, Audit & Risk Management, Legal, Compliance, and local management, which included incremental site visits, gaining an understanding of the business, significant processes, and operations at the central processing location.
• Interaction with the predecessor auditors, including reviewing the prior year audit files and formal hand over procedures as prescribed by our professional standards.
• Obtaining an understanding of the control environment and significant processes and considering whether management has applied a suitable control framework.
• Obtaining sufficient appropriate audit evidence regarding the opening balances including the selection and application of accounting principles.
• Assessing the impact of any control observations and unrecorded audit differences in the prior year audit.
• Observing clearance meetings with senior management, the Audit Committee, and the predecessor auditors for the 2015 audit.

We have executed our audit in accordance with our transition plan. Accounting principles have been consistently applied and we have not identified any misstatements in the financial statements as a result of our opening balance procedures.