Underlying Investments

As detailed in the summary of accounting policies in Note 2 and the audit committee report, the underlying investee companies, which are unquoted entities, are measured at fair value, this being established in accordance with the International Private Equity and Venture Capital Valuation Guidelines by using the following measurements of value:

• revenue multiples;
• earnings multiples; and
• net assets.

There is a significant risk over the valuations of these investments due to the inherent subjectivity and estimation involved in the valuation of such assets. Accordingly this is the key judgmental area on which our audit focused.

Our procedures included:

• enquiry of the Consultant to assess and document the design and implementation of the investment valuation processes;
• challenging the Consultant on key judgements affecting investee company valuations in the context of observed industry best practice and the provisions of the International Private Equity and Venture Capital Valuation Guidelines;
• In particular, we focused on the appropriateness of the valuation basis selected for each investment as well as the underlying assumptions, such as discount factors, and the choice of benchmark for earnings multiples;
• We compared key underlying financial data inputs to external sources, investee’s company audited accounts and management information, as applicable. We challenged the assumptions around sustainability of earnings based on the plans of the investee companies and whether these are achievable;
• Our work included consideration of events which occurred subsequent to the year end until the date of this audit report and attending the year end board meeting where we assessed the effectiveness of the Board’s challenge and approval of unlisted investment valuations.

Valuation, impairment and amortization of goodwill and intangible assets
We focused on this area due to the management judgement required when assessing impairment triggers and performing detailed impairment reviews. The Group have three different categories of intangible assets:

Goodwill
Goodwill of £981.7m relates to a number of acquisitions made by the Group. As is common in the asset management industry, there is considered to be one cash generating unit (“CGU”) within the Group, reflecting the asset management business. Goodwill is assessed for impairment on an annual basis in accordance with IAS 36 ‘Impairment of assets’ (“IAS 36”), based on the calculated fair value of this CGU.

Indefinite lived intangibles
Indefinite lived intangibles of £79.3m relate to customer relationships associated with open-ended funds acquired in previous acquisitions. These intangible assets are assessed for impairment on an annual basis in accordance with IAS 36.

Definite lived intangibles
Customer relationships acquired which have a definite life, are capitalized at fair value and amortized over their estimated useful life. Definite lived intangible assets require an impairment review only if there is an impairment trigger identified. In the current year, management identified an impairment trigger on the Artio management contracts. A detailed impairment review was performed which resulted in a reduction in the book value of these assets by £7.7m, leaving a closing balance of £388.8m.

When an impairment review and calculation of any of the above assets are performed, there are significant judgements in relation to the assumptions made such as:

• Revenue estimates;
• Growth rates applied; and
• Discount rates.

We focused on this area due to the significant values and the nature of the judgements and assumptions management are required to make in determining whether there are any impairment triggers or impairments.

Refer to Note 13 to the financial statements.

We tested management’s impairment review of goodwill, indefinite lived intangibles and definite lived intangibles by performing the following work.

We read management’s assessment of impairment triggers based on the movement in AuM compared to the movement in the carrying value of individual contracts, and did not identify any further triggers which had not been considered by management.

Specific work we performed over the impairment reviews prepared by management included:

• comparing the assumptions used within the impairment review model to approved budgets and business plans, which we found to be materially consistent;

• benchmarking of key assumptions in conjunction with our valuation specialists, including the discount rate and inflation rate against our own internal data and recent public announcements from other comparable companies. We consider the assumptions used by the Group to be reasonable and in line with our expectations based on information that is publicly available about other market participants;

• reading management’s sensitivity analysis and performed additional sensitivity analysis over key assumptions in the model in order to assess the potential impact of a range of possible outcomes. We identified no reasonably possible outcomes which would result in a material impairment charge;

• assessing the inclusion of all appropriate assets and liabilities in the cash generating unit, and agreed that all relevant balances had been included; and

• comparing the calculated business valuation to the market capitalization of the Group, which demonstrated significant headroom exists.

Through the work outlined above we did not identify any material adjustments to management’s recorded impairment charge.

The Group completed three acquisitions in the year: Arden, Advance and Parmenion for consideration of £11.2m, £14.6m and £50.2m respectively. Management are required to apply judgement to determine the fair value of the consideration payable, the identifiable assets and liabilities, and any resultant goodwill, in accordance with IFRS 3. We focused our testing on the management contracts where there is a higher degree of judgement and estimation required.

In addition to the acquisitions completed during the year, there are earn-out liabilities associated with previous acquisitions of SWIP and FLAG which may be payable depending on performance of the underlying businesses. These are included within the total earn-out liability of £45.1m. These liabilities are re-assessed at each balance sheet date based on management estimates and projections.

We focused on this area due to the significant values and the nature of the judgements and assumptions management are required to make in determining the associated fair values.

Refer to Note 14 to the financial statements.
Completeness and accuracy of data

We tested management’s acquisition accounting and associated valuations by performing the following work:

• comparing the cash consideration paid to the signed sale and purchase agreements and bank receipt, which agreed without exception.

• assessing management’s calculation of any contingent consideration “earn-out liabilities” with reference to approved business plans and comparing growth assumptions to actual growth achieved, which we found to be within a reasonable range.

• in conjunction with our valuation specialists, considering, basedon our knowledge of the industry, whether management’s valuation experts had identified all potential intangible assets and we agreed that they had.

• comparing the assumptions used within the intangible asset valuation model to approved budgets and business plans, which we found to be materially consistent.

• confirming the mathematical accuracy of the valuation models and agreeing the calculation of residual goodwill based on the agreed fair values.

• in conjunction with our valuation specialists, benchmarking key assumptions, including the discount rate, against our own internal data and recent public announcements from other comparable companies. We consider the assumptions used by Aberdeen on the whole, to be reasonable and in line with our expectations based on information that is publicly available about other market participants.

There are three revenue streams: management fees (£984.9m), performance fees (£15.8m) and transaction fees (£6.4m) We focused our testing on management fees due to the material nature of the balance. Our focus was also driven by the relative complexity of revenue streams, resulting in more testing in the streams with higher levels of complexity.

The majority of revenue relates to management fees (£984.9m), which are high volume transactions based on Assets Under Management (“AuM”) and contractual fee rates. These transactions are generally straightforward in nature. We focused our audit effort on the larger revenue streams where there was additional complexity due to the structure of customer agreements.

Judgement is required in relation to the recognition of performance fees of £15.8m to assess whether the performance criteria has been met at the balance sheet date and we therefore focused on these fees given the relatively higher level of estimation involved.

The transactions fees in the year were not material and therefore we did not focus our audit work on these.

Refer to Note 2 to the financial statements

We tested the revenue recognition by performing the following procedures:

• considering the findings included in the ISAE 3402 reports of third party administrators and the implications for our audit, placing reliance on relevant key controls where appropriate.

• considering the third party administrator oversight and pricing controls in place within the Group as documented within their own ISAE 3402 report, placing reliance on relevant key controls where appropriate.

• agreeing a sample of fee rates back to the original Investment Management Agreement (“IMA”).

• re-performing the management fee calculation based on the source AuM and fee rates, for a sample of funds and clients.

• agreeing a sample of transactions to invoice and subsequent cash receipt.

• reading the relevant clauses of the original contracts relating to the performance fees generated, which we found to be consistent with the calculation, and assessing the Group’s right to those performance fees which we agreed met the revenue recognition criteria.

Inaccurate or incomplete recognition of dividend and interest income, including the misclassification of special dividends between revenue and capital

Income from investments £20.9m (2015:£21.2m)
Refer to the Audit Committee Report (page 35); Accounting policies (page 51); and Note 4 of the Financial StatementsRevenue includes the dividend and interest income streams generated from the Company’s investments.Dividend and interest income is the most significant component of the Company’s revenue profit for the year which drives some of the Company’s key performance indicators including revenue earnings per ordinary share. Management may seek to overstate revenue in order to justify higher dividends and to maximize total return.

We walked through the revenue recognition process and understood the systems and controls implemented.

We assessed whether the revenue recognition policies were in compliance with IFRS.

We agreed samples of dividends received and receivable and of interest income entitlements to independent sources and bank statements.

We validated the classification of special dividends between revenue and capital by examining independent information about the nature of the dividends.

We re-calculated the interest income, on a sample basis, using the effective interest rate method.

We reported that there were no matters identified during our audit work to indicate that dividend and interest is materially misstated.

Mispricing of investments due to the use of inappropriate pricing inputs

Investments held at fair value through profit or loss £428.9m (2015:£356.9m)
Refer to the Audit Committee Report (page 34-35); Accounting policies (page 52); and Note 10, 16 and 20 of the Financial StatementsInvestments comprise a portfolio of equity and fixed interest securities measured at fair value through profit or loss. The valuation of the Company’s investments is a significant driver of the net asset value of the Company and of its total return.Management may seek to overstate the valuation of investments to maximize reported performance and net asset value per share.

We walked through the valuation processes and understood the systems and controls implemented.

We agreed the prices used to value each security at the balance sheet date to an independent pricing source.

We reported that there were no matters identified during our audit work to indicate that the valuation of investments is materially misstated.

Valuation of investments

The valuation of investments at £231m as at 31 December 2016 (2015: £178m) held by the Company is the most quantitatively significant financial statement line on the Statement of Financial Position and there has been a significant increase from the previous Statement of Financial Position date.

In addition, the investments held at fair value through profit and loss balance is the main driver of the Company’s performance and net asset value. The portfolio of investments have a wide geographical spread and there is a risk that investments within the portfolio may not be actively traded and the prices quoted may not be reflective of fair value. This may result in a material misstatement within the investments held at fair value through profit and loss balance and also the fair value hierarchy for Investments disclosures.

Refer to note 1e for the accounting policy on investments and details of the investments are disclosed in note 8. The valuation of investment significant risks were included within the Audit Committee report and discussed with the Audit Committee.

We performed the following procedures to address the valuation of investments risk:

• We critically assessed the design and implementation of controls in place to value the investment portfolio within the State Street service organisation report on controls. We have also assessed whether the service auditors were professionally competent and that the scope of the controls tested were appropriate to give us assurance over the risk identified.
• We agreed 100% of the last traded prices of quoted investments on the investment ledger at year end to closing prices published by an independent pricing source and investigated any differences above 1%;

We performed the following procedure to address the liquidity of investments risk:

• We monitored the post year-end volume of trade and price movements from independent sources. We identified and challenged valuation of investments that are not frequently traded and considered indicators of impairment and fair value hierarchy with management.

There were no differences that exceeded 1% between the prices used by the Company for valuing its listed investments and the independent pricing sources used in our valuation testing.

We found from our volume of trade and liquidity analysis, that six investments (2015: two) held at the year end with a total fair value of £24.7m had low volumes of trade. This indicated that a level 2 fair value measurement should be applied to these investments. Management changed the fair value categorisation from level 1 to level 2 for these investments in the financial statements. We are now satisfied that the liquidity and fair value categorisation of investments at year end has been appropriately disclosed in note 8.

The Company holds a substantial investment portfolio of £231m as at 31 December 2016 (2015: £178m) which has increased by 34% from the prior year-end. There is an increased risk that the effect of any investments not held in the name of the Company or where the Company did not have ownership of the investments at year-end may result in a material misstatement.

Refer to note 1e for the accounting policy on investments and details of the investments are disclosed in note 8. The ownership of investment significant risks were included within the Audit Committee report and discussed with the Audit Committee.

We performed the following procedures to address this risk:

• We critically assessed the State Street service organisation control report to understand and document the design and implementation of controls over ownership of investments within the State Street service organisation control report. We have also assessed whether the service auditors were professionally competent and that the scope of the controls tested were appropriate to give us assurance over the risk identified; and
• We agreed 100% of the Company’s investment portfolio at the year end to confirmations received directly from the independent custodian and depositary.

No issues were identified from our review of the State Street service organisation report and assessment of the related service auditors.

We did not identify any differences in the investment holdings when agreeing the Company’s investment portfolio to the confirmation received directly from the custodian and depositary.

Dividend income of £4m for the year ended 31 December 2016 (2014: £3m) from equity investments is accounted for on an ex-dividend basis. Overseas dividends are included gross of any withholding tax.

1. There is a risk that dividend income from the various geographical equity investments will not be accurately calculated;

2. There is a risk that dividend income will not be recognised in the correct accounting period in the financial statements; and

3. In addition there is a risk of completeness of dividend income for the year. Dividends declared for the investments held may not all be recorded on the general ledger.

Refer to note 1c for the revenue accounting policy and details of revenue are disclosed in note 2. The revenue recognition significant risks were included within the Audit Committee report and discussed with the Audit Committee.

We performed the following procedures to address this risk:

1. We have critically assessed and documented the design and implementation of controls over revenue recognition within the State Street service organization control report. We have also assessed whether the service auditors were professionally competent and that the scope of the controls tested were appropriate to give us assurance over the risk identified;

2. We obtained a listing for all the investments held at any point during the year and obtained the ex-dividend dates and rates for all dividends declared in the year from an independent third par ty resource. A sample of these were taken and the ex-dividend dates and rates compared to the client’s ledger. We recalculated the expected income and compared this to the client’s ledger. We agreed receipts of payments to bank statement;

3. For a sample of listed investments we tested cut-off around the balance sheet date by agreeing the ex-dividend dates and rates of a sample of accrued dividends to independent data and checked for subsequent collections; and

4. We gained comfort over the completeness of dividend income by selecting our sample from an independent population. We obtained the dividend history for each investment held at the year end from a third party resource.

No misstatements in relation to revenue recognition, revenue cut off, and revenue completeness were identified which required reporting to those charged with governance.