Refer to page 52 (Audit Committee report), page 91 (Accounting policies) and pages 100 to 101 (notes).

The Group holds significant amounts of goodwill and costs of landing rights on the balance sheet. The risk is that these balances are overstated.

The Group has one cash-generating unit (‘CGU’) being its route network, to which all goodwill and landing rights relate.

We focused on the impairment test and the estimated values in use of the one CGU, which has a net book value of goodwill and landing rights of £459 million as at 30 September 2016.

We focused on this assessment as the impairment test involves a number of subjective judgements and estimates by management, many of which are forward looking. These estimates include key assumptions surrounding the strategic plan through to 2021, fuel prices, exchange rates, long-term economic growth rates and discount rates.

We evaluated the directors’ future cash flow forecasts, and the process by which they were drawn up, including testing the underlying calculations and comparing them to the latest Board approved strategic plan. We challenged:

• the directors’ key assumptions for long term growth rates in the forecasts by comparing them to historical results, economic and industry forecasts;

• the discount rate by assessing the cost of capital for the Group and comparable organizations; and

• the assumptions used in the Group’s five-year Plan, including fuel prices and exchange rates, by comparing them to historical results, and economic and industry forecasts.

We performed sensitivity analysis around the key assumptions above to ascertain the extent of change in those assumptions that either individually or collectively would be required for the goodwill and landing rights to be impaired. We found no material exceptions from this analysis.

We also assessed the appropriateness of the disclosures in the accounts in respect of goodwill and landing rights. Based on our work, we considered the disclosures to be appropriate.

Refer to page 52 (Audit Committee report), page 91 (Accounting policies) and page 103 (notes).

The Group records a number of accrual balances which are specific to the business and its operations. At 30 September 2016, the aggregate of all accruals and provisions was £379 million. Whilst some accruals are easily and ordinarily calculated, others contain an element of judgement and are more complex in nature, for example, customer claims in respect of flight delays, cancellations and refunds of air passenger duty or similar charges.

We focused on this area because there is an inherent level of complexity in management estimating certain provisions owing to their uncertain nature. These types of provisions are not individually material but may, under certain circumstances, be material in the aggregate.

We understood and evaluated the processes, procedures and controls in place in respect of these judgmental provision balances and assessed key account reconciliation processes.

We tested and challenged the reasonableness of the key assumptions underlying the judgmental provisions which included:

• passenger claim history;
• levels of passenger claims;
• flight disruptions;
• no-show passengers; and
• time periods over which the assessment is made.

We tested the input data of the judgmental provisions, re-performed the underlying calculations and performed sensitivity analysis over the key drivers of the valuation of the provision.

Having ascertained the magnitude of movements in those key assumptions, that either individually or collectively would be required for the provision to be materially misstated, we considered the likelihood of such movements arising and any impact on the overall level of judgmental provisions recorded in the accounts. Our assessment as to likelihood and magnitude did not identify any material exceptions.

We obtained evidence of post year end cash and other account movements which provided evidence as to the validity of the provisions at the year end.

We found no material exceptions from these procedures.

Refer to page 52 (Audit Committee report), page 91 (Accounting policies) and pages 103 to 104 (notes).

The Group operates aircraft which are owned or held under finance or operating lease arrangements. Liabilities for maintenance costs are incurred during the term of the lease in respect of aircraft leased under operating leases.

These arise from legal and contractual obligations relating to the condition of the aircraft when it is returned to the lessor.

Maintenance provisions of £259 million for aircraft maintenance costs in respect of aircraft leased under operating leases were recorded in the accounts at 30 September 2016.

At each balance sheet date, the maintenance provision is calculated using a model that incorporates a number of variable factors and assumptions including:

• likely utilisation of the aircraft;

• the expected cost of the heavy maintenance check at the time it is expected to occur;

• the condition of the aircraft; and

• the lifespan of life-limited parts.

We focus on this area because of an inherent level of management judgement required in calculating the amount of provision needed as a result of the complex and subjective elements around these variable factors and assumptions together with the materiality of the balance.

As with any significant audit risk, we understood and evaluated the controls that the Group has in place in respect of the aircraft maintenance provision.

We evaluated the maintenance provision model and tested the mechanics of the underlying calculations therein. Specifically, we:

• assessed the process by which the variable factors within the provision were estimated;

• understood and challenged the key assumptions that were based on the Group’s internal data, such as business plans and maintenance contract terms;

• validated the input data;

• performed sensitivity analysis on the key drivers of the model; and

• reviewed the calculations within the model.

We found no material exceptions from these assessments and comparisons.

Having ascertained the magnitude of movements in those key assumptions, that either individually or collectively would be required for the provision to be misstated, we considered the likelihood of such movements arising and any impact on the overall level of aircraft maintenance provisions recorded in the accounts. Our assessment as to likelihood and magnitude did not identify any material exceptions.

Refer to page 52 (Audit Committee report), page 94 (Accounting policies) and pages 106-111 (notes).

The Group holds significant net funds, comprising cash and money market deposits and borrowings through bank loans and finance lease obligations. Given the nature of the business, the Group also makes use of derivative financial instruments.

These derivative financial instruments include foreign currency forward exchange contracts to hedge foreign currency risks on transactions denominated in US dollars, euros, Swiss francs and South African rand.

These transactions primarily affect revenue, fuel and aircraft dry leasing costs, and the carrying value of owned aircraft. The Group also uses jet fuel forward contracts to hedge fuel price risks. At 30 September 2016, cash and money market deposits amounted to £969 million, borrowings were £756 million, derivative financial assets amounted to £422 million and derivative financial liabilities were £324 million.

We focused on these balances because of their materiality to the financial position of the Group, the volume of transactions passing through the respective accounts and the number of counterparties involved.

We understood and evaluated the processes, procedures and controls in place in respect of the Group’s treasury and other management functions which directly impact the relevant account balances and transactions.

We tested management’s year end account reconciliation process, the results of which allowed us to focus on substantiating the year-end positions recorded in the accounts.

We independently obtained third-party confirmations from counter parties of the year end positions as well as agreeing to original agreements. We assessed the appropriateness of hedge accounting for the derivative financial instruments and tested, using independent data-feeds, the fair values being ascribed to those instruments at the year end.

We found no material exceptions from these assessments and comparisons.

We also assessed the appropriateness of the disclosures in the accounts in respect of both non-derivative and derivative financial instruments. Based on our work, we considered the disclosures to be appropriate.

Historically, the Group has accounted for itself as principal in all contract arrangements (except some tour operations contracts). In the interim financial information for the period ended 31 July 2015, management effected a retrospective adjustment to account for revenue on the majority of contracts on an agent basis. This resulted in a significant adjustment to revenue and cost of sales. The change of accounting treatment had no impact on profit, cash or net assets. This is discussed by the Audit and Risk Committee on page 46.

For our audit of the year ended 31 January 2016 we highlighted an audit risk around the classification of revenue as either principal or agent.

The recognition of revenue as either ‘agent’ or ‘principal’ is determined by the application of the criteria set out in IAS (International Accounting Standard) 18 Revenue. Under this standard, an entity is acting as principal when it has exposure to the significant risks and rewards associated with the rendering of services. The overriding identifier for treatment of revenue as agent or principal is the level of risk and reward taken on by the Group.

The Group’s revenue recognition accounting policy is included on page 94 of the notes to the financial statements.

We performed the following procedures to address this risk:

• we reviewed Air Partner’s standard contract terms to evaluate management’s assessment on whether Air Partner is an agent;

• for those contracts where management concluded that they were principal, we obtained and reviewed those contracts against the IAS 18 criteria to assess whether the correct application of IAS 18 recognition had been applied;

• we also selected a random sample of recorded revenue amounts, obtained and reviewed the customer contract in order to assess whether the correct application of IAS 18 revenue classification had been applied; and

• we performed focused testing on a further sample of contracts which management has classified as agent arrangements by selecting a sample of those which had similar characteristics (industry, size, margin) to customer contracts where Air Partner were classified as principal.

For these we evaluated management’s assessment on whether Air Partner is an agent using the criteria of IAS 18.

Our risk is focused on revenue being inappropriately recognised in order to improve the business’ results through the early recognition of pre-purchased private Jetcard programme (“Jetcard”) and other deferred income before the flight has occurred.

This is discussed by the Audit and Risk Committee on page 46.

We performed the following procedures to address this risk:

• we selected a sample of recorded revenue amounts relating to both Jetcard and other deferred income to check that the flight had occurred by verifying to underlying flight records, customer contract and assessing for recoverability;

• we assessed the accuracy of the recorded revenue amount to the price agreed with the customer per the contract; and

• we performed analytical procedures to compare the gross margins made on the different types of revenue streams in the year compared to the prior year. If we identified an unexpected margin, we carried out more focused testing on these revenue streams.

The Group enters sales contracts with customers for aircraft and enters purchase contracts ‘back-to-back’. The Group is required to prepay operators for flights which occur in the future. At the year end the value of operator prepayments was £5.0m (2015: £4.3m).

Although the Group matches the purchase contract with the customer receipt, there is a credit risk in cases where suppliers default before the flight takes off and monies prepaid to suppliers are not recoverable. In certain cases Air Partner may still fulfill the flight for the customer. There is a risk these prepayments need to be provided for. This is discussed by the Audit and Risk Committee on page 46.

In order to address this risk:

• we checked the accuracy of the listing of prepaid operator costs as at 31 January 2016 by agreeing a sample through to signed contract;

• we traced this sample through to post year end flight records to ensure that the operator has settled the prepaid cost with a flight;

• for those flights that had not yet taken off at the date of our testing we reviewed their business history with the Group for evidence of dispute and slow payment as well as third party evidence of their financial position; and

• we requested details from the Group’s external legal advisors to identify legal disputes with operators.

Flights and related services are purchased from a large number of suppliers across a number of jurisdictions and are bespoke in nature. The completeness of operator accruals is a significant risk because:

• suppliers submit invoices with differing timescales, often significantly later than the date of the service provision; and

• certain employees have elements of their remuneration based on a commission calculated with reference to gross profit on flight services.

The combination of these two factors result in a heightened risk of under accrual of costs where purchase invoices have not yet been received. This is discussed by the Audit and Risk Committee on page 46.

We tested a sample of purchase invoices received and payments made after 31 January 2016. We agreed to evidence supporting the date of flights or service delivery and considered whether, where this was before the year end, an accrual had been recorded.

We performed analytical procedures on gross margin for the components in our scope to highlight instances where costs may not have been recorded. If we identified an unexpected margin, we carried out more focussed testing on the completeness of accruals.

We reviewed significant accrual amounts against amounts recorded at the prior period end to highlight any potential risk of under accrual.

During the year ending 31 January 2016 Air Partner has made two acquisitions, Cabot Aviation Services Limited and Baines Simmons Limited. The value of acquisition goodwill and intangible assets is £6.5m.

There is significant judgement required in the valuation of the goodwill and intangible assets acquired and management has used an expert to assist in this process. The financial statements also required disclosure of the transactions in accordance with IFRS 3 (revised) – Business Combinations.

We have identified the valuation of goodwill and intangible assets as the key audit risk in the acquisition accounting.

The Group’s accounting policy is included on page 92 of the notes to the financial statements. This is discussed by the Audit and Risk Committee on page 46.

In order to address this risk:

• we checked the accuracy of the schedules supporting the valuation of goodwill and intangible assets acquired as at 31 January 2016.

• we challenged the inputs and assumptions built into the valuation by involving internal specialists; and

• we audited the accounting journals posted in relation to the transaction including agreeing the consideration paid to contracts and bank statements to confirm that they were in accordance line with IFRS 3.