The Group has a variety of agreements with suppliers whereby rebates and discounts are earned based on the quantity of goods bought. The majority of the rebates and discounts due to the Group are reflected in the net price charged by its suppliers or are based on fixed percentages linked to the quantity of goods bought. There is little estimation or judgement involved in determining the timing and amount to be recognized. However, due to the large number of agreements in place across numerous jurisdictions within the Group, the complexity of transaction processing as well as supplier rebate periods frequently not being coterminous with the year end date, we consider there is a risk of error.

We evaluated the controls that the Group has in place over the accounting for rebates and discounts. Our audit procedures included inspecting underlying contractual terms and supplier correspondence for a selection of arrangements in place and considered whether the accounting policy had been applied appropriately to the terms of the rebate. We performed detailed testing on a sample basis of the largest rebates and discounts recognized in the period, with particular attention to whether the rebates and discounts were recognized in the correct period and the appropriateness of any rebates and discounts accrued at the period end. This involved selecting a sample of amounts invoiced and accrued as at the balance sheet date and agreeing the underlying calculation to contractual terms and supplier correspondence. We also considered the adequacy of the Group’s disclosures in respect of supplier rebates and discounts.

The Group has extensive international operations and in the normal course of business the directors make judgements and estimates in relation to direct and indirect tax issues and exposures. As a result of the complexities of tax rules on transfer pricing and other tax legislation the accounting for tax exposures is a key audit judgement.

Our audit procedures included evaluating the controls the Group has in place to identify and quantify its tax exposures. We used our tax specialists to analyze and challenge the assumptions used to determine provisions using our knowledge and experience of the application of international and local legislation by the relevant authorities and courts, and assessed whether the approach applied by the Group is supported by custom and practice in the industry. We have examined the calculations prepared by the directors and agreed assumptions used to underlying data, and considered the judgements applied including the maximum potential exposure and the likelihood of a payment being required. We have inspected correspondence with relevant tax authorities to identify tax risk areas and assessed third party tax advice received to evaluate the conclusions drawn in the advice. In addition, transfer pricing documentation was critically assessed as part of our consideration of the tax positions taken by the Group. We also considered the adequacy of the Group’s disclosures in respect of tax and uncertain tax positions.

Revenue is measured net of discounts, incentives and rebates earned by customers on the Group’s sales. Within a number of the Group’s markets, the estimation of discounts, incentives and rebates recognised based on sales made during the year is material and considered to be complex and judgemental. Therefore, there is a risk that these arrangements are not appropriately reflected and as a result revenue is misstated in the Financial Statements. There is also a risk that revenue may be overstated due to fraud through manipulation of the discounts, incentives and rebates recognised resulting from the pressure local management may feel to achieve performance targets.

Revenue is recognised when the risks and rewards of the underlying products have been transferred to the customer. There is a risk that revenue may be overstated due to fraud resulting from the pressure local management may feel to achieve performance targets at the reporting period end. The Group focuses on revenue as a key performance measure which could create an incentive for revenue to be recognised before the risks and rewards have been transferred.

Our audit procedures included considering the appropriateness of the Group’s revenue recognition accounting policies, including those relating to discounts, incentives and rebates and assessing compliance with the policies in terms of applicable accounting standards.

In response to the risk of fraud, we tested the effectiveness of the Group’s controls over the calculation of discounts, incentives and rebates and correct timing of revenue recognition.

We assessed sales transactions taking place at either side of the year end as well as credit notes issued after the year end date to assess whether that revenue was recognised in the correct period. We also developed an expectation of the current year revenue balance based on trend analysis information, taking into account historical weekly sales and returns information and our understanding of each market.

We then compared this expectation to actual revenue and, where relevant, completed further inquiries and testing. Within a number of the Group’s markets, we compared current year rebate accruals to the prior year and, where relevant, we completed further inquiries and testing. We reconciled a sample of claims and rebate accruals to supporting documentation and challenged management’s assumptions used in estimating rebate accruals.

We performed testing over manual journals posted to revenue to identify unusual or irregular items.

We also considered the adequacy of the Group’s disclosures (in note 2) in respect of revenue.

Provisions for indirect tax require the Directors to make judgements and estimates in relation to the issues and exposures. In Brazil, one of the Group’s largest markets, the complex nature of the local tax regulations and jurisprudence make this a particular area of significant judgement.

Our audit procedures included testing the effectiveness of the Group’s controls around the recording and re-assessment of tax provisions. Furthermore, our procedures included using our own indirect tax specialists to consider the level of provisions required in light of the nature of the Group’s exposures, applicable regulations and the Group’s related correspondence with the authorities. We assessed relevant historical and recent judgments passed by the court authorities in considering any legal precedent or case law, as well as assessing legal opinions from third party lawyers.

We also gained an understanding of the Group’s provisioning methodology and challenged assumptions using the knowledge and experience of our own specialists. In addition, we obtained formal confirmations from the Group’s external counsel, where appropriate.

We also considered the adequacy of the Group’s disclosures (in note 19 and 20) made in relation to indirect tax provisions and contingencies.

The Group has extensive international operations and in the normal course of business the Directors make judgements and estimates in relation to tax issues and exposures. This is a key judgement due to the Group operating in a number of tax jurisdictions, the complexities of transfer pricing and other tax legislation.

Our audit procedures included testing the effectiveness of the Group’s controls around the recording and re-assessment of tax provisions.

Our own tax specialists performed an assessment of the Group’s related correspondence with relevant tax authorities, to consider the completeness of tax provisions. We also challenged the assumptions used, taking into consideration our own tax specialists’ knowledge and experience. In addition, we assessed relevant judgments passed by authorities in considering any need for a provision, as well as assessing relevant opinions from third parties.

We also considered the adequacy of the Group’s disclosures (in note 6 and 20) in respect of tax and uncertain tax positions.

Refer to the Report of the Audit Committee, note 4 – Exceptional items, and note 10 – Intangible assets.

The group has goodwill of ￡2,699 million, indefinite-lived brand intangibles of ￡8,079 million and other intangible assets of ￡1,592 million as at 30 June 2016, contained within 21 cash generating units (‘CGUs’).

Goodwill and indefinite-lived intangible assets must be tested for impairment on at least an annual basis. The determination of recoverable amount, being the higher of value-in-use and fair value less costs to dispose, requires judgement on the part of management in both identifying and then valuing the relevant CGUs. Recoverable amounts are based on management’s view of variables and market conditions such as future price and volume growth rates, the timing of future operating expenditure, and the most appropriate discount and long term growth rates.

With challenging trading conditions in certain territories, the group’s performance and prospects have been impacted. As a result, impairment charges have been recognized in the year ended 30 June 2016. A pre-tax impairment charge of ￡118 million was recognized in respect of the Ypioca brand intangible and Paraguay, Uruguay and Brazil (‘PUB’) CGU goodwill.

In addition, CGUs containing the USL goodwill, Greater China goodwill and Meta brand have been determined by management to be sensitive to reasonably possible changes in the assumptions used, which could result in the calculated recoverable amount being lower than the carrying value of the CGU. Additional sensitivity disclosures have been included in the group financial statements in respect of these CGUs.

We evaluated the appropriateness of management’s identification of the group’s CGUs and tested the operation of the group’s controls over the impairment assessment process, which we found to be satisfactory for the purposes of our audit.

Our audit procedures included challenging management on the appropriateness of the impairment model and reasonableness of the assumptions used, with particular attention paid to Ypioca, USL, Greater China and Meta, through performing the following:

• benchmarking Diageo’s key market-related assumptions in the models, including discount rates, long term growth rates and foreign exchange rates, against external data, using our valuation expertise;

• assessing the reliability of cash flow forecasts through a review of actual past performance and comparison to previous forecasts;

• testing the mathematical accuracy and performing sensitivity analyses of the models;

• understanding the commercial prospects of the assets, and where possible comparison of assumptions with external data sources; and

• for USL, assessing the reasonableness of assumptions compared to the original fair value model and performance since acquisition.

We assessed the appropriateness and completeness of the related disclosures in note 4 and note 10 of the group financial statements, including the sensitivities provided with respect to USL, Greater China and Meta, and considered these reasonable.

Based on our procedures, we noted no material exceptions and considered management’s key assumptions to be within reasonable ranges.

Refer to the Report of the Audit Committee, note 14(d) – Working capital (provisions) and note 18 – Contingent liabilities and legal proceedings.

The group faces a number of threatened and actual legal and regulatory cases. There is a high level of judgement required in estimating the level of provisioning and/or the level of disclosure required.

We evaluated the design and implementation of controls in respect of litigation and regulatory procedures, which we found to be satisfactory for the purposes of our audit.

Our procedures included the following:

• where relevant, reading external legal advice obtained by management;

• discussing open matters and developments with the group general counsel and regional general counsel;

• meeting with regional and local management and reading subsequent correspondence;

• assessing and challenging management’s conclusions through understanding precedents set in similar cases; and

• circularizing relevant third party legal representatives and follow up discussions, where appropriate, on certain material cases.

Based on the evidence obtained, whilst noting the inherent uncertainty with such legal and regulatory matters, we determined that the level of provisioning at 30 June 2016 to be appropriate.

We assessed the appropriateness of the related disclosures in note 14(d) and note 18 of the group financial statements, and believed these to be reasonable.

The group operates across a large number of jurisdictions and is subject to periodic challenges by local tax authorities on a range of tax matters during the normal course of business, including transfer pricing, direct and indirect taxes, and transaction related tax matters.

As at 30 June 2016, the group has current taxes payable of £340 million, deferred tax assets of £298 million and deferred tax liabilities of £1,982 million.

Where the amount of tax payable is uncertain, the group establishes provisions based on management’s judgement of the probable amount of the liability. The group has also undertaken a number of disposal transactions during the year which has resulted in a net exceptional tax charge of £56 million.

We focused on the judgements made by management in assessing the quantification and likelihood of potentially material exposures and therefore the level of provision required. In particular we focused on the impact of changes in local tax regulations and ongoing inspections by local tax authorities, which could materially impact the amounts recorded in the group financial statements.

We evaluated the design and implementation of controls in respect of identifying uncertain tax positions, which we found to be satisfactory for the purposes of our audit. We also evaluated the related accounting policy for provisioning for tax exposure and found it to be appropriate.

We used our tax specialists to gain an understanding of the current status of tax assessments and investigations and to monitor developments in ongoing disputes. We read recent rulings and correspondence with local tax authorities, as well as external advice received by the group where relevant, to satisfy ourselves that the tax provisions had been appropriately recorded or adjusted to reflect the latest external developments.

We challenged management’s key assumptions, in particular on cases where there had been significant developments with tax authorities, noting no significant deviations from our expectations.

We assessed the appropriateness of the related disclosures in note 7 and note 18 of the group financial statements, and considered these reasonable.

In the past few years the group has had significant levels of exceptional items that are disclosed separately within the consolidated income statement and are excluded from management’s reporting of the underlying results of the business.

The nature of these exceptional items is explained within the group accounting policy and includes restructuring costs, gains or losses arising on acquisitions or disposals, impairment charges or reversals, and costs resulting from non-recurring legal or regulatory matters.

This year the group has identified £167 million of net operating exceptional costs and £123 million of non-operating exceptional income before tax, which relate primarily to:

• impairment charges (£118 million);

• the gain on sale of the group’s shareholdings in D&G (Jamaican Red Stripe business) and GAPL (Singapore and Malaysia beer business) (£457 million); and

• the loss on sale of the group’s wine interests in the United States and UK (Percy Fox) (£191 million).

Our specific area of focus was to assess whether the items identified by management as exceptional met the definition of the group’s accounting policy and have been treated consistently, as the identification of such items requires judgement by management.

Consistency in the identification and presentation of these items is important to ensure comparability of year-on-year reporting.

We evaluated the design and implementation of controls in respect of exceptional items, which we found to be satisfactory for the purposes of our audit.

We considered the judgements within management’s accounting papers for the business disposals and other one-off transactions, and obtained corroborative evidence for the items presented within ‘exceptional items’. This included the timing of recognition and nature of costs associated with the business disposals. We considered these reasonable.

We challenged management’s rationale for the designation of certain items as ‘exceptional’ and assessed such items against the group’s accounting policy.

For the disposal transactions, we read underlying contractual and other agreements and verified that the accounting papers, and associated calculations prepared by management, reflected the substance of these. We also vouched the receipt of net proceeds received, where applicable. No material exceptions were identified.

We assessed the appropriateness and completeness of the disclosures in note 4 and other related notes of the group financial statements, and checked that these reflected the output of management’s accounting papers, noting no significant deviations from our expectations.

We also considered whether there were items that were recorded within underlying profit that we determined to be ‘exceptional’ in nature and should have been included within ‘exceptional items’.

No such material items were identified.

The group has approximately 40 defined benefit post employment plans. The total present value of obligations is £9,447 million at 30 June 2016, which is significant in the context of the overall balance sheet of the group. The group’s most significant plans are in the United Kingdom, Ireland and North America.

The valuation of pension plan liabilities requires judgement in determining appropriate assumptions such as salary increase, mortality rates, discount rates, inflation levels and the impact of any changes in individual pension plans.

Movements in these assumptions can have a material impact on the determination of the liability. Management uses external actuaries to assist in determining these assumptions

We evaluated the design and implementation of controls in respect of post employment benefit obligations, which we found to be satisfactory for the purposes of our audit.

We used our actuarial specialists to assess whether the assumptions used in calculating the liabilities for the United Kingdom, Ireland and North America pension plans were reasonable, by performing the following:

• assessing whether salary increases and mortality rate assumptions, were consistent with the specifics of each plan and, where applicable, with relevant national and industry benchmarks;

• verifying that the discount and inflation rates used were consistent with our internally developed benchmarks and in line with other companies’ recent external reporting; and

• reviewing the calculations prepared by external actuaries to assess the consistency of the assumptions used.

Based on our procedures, we noted no exceptions and considered management’s key assumptions to be within reasonable ranges.

This is a key area of judgment because the process is complex and requires management (after taking advice from their actuarial advisers) to make a number of assumptions concerning long term interest rates, inflation, salary and pension increases, investment returns and longevity of current pensioners.

With support from the pension specialists within our audit team, we challenged the assumptions used in the calculation of the pension scheme deficit as detailed in note 28, specifically regarding the discount rate, inflation rate and mortality assumptions with reference to comparable market and other third party data.

A proportion of Severn Trent Water Limited’s customers do not or cannot pay their bills which results in the need for provisions to be made for nonpayment of the customer balance. There is significant judgment involved in calculating the bad debt provision, particularly regarding the estimation of future cash collection.

Provisions are made against Severn Trent Water Limited’s trade receivables based on historical experience of levels of recovery from accounts in particular ageing categories.

We reviewed and challenged the information used to determine the bad debt provision by considering cash collection performance against historical trends and the level of bad debt charges over time. Specifically, we reviewed the actual history of slow paying customers in Severn Trent Water Limited in the period using data analytics to understand the collection of previously aged debtors and to re-compute the ageing analysis. We tested the design and implementation of key management review controls and those relating to the production of the data used in the bad debt model. We have also agreed a sample of this data back to its source, being the billing system.

Assessing the outcome of uncertain tax positions requires judgments to be made regarding the result of negotiations with, and enquiries from, tax authorities in a number of jurisdictions.

The opening current and deferred tax balance has been restated by £67.8 million with a corresponding debit adjustment in opening reserves, primarily in order to correct the deferred tax position in light of the reclassification of contributions received in relation to infrastructure assets from property, plant and equipment to non-current trade and other payables. Further details are set out in note 2a).

With support from the tax specialists within our audit team, we considered the likely outcomes of uncertain tax positions and reviewed correspondence with the relevant tax authorities to assess the appropriateness of the tax balances that have been recorded in the balance sheet.

We have reviewed the underlying workings supporting the restated current and deferred tax balances and challenged the revised treatment to test that it is in accordance with IAS 12 ‘Income Taxes’

Severn Trent Water Limited has a substantial capital programme (fixed asset additions in the year £411.5 million) which has been agreed with the regulator (‘Ofwat’) and therefore incurs significant expenditure in relation to the development and maintenance of both infrastructure and non-infrastructure assets. Expenditure in relation to increasing the capacity or enhancing the network is treated as capital expenditure.

Expenditure incurred in maintaining the operating capability of the network is expensed in the year (£126.0 million) in which it is incurred.

Capital projects often contain a combination of enhancement and maintenance activity which are not distinct and therefore the allocation of costs between capital and operating expenditure is inherently judgmental. Whilst under AMP6, total expenditure or Totex is a key driver of regulatory performance rather than capital expenditure which was monitored under AMP5, the accounting distinction between operating and capital expenditure remains and hence it is important that capital project expenditure is accounted for correctly in accordance with International Accounting Standards (‘IAS’).

In addition, the comparative consolidated balance sheet has been restated to reflect a reclassification between property, plant and equipment and non-current trade and other payables. Contributions, which had been received in previous years in relation to infrastructure assets, and which had a carrying value of £294.5 million as at 31 March 2014, were identified as being deducted from the carrying value of property plant and equipment. In order to comply with the requirements of IAS 16 and IAS 18, these contributions have been reclassified from property plant and equipment to non-current trade and other payables.

Further details are set out in note 2a.

We assessed the group’s capitalisation policy to determine compliance with relevant accounting standards and tested the operating effectiveness of controls over the application of the policy to expenditure incurred on projects within the group’s capital programme during the year. This includes consideration of the allocation of costs between capital and operating expenditure.

In addition, for a sample of capital projects, we assessed the application of the capitalisation policy to the costs incurred by agreement to third party invoices and obtained explanations and further support for any significant changes in capital expenditure from budget.

In relation to the reclassification of infrastructure asset contributions from property, plant and equipment to non current trade and other payables, we have reconciled in total the contributions received in relation to infrastructure assets to the underlying accounting records and have confirmed that the revised presentation is in line with International Accounting Standards.

For water and waste water customers with water meters, the amount recognised depends upon the volume supplied, including an estimate of the sales value of units supplied between the date of the last meter reading and the year end. This is a key judgment because the estimated usage is based upon historical data and assumptions around consumption patterns

We challenged the validity of management’s estimate of current year accrued revenue by comparing actual amounts billed to the estimate made in the prior year to determine the accuracy of the estimation techniques.

In addition, we used data analytics to recompute the total level of unbilled revenue for the current year in Severn Trent Water Limited as well as testing the design and implementation of key management review controls and those relating to the key data inputs to the model. We also agreed a sample of this data back to its source.