In light of the ongoing investigation by the Serious Fraud Office (“SFO”) in the UK following the commercial income misstatements identified in the prior year (see page 46 of the Audit Committee report and Note 31 (commitments and contingencies) of the Group financial statements), the Group has a number of potential litigation and other exposures for which the outcome is uncertain.

As a result, judgement is required in assessing the nature of these exposures and their accounting and disclosure requirements.

In assessing the potential exposures to the Group, we have completed a range of procedures including:

• assessing the design and implementation of  controls in relation to the monitoring of known legal exposures;
• reading Board and other meeting minutes to identify areas subject to Group consideration;
• meeting with the Group’s internal legal advisors in understanding ongoing and potential legal matters impacting the Group;
• reviewing third party correspondence with external legal advisors, regulators and GSCOP; and
• reviewing the proposed accounting and disclosure of actual and potential legal liabilities, drawing on third party assessment of open matters.

From the work completed, we concur with management’s position that no provision is required and that the disclosures provided are appropriate.

As described in Note 1 (accounting policies) and Note 15 (inventories), the Group carries inventory at the lower of cost and net realisable value. As at 27 February 2016, the Group held inventories of L2,430m (2014/15: L2,957m).

The Group applies particular judgement in the following areas relating to inventory:

• following changes in the Group’s inventory provisioning methodology in the prior year, the Group provides for obsolescence based on forecast inventory usage. This methodology relies upon assumptions made in determining appropriate provisioning percentages categories of inventory; and
• the Group capitalises certain directly attributable overheads within the cost of inventory. These overheads relate to the costs incurred in bringing inventory to its final destination for sale and in line with normal market practice includes the costs associated with the Group’s distribution centres.

In addition, given the overall level of inventory across the business in multiple locations, we identified the existence of inventory to be a further area of focus for our audit work.

We tested the operating effectiveness of controls associated with the existence and condition of inventory by attending a sample of inventory counts throughout the year in all significant locations (including stores and distribution centres). Across the Group, we attended 222 inventory counts within stores and 28 inventory counts within distribution centres.

We obtained assurance over the appropriateness of management’s assumptions applied in calculating the value of inventory provisions by:

• critically assessing the Group’s inventory provisioning policy, with specific consideration given to aged inventory (especially for non-food and general merchandising products) as well as stock turn calculations including the impact of seasonality;
• verifying the value of a sample of inventory to confirm it is held at the lower of cost and net realizable value, through comparison to vendor invoices and sales prices;
• using data analytics in relation to the UK business to recalculate the provision based on the Group’s provisioning policy; and
• reviewing historical accuracy of inventory provisioning with reference to inventory write-offs during the year in relation to stock loss or other inventory adjustments.

In relation to the capitalization of directly attributable costs, we assessed the nature of costs capitalized and for a sample of individual products, assessing whether costs had been correctly allocated.

The results of our audit work were satisfactory and we concur with the nature of costs capitalized within the inventory balance and the level of provision held.

In relation to the inventory provisioning policy, we concur that the total level of provision is within an acceptable range.

• loan impairment provisioning, where judgements include estimating the level of impaired loans and the expected cash recoveries thereon;

• conduct risk provisioning, where judgements are required in relation to assessing the level of provision required in relation to historical payment protection insurance and the Consumer Credit Act redress programme; and

• insurance reserving in light of the Group’s exposure to insurance claims through its investment in Tesco Underwriting Limited

We have tested the design and implementation of key controls relating to loan impairment provisioning, conduct risk provisioning and insurance reserving. In addition, we have challenged the judgements taken by management, specifically:

• in relation to loan impairment provisioning, using internal specialists, we tested a sample of the data used in the models as well as testing the model methodology and calculations. We assessed whether the modelling assumptions used considered all relevant risks, and whether the additional adjustments to reflect un-modelled risks were reasonable in light of historical experience, economic climate, current operational processes and the circumstances of the customers as well as our own knowledge of other practices; and

• in relation to conduct risk provisioning, we challenged the adequacy of provisions recognized by critically assessing the key assumptions used in the provision models, comparing the assumptions to available peer and historical data. This work also included, amongst other things, reviewing regulatory correspondence and the bank’s complaint logs as well as comparing the bank’s position with our own knowledge and experience; and

• in relation to insurance reserving, using internal insurance specialists, we have understood the key judgements and assumptions used to estimate the level of claims reserves.

As a result of our work, we concluded that the provisions and reserves held by Tesco Bank in relation to loan impairment provisions, conduct risk provisions and insurance reserving were reasonable.

As described in Note 1 (accounting policies) and Note 11 (property, plant and equipment), the Group held £17,900m (2014/15: £20,440m) of property, plant and equipment at 27 February 2016.

In light of the continued competitive environment in which the Group operates, there is a risk that the carrying value of stores and related fixed assets may be higher than the recoverable amount. When a review for impairment is conducted, the recoverable amount is determined based on the higher of ‘value in use’ and ‘fair value less costs of disposal’:

• value in use is calculated from cash flow projections for five years using data from the Group’s internal forecasts and as such relies upon the Directors’ assumptions, such as the estimates of future trading performance, longer-term growth rates and discount rates utilised; and

• fair value less costs of disposal, reflecting the market valuation of the Group’s stores less costs which would be incurred on disposal, is determined on a sample basis by independent valuation specialists where appropriate.

As a result of the Group’s impairment review completed during the year, an impairment charge of £18m (2014/15: £4,116m) was recognised.

Our audit procedures included testing the design and implementation of key controls around the impairment review processes and assessing the appropriateness of the methodology applied by the Directors in calculating the impairment charges, and the judgements applied in determining the cash generating units (“CGUs”) of the business, which the Group has determined as being individual stores and, in the UK, the general merchandising online business.

In relation to the completeness of the Group’s impairment review process, we have assessed the completeness of the Group’s impairment charges and impairment reversals with reference to CGU performance.

In relation to the Group’s ‘value in use’ valuations, we have assessed the review completed by the Group by:

• assessing the methodology applied in determining the value in use compared with the requirements of IAS 36 Impairment of Assets and checking the integrity of the impairment model utilised by the Group;

• challenging the key assumptions utilised in the cash flow forecasts with reference to historical trading performance, market expectations and our understanding of the Group’s strategic initiatives;

• assessing the long-term growth rates and discount rates applied to the impairment review for each country, comparing the rates utilised to third party evidence and in relation to the discount rate, our independently estimated discount rates; and

• completing sensitivity analysis in relation to key assumptions to consider the extent of change in those assumptions that either individually or collectively would be required for the assets to be impaired, in particular relating to forecast future cash flows, including any sub-lease income received, long-term growth rates and discount rates applied.

In relation to the Group’s ‘fair value less costs of disposal’, we have challenged the assumptions used by the Group in determining the fair market value of the assets, including those completed by external valuers, using internal property valuation specialists and assessing whether appropriate valuation methodologies have been applied.

We note that cash flow forecasting, impairment modeling and property values are all inherently judgemental. Nevertheless, whilst we note further actions are required by the Group to achieve these forecasts over the medium term, we concluded that the assumptions applied in the impairment models were within an acceptable range, and that the overall level of net impairment recognized was reasonable.

We also agree that the disclosure of the net impairment as an exceptional item is in accordance with the Group’s policy on exceptional items and is reasonable.

As described in Note 1 (accounting policies, including disclosure within ‘use of assumptions and estimates’ disclosure) to the financial statements, the Group has agreements with suppliers whereby volume-related allowances, promotional and marketing allowances and
various other fees and discounts are received in connection with the purchase of goods for resale from those suppliers. As such, the Group recognises a reduction in cost of sales as a result of amounts receivable from suppliers for goods sold.

In accordance with IFRS, commercial income should only be recognised as a deduction from cost of sales within the income statement when the performance conditions associated with it have been met. As such, judgement exists in determining the period over which the reduction in cost of sales should be recognised, requiring both a detailed understanding of the contractual arrangements in addition to complete and accurate source data on purchase volumes and fulfillment of promotional programmes.

In light of the accounting errors identified in the prior year in this area, the Group completed a detailed internal review of the factors which gave rise to these errors and the controls associated with the recognition of commercial income amounts.

In completing our work, we obtained a detailed understanding of the work completed by Tesco, together with obtaining an understanding and evaluating the design and implementation of controls that the Group has established in relation to commercial income. This included testing the completeness and accuracy of the systematic inputs upon which the Group’s controls rely, such as sales volume data.

In addition, our substantive audit procedures across the Group’s retail operations included a combination of the following:

• we tested that amounts recognised were accurate and recorded in the correct period based on the contractual performance obligations by agreeing a sample of individual supplier agreements. We circularised a sample of suppliers to test whether the arrangements recorded were complete and interviewed a sample of buyers to supplement our understanding of the contractual arrangements.

Where responses were not received, we completed alternative procedures such as agreement to underlying contractual arrangements;

• we used data analytics to profile commercial income, identifying key risk deals upon which we completed detailed testing; and

• we reviewed Groceries Supply Code of Practice (“GSCOP”) reporting and correspondence to the supplier hotline in order to help identify any areas where further investigation was required.

The results of our testing were satisfactory. We consider the disclosure given around supplier rebates to provide
an appropriate understanding of the types of rebate income received and the impact on the Group’s balance sheet as at 27 February 2016.

As described in Note 1 (accounting policies) and Note 26 (post-employment benefits), the Group has a defined benefit pension plan in the UK. At 27 February 2016, the Group recorded a net retirement obligation of £3,175m (2014/15: £4,842m), comprising scheme assets of £10,302m (2014/15: £9,677m) and scheme liabilities of £13,477m (2014/15: £14,519m).

During the period, the Group closed the UK scheme to new entrants and future accrual and replaced it with a new defined contribution scheme. As such, a curtailment gain of £538m (2014/15: £nil) has been recognised and treated as an exceptional item, offset by one-off payments of £58m relating to auto-enrolment and top-up payments to the new contribution defined contribution scheme.

The pension valuation and associated curtailment gain is dependent on market conditions and key assumptions made, in particular relating to investment markets, discount rate, inflation expectations and life expectancy assumptions.

The setting of these assumptions is complex and requires the exercise of significant management judgement with the support of third party actuaries.

In relation to the pension curtailment gain, we have assessed the basis of the gain recognised and tested the integrity of the calculation.

In testing the pension valuation and curtailment gain, we have utilised internal pension actuarial specialists to review the key actuarial assumptions used, both financial and demographic, and considered the methodology utilised to derive these assumptions. Furthermore, we have benchmarked and performed a sensitivity analysis on the key assumptions determined by the Directors.

We tested the membership data utilised in the valuation of the schemes to assess whether the basis of the valuation is appropriate. Furthermore, we have assessed the disclosure of the curtailment gain as an exceptional item.

From the work completed, we are satisfied that the methodology and assumptions applied in relation to determining the pension valuation and curtailment gain are appropriate.

We also agree that the disclosure of the curtailment gain as an exceptional item is in accordance with the Group’s policy on exceptional items and is reasonable.

There are a number of areas within the Group’s financial statements which comprise accounting estimates by management and accordingly there is a risk that the Group’s results are influenced through management bias in determining such estimates.

Specifically this risk lies in those areas with high levels of judgement such as commercial income, value-in-use calculations within the impairment reviews, inventory accounting and provisioning.

Furthermore, the presentation of non-GAAP measures is judgemental, with IFRS only requiring separate presentation of material items. Management judgement is therefore required in determining the classification of exceptional items.

In order to address this risk, in addition to the procedures set out in the commercial income, impairment and inventory risks set out above, we have completed audit procedures including:

• assessing the design and implementation of controls which address the risk of management override, such as the overall ‘entity level’ controls which underpin the overall control environment for the Group;

• auditing key areas of management estimate and judgement, including consideration of exceptional items disclosed by the Group and the existence of any further potential exceptional items included within the Group’s underlying profit measures;

• using data analytics, tested journal entries for fraud characteristics by testing the completeness of the journal population reviewed and risk profiling the population to focus our work on journals of interest;

• assessing transactions completed outside of the normal course of business; and

• obtaining an understanding of the work of internal audit so as to assist us in directing our audit effort and obtain greater understanding of the controls in place across the Group.

From our work completed, we have no matters to highlight in these areas. However, we note that consistent with other businesses of a similar scale to the Group, there are offsetting non-recurring income and expense items included within underlying profit which do not meet the Group’s definition of exceptional items. We concur that these have been appropriately included within underlying profit as they do not distort the overall result reported.

The Group’s retail operations utilise a range of information systems where we identified deficiencies in certain controls at the IT infrastructure level. These could have an adverse impact on the Group’s controls
and financial reporting systems.

We tested the design and operating effectiveness of the Group’s controls over the information systems that are important to financial reporting and identified weaknesses in the control environment.

Where these deficiencies affected applications and databases within the scope of our audit, we completed a combination of controls and substantive testing in order to determine whether we could place reliance on the completeness and accuracy of system generated information, including:

• determined whether authorised inappropriate changes had been made to the affected databases and IT application systems; and
• assessed the design and operating effectiveness of any controls that mitigated the identified risks.  In addition, and where appropriate, we extended the scope of our substantive audit procedures.

We identified weaknesses in relation to user access and change management controls in relation to the Group’s retail financial reporting systems and which the company is addressing as detailed within the Audit Committee Report on page 47.

Where these deficiencies affected applications and systems within the scope of our audit, we completed additional substantive testing in order to assess the completeness and accuracy of system generated information.

As described in the Accounting Policies in note 1 and in note 11 to the Financial Statements the Group has a defined benefit pension plan for its UK employees, which was closed to new entrants with effect from 1 April 2002, and a funded defined benefit pension scheme in the Republic of Ireland, where no new benefits have accrued since 31 October 2013.

At 2 April 2016, the Group recorded a net retirement benefit asset of £824 million (2015: £449 million), being the net of scheme assets of £8,515 million (2015: £8,597 million), scheme liabilities of £7,682 million (2015: £8,136 million) and unfunded retirement benefits of £9 million (2015: £12 million). The Group net retirement benefit asset has shown significant volatility, as the valuation is sensitive to changes in key assumptions such as the discount rate, inflation and mortality estimates.

The setting of these assumptions is complex and an area of significant judgement; changes in any of these assumptions can lead to a material movement in the net surplus. The increase/(decrease) in scheme surplus caused by a change in each of the key assumptions is set out below:

We evaluated the directors’ assessment of the assumptions made in the valuation of the scheme liabilities, and evaluated the information contained within the actuarial valuation reports for each scheme. We assessed the design and implementation of controls in respect of the pension scheme valuation process.

We tested the membership census data used in the valuation of the schemes and, with support from our own actuarial specialists, we considered the process applied by the Group’s actuaries, the scope of the valuation performed and the key assumptions applied and evaluated their expertise. We benchmarked and performed a sensitivity analysis on the key variables in the valuation model, including:

• Salary increases;
• Inflation rates;
• Mortality rates; and
• Discount rates.

From the work performed above we are satisfied that all assumptions applied in respect of the valuation of the scheme assets and liabilities are appropriate.

At 2 April 2016, the Group held inventories of £800 million (2015: £798 million). As described in the Accounting Policies in note 1 to the Financial Statements, inventories are carried at the lower of cost and net realizable value. As a result, the directors apply judgement in determining the appropriate provisions for obsolete stock based upon a detailed analysis of old season inventory, net realizable value below cost based upon plans for inventory to go into sale and stock loss based upon the run rate from recent inventory counts.

We obtained assurance over the appropriateness of management’s assumptions applied in calculating the
value of the inventory provisions by:

• Checking the effectiveness of key inventory controls operating across the UK business, including those at 13 distribution centres and 18 retail stores;
• Attending inventory counts at 13 distribution centres and 13 retail stores;
• Checking for a sample of individual products that invoiced costs have been correctly recorded and that the allocation of directly attributable costs has been correctly calculated;
• Comparing the net realisable value, obtained through a detailed review of sales subsequent to the year-end using audit analytics, to the cost price of inventories to check for completeness of the associated provision;
• Performing audit analytics on stock holding and movement data to identify product lines with indicators of low stock turn or significant levels of aged stock; and
• Meeting with buyers to validate the assumptions applied by management compared to the current purchasing strategy and ranging plans.

We evaluated consumer trends identified through benchmarking and external market data to challenge the assumptions underlying sales forecasts by category to assess the completeness of provisions for obsolescence.

As described in the Accounting Policies in note 1 and note 17 to the Financial Statements, the Group recognizes a reduction in cost of sales as a result of amounts receivable from suppliers, primarily comprising contributions in relation to promotions in the Food business, strategic volume moves and some annual volume-based rebates.  The majority of these contributions tend to be small in unit value but high in volume and span relatively short periods of time, although these can be across the financial year end. There are a small number of larger arrangements, which relate to multi-year periods. Judgement is required in determining the period over which the reduction in cost of sales should be recognized, requiring both a detailed understanding of the contractual arrangements themselves as well as complete and accurate source data to apply the arrangements to.

We tested that amounts recognized were accurate and recorded in the correct period based on the contractual performance obligations by agreeing a sample to individual supplier agreements. We also conducted interviews with a range of buyers and trading managers. In addition, we circularized a sample of 28 suppliers to test whether the arrangements recorded were complete.

We tested the completeness and accuracy of the systematic inputs to the calculations for recording supplier rebates and discounts by agreement to supporting evidence, including volume data and promotion dates.

We performed revenue and margin analysis to understand detailed trends by product category in order to identify apparent anomalies which may indicate potential rebate income errors. Such anomalies were investigated to assess whether they were indicative of a misapplication of contractual terms or other calculation errors.

We also tested a sample of invoices and debit notes raised post-year end to test the completeness and accuracy of accrued supplier income at 2 April 2016. In addition we tested the recoverability of the amounts due at the year-end by agreeing the amounts to subsequent settlement.

The results of our testing were satisfactory. We consider the disclosure given around supplier rebates to provide an accurate understanding of the types of rebate income received and the impact on the statement of financial position as at 2 April 2016.

The presentation of income and costs within non-GAAP measures (to derive ‘underlying profit before tax’) under IFRS is judgemental, with IFRS only requiring the separate presentation of material items. Judgement is exercised by management in determining the classification of items as non-underlying.

In the Group’s reported results, significant adjustments have been made to statutory profit before tax of £489 million to derive underlying prof t before tax of £690 million. Explanations of each adjustment are set out in notes 1 and 5 to the financial statements, and summarized in the graphic on the right.

In calculating the reported non-GAAP measures, there are two risks which may result in the underlying profit measure being misstated and therefore not being reliable to users of the financial statements:

• Items may be included in the non-underlying adjustments which are underlying or recurring items, distorting the reported underlying earnings; and

• Items may be omitted from the non-underlying adjustments which are material and one-off in nature.

We evaluated the appropriateness of the inclusion of items, both individually and in aggregate, within non-underlying profits, including assessing the consistency of items included year on year and ensuring adherence to IFRS requirements and latest Financial Reporting Council (“FRC”) guidance. We also agreed these items to supporting evidence.

We assessed all items, either highlighted by management or identified through the course of our audit, which were regarded as one-off but included within underlying earnings to ensure that these are not material either individually or in aggregate. For all adjustments recorded in calculating underlying profits, we discussed the appropriateness of the item with the Audit Committee and any disclosure considerations.

We are satisfied that the items excluded from underlying earnings and the related disclosure of these items in the financial statements is appropriate.

As described in the Accounting Policies in note 1 and in notes 14 and 15 to the Financial Statements, the Group held £5,027 million (2015: £5,031 million) of property, plant and equipment and £803 million (2015: £858 million) of intangible assets at 2 April 2016.

There is a risk that the carrying value of these assets may be higher than the recoverable amount, particularly in light of recent trading performance in certain parts of the Group. Management has performed an assessment of indicators of impairment for PP&E and a full impairment review for goodwill and brand intangibles.

As a result, an impairment charge of £160 million has been recorded. When a review for impairment is conducted, the recoverable amount is determined based on value in use calculations which rely on the directors’ assumptions and estimates of future trading performance.

The key assumptions applied by the directors in the impairment reviews are:

• Country-specifi c discount rates;
• Future revenue growth;
• Trading margin; and
• Store costs, including rent, staff payroll costs and general operating costs.

The directors consider that each retail store constitutes its own cash generating unit (‘CGU’), with the exception of the outlet stores, which are used to clear old season general merchandise stock at a discount, and certain strategic stores.

The outlet stores are considered to represent one CGU in aggregate and strategic stores are evaluated as part of a country-wide impairment review. The Group’s accounting policy sets out a relevant shelter period for new stores to be taken into account when assessing indicators of impairment during initial years of trading to enable the store to establish itself in the market.

We considered the appropriateness of the methodology applied by the directors in calculating the impairment charges, and the judgements applied in determining the CGUs of the business. In addition, we assessed the design and implementation of controls in respect of the impairment review process and considered the adequacy of disclosures made in the Financial Statements.

We assessed the impairment models and calculations by:

• Checking the mechanical accuracy of the impairment models;
• Assessing the discount rates applied to the impairment reviews for each country with support from our internal valuations specialist and comparing the rates to our internal benchmark data;
• Comparing forecast growth rates to economic data; and
• Evaluating the information included in the impairment models through our knowledge of the business gained through reviewing trading plans, strategic initiatives, and meeting with senior trading managers from key categories and our retail industry knowledge.

We assessed the appropriateness of the shelter period for each store opened within that time frame, and compared the original investment case for the store against its current trading performance. Where stores were trading significantly below the original case, we considered the evidence available to support future improvements in performance, specifically by assessing the trading plans and actions being taken on an individual store basis.

We assessed the level of impairment recorded in respect of the international business and are satisfied that the judgements applied by management are appropriate. We specifically assessed the impairment calculations of international goodwill and brand intangibles and concluded that the level of impairments recorded in the year are appropriate.

For the UK store assets, we concluded that the assumptions applied in the impairment calculations were appropriate, including the assumptions applied to new store shelter periods, and no additional impairments were identified from the work performed above.

As described in the Accounting Policies in note 1 to the Financial Statements, the Group’s revenue recognition policies require the directors to make a number of assumptions in determining the reported revenue for the period. The key assumptions are:

• Gift cards, vouchers and loyalty schemes – the directors apply an expected redemption rate to the total value of gift cards, vouchers and loyalty points in issue based on historic trends.

• Returns – customers are entitled to return products up to 35 days after purchase, giving rise to a risk that sales recognised during the period will be reversed in the next financial period.

The directors apply judgement in determining the provision required for returns based on actual sales data and recent product return rates. Returns from online sales are commonly at a higher level than traditional store retailing, resulting in this judgement becoming more significant in determining the level
of provision required.

We considered each revenue-impacting provision individually, and assessed the appropriateness of the assumptions and judgements applied. We assessed the design and implementation of controls in respect of these revenue judgements, in addition to testing the effectiveness of key revenue controls operating across the UK business.

For the key assumptions used in the gift card and voucher, and loyalty scheme provisions, we assessed the historic rates of redemption and compared these to the directors’ judgements.

We assessed the appropriateness of the methodology applied in calculating the returns provision, and compared the calculated provision to the actual level of returns recorded subsequent to the period end.

We are satisfied that the key assumptions applied in calculating the returns, gift card, voucher and loyalty scheme provisions are appropriate.

As at 31 January 2016 the value of inventory held by the Group was £1,957 million as disclosed in note 18 to the financial statements.

Assessing the valuation of inventory is an area of significant judgement. In particular for a retailer such as Kingfisher where there are upward of 393,000 stock-keeping units (SKUs) held across over 1,100 global locations.

There is a risk in estimating the eventual selling price of items held, as well as assessing which items may be slow-moving or obsolete.

As detailed in the strategic report on page 2 Kingfisher plc have announced their plans to “cut the tail” of inventory held and rationalize the number of SKUs within the business. Further, as detailed in note 5 to the financial statements, following the announcement of 65 store closures at B&Q, an inventory write down has been recorded.

These events add a layer of complexity to assessing the level of inventory which will become obsolete and the expected net realizable value (NRV) of inventory which will be sold.

The Group’s principal accounting policy on inventory is on page 95 and the critical accounting estimates and judgements on inventory are on page 97.

Our audit focused on whether the valuation of year-end inventory was in line with IAS 2. This included challenging judgements taken regarding obsolescence and net realizable value provisions.

We obtained assurance over the appropriateness of management’s assumptions applied in calculating the value of inventory provisions by:

• checking the effectiveness of controls associated with the existence and condition of inventory by attending a sample of inventory counts throughout the year across all in scope components to assess store level control processes, including those at 15 distribution centres and 64 retail stores;

• checking the value of a sample of inventory to confirm it is held at the lower of cost and selling price, through comparison to vendor invoices and sales prices; and

• re-computing provisions recorded to verify that they are in line with Group policy and IAS 2. This was done in conjunction with IT specialists for some components where a manual re-computation was not possible.

The Group receives significant amounts of supplier incentives, discounts, and rebates, and recognizes these as a deduction in cost of sales.

These agreements largely comprise of volume-based rebates based on percentage levels agreed for the calendar year, but also include arrangements with a greater degree of judgement such as advertising and marketing support. Given the materiality of the volume based rebates these have been the focus of our work.

Assessing the timing of recognition of the reduction in cost of sales earned from suppliers, including adherence to contractual terms, is an area of complexity requiring both a detailed understanding of the contractual arrangements themselves as well as complete and accurate source data to apply the arrangements to.

The majority of rebates agreements are subject to netting agreements with the supplier. However, as detailed in note 19 on page 112 there are £313 million of rebate debtors recorded at year-end.

The Group’s principal accounting policy on rebates is on page 93 and the critical accounting estimates and judgements on rebates are on page 98.

We tested that amounts recognized were accurate and recorded in the correct period based on the contractual performance obligations by obtaining and reviewing a sample of contracts with suppliers to assess the conditions required for rebate income to be recognized and verified whether or not these had been met.

We circularized a sample of suppliers to give assurance that the arrangements recorded were accurate and complete and, where outstanding balances were significant at the year end, to confirm the amounts owed. Where responses were not received, we completed alternative procedures such as obtaining rebate contracts, understanding the contractual terms and re-computing the rebate earned.

For volume-based agreements, we recalculated the rebates due based on shipments in the year and contractual terms. For other rebates, we also focused on the timing of recognition of the rebate income based on the contractual performance obligations.

We recomputed the level of volume rebate earned but not recognized, in particular challenging the key assumption of stock turn in the volume rebate in stock adjustment.

Our audit assessed the recoverability of rebate debtors by assessing the Group’s right to receive the rebate. Where there were netting agreements we agreed that there was a sufficient creditor against which to deduct the rebate due and reviewed post year end debit notes; where there was not a netting agreement we reviewed post year end cash receipts to give assurance that the rebate was recoverable.

The Group operates over 1,100 stores across 10 countries giving rise to a diverse leasehold and freehold property portfolio.

As at 31 January 2016 the value of property, plant and equipment held by the Group was £3,212 million as disclosed in note 14 to the financial statements.

There are several technically complex or judgemental aspects of store impairment and store based provisioning across the Group, these are set out below.
Store impairment

As detailed in note 14 to the financial statements, store impairments of £36 million have been recorded in the year. A judgement arises in forming an assessment of carrying values of freehold stores and store assets for potential impairment.

The key assumptions applied by management in their store impairment reviews are:

• country-specific discount rates;
• store costs, including rent, staff payroll and general operating costs; and
• forecast contribution growth.

As detailed in note 2 to the financial statements the Group uses vacant possession to approximate fair value less costs to sell when considering impairment.

Store based provisioning

As detailed in note 26 to the financial statements, a provision has been recorded in relation to onerous lease obligations following the announcement of the closure of 65 stores within B&Q. The key assumptions applied by management in estimating this provision relate to the length of void periods and likelihood and level of sub-tenancy income.

The Group’s principal accounting policy on property, plant and equipment is on page 94 and the critical accounting estimates and judgements on impairment are on page 97.

Store impairment

For freehold properties and store assets with indicators of impairment, we challenged the impairment models and calculations by:

• checking the mechanical accuracy of the impairment models;

• assessing the discount rates applied to the impairment reviews for each country and comparing the rates to our benchmarks of market data which were assessed in conjunction with valuation specialists;

• comparing forecast growth rates to economic data;

• considering the historical budgeting accuracy at a store level;

• challenging key inputs into the value in use computation, namely forecast sales growth and margin by reviewing both past performance and the rationale for future assumptions. We challenged the level of past store performance to critically assess whether assumptions applied were appropriate at the store level;

• agreeing the vacant possession value of freehold property to third party valuation reports; and

• verifying that freehold properties are held in line with IAS 36.

Store based provisioning

We performed procedures to identify leases which could be considered onerous – for example, we reviewed the properties currently under lease, and identified those which may be vacant or underutilised, or where properties are sublet whether the estimated rental income leads to an onerous contract.

As detailed in note 12 there has been a £15 million impairment charge recorded in the year in relation to Brico Dépôt Romania.Determining the appropriate carrying value of goodwill requires management to make significant estimates including the operating cash flow projections, discount rates and long term growth rates applied.The goodwill attributable to cash generating units (CGUs) is reviewed for impairment using a value in use model, as described in note 12 to the financial statements.As detailed on page 15 to the annual report the Group’s five year plan expects to generate savings of £500 million. A risk arises that cash flow projections used to support the valuation of goodwill are not in compliance with IAS 36 which requires that future cash flows do not include inflows or outflows that are expected to arise from a future restructuring to which an entity is not yet committed or improving or enhancing the asset’s performance.

The Group’s principal accounting policy on goodwill and intangible assets is on page 94 and the critical accounting estimates and judgements on impairment are on page 97.

In order to address this key audit risk we audited the assumptions used in the impairment model for goodwill and intangible assets.

Our work included:

• Considering the projected future cash flows, understanding variances between the forecast and actual results for the year ended 31 January 2016 and comparing the forecast performance to the Group’s five year plan and supporting workings.

• Comparing the long-term growth rates for each cash generating unit to economic forecasts.

• Working with our internal valuation specialists, who assisted in computing an independent assessment of the discount rates used and assessing management’s methodology used in calculating the discount rates applied by benchmarking against those companies in the same or similar sectors.

• Assessing the appropriateness of the sensitivities applied by management to the impairment testing model including considering future capital spend and whether the scenarios represented reasonably possible changes in key assumptions.

We performed further sensitivities based on recent trading activity and our understanding of the future prospects to identify whether these scenarios could give rise to further impairment.

• Considering CGU allocation in light of the Group’s new strategy and concluded that there have not been any triggers which would require a reallocation of the CGUs.

• Checking the arithmetic accuracy of the impairment model.

• Considering the adequacy of the Group’s disclosure in respect of its goodwill impairment testing and whether the disclosures about the sensitivity of the outcome of the impairment assessment to reasonably possible changes in key assumptions properly reflected the risks inherent in such assumptions.

Due to the estimation uncertainty in respect of settlements with tax authorities around the world, assessing the Group’s exposure to significant tax risks and the level of provisions recognised is a judgemental area.

The Group’s principal accounting policy on taxation is on page 95 and the critical accounting estimates and judgements on taxation are on page 98.

We engaged tax specialists who have considered significant taxation exposures across the Group, including challenging the estimates and judgements made by management when calculating the income tax payable in each territory and the associated provisions held.

In assessing the provisions we have considered the tax environment in the significant territories in which the Group operates, the outcome of past settlements and the status of tax audits.

The tax specialists reviewed correspondence with taxation authorities in significant locations, as well as reviewing the opinions or other support received from external counsel and other advisers where management has relied on them to make assumptions on the level of taxation payable.