Refer to pages 115 and 118 (Accounting policies) and page 150 (notes).

The Group has defined benefit pension plans with net post –retirement liabilities of £457m which is significant in the context of the overall balance sheet of the Group. The valuation of the pension liabilities requires significant levels of judgement and technical expertise in choosing appropriate assumptions. Changes in a number of the key assumptions (including salary increases, inflation, discount rates and mortality) can have a material impact on the calculation of the net liability, particularly for the Airlines Germany pension schemes which are unfunded. There is also an element of judgement in the measurement of fair value of pension assets due to the nature of financial investments.

We used our pension specialist to evaluate the assumptions used in the valuation of the liabilities and assets in the Group’s pension plans.

We also focused on the valuations of the pension plan liabilities and the pension assets and our procedures included the following:

• We agreed the discount and inflation rates used in the valuation of the pension liability to our internally developed benchmarks
• We assessed salary increase and mortality rate assumptions against national and industry averages
• We obtained third-party confirmations on the ownership and valuation of pension assets

We checked that there was no impact of specific events, such as changes to schemes and redundancies that should have been incorporated into the calculation.

We tested underlying inputs, such as employees in the scheme, to the liability valuation used by the scheme actuary. We also evaluated and tested management’s controls and processes over pension data such as leavers to the plan.

The assumptions used by the Directors’ were in line with our independently determined expectations and management’s disclosures in respect of the schemes are appropriate.

Refer to page 112 (Accounting policies) and pages 128 and 144 (notes).

The Group holds significant goodwill and deferred tax assets on the balance sheet of £2,595m and £228m respectively.

In particular, in respect of goodwill we focused on the value in use of the UK, Continental Europe and Northern Europe Cash Generating Units (“CGUs”) which account for 99% of the total goodwill balance. Similarly, for deferred tax we focused on certain countries including the UK, Germany and Spain.

Determining the carrying value of these assets is dependent on complex and subjective judgements by the Directors about the future results of the business.

The value of these assets is highly dependent upon the Directors’ views of the future results and prospects of the business including the successful implementation of the ongoing UK transformation and business development and restructuring initiatives that form part of the New Operating Model.

If forecast results are not achievable, the valuation of the goodwill and the recognition of the deferred tax assets may not be appropriate.

We evaluated the process by which the Directors prepared their cash flow forecasts and confirmed that they reflected the latest Board approved three-year plans. We performed a critical review of the historical accuracy of budgets and forecasts by, for example, comparing the actual performance of the business in the current year against the board approved budgets. These procedures enabled us to determine the quality and accuracy of the forecasting process.

The key assumptions within the forecasts are the continuing successful implementation of the business model and profit improvement initiatives which drive the resulting growth rates. In assessing the appropriateness of the Directors’ assumptions we benchmarked certain external data used in the discount rate calculation against rates used by comparable companies.

We also considered factors such as independent forecast growth rates for Thomas Cook and the wider travel industry. We applied sensitivity analysis to the Directors calculations to ascertain the extent to which reasonably possible changes would, either individually or in aggregate, require the impairment of goodwill. We have assessed the recognition of deferred tax assets on losses against forecast future profits.

As a result of our work, we concurred with the Directors’ conclusion that no goodwill impairment charges were required and that it was appropriate to recognise deferred tax assets.

Refer to pages 112 and 113 (Accounting policies) and pages 130 and 145 (notes).

Significant fixed assets for aircraft of £627m and provisions of £284m for maintenance and contractual end of lease obligations are held on the balance sheet.

This was an area of focus for our audit due to the size of these balances and the inherent level of estimation included in the calculation of the maintenance provisions which are based upon forecast aircraft usage and maintenance costs. Furthermore, there is judgement needed to determine whether leases are operating or financing in nature. Further complexity arises in respect of aircraft where contractual terms have been amended, including the extension of lease terms.

We examined the terms included within new or extended aircraft lease contracts to check that they were appropriately accounted for as operating or finance leases.

We examined the appropriateness of the maintenance and other contractual end of lease provision calculations prepared by management by performing an assessment of new obligations, assessing key assumptions such as the quantum and timing of maintenance expenditure to contracts, confirming flying hours to the aircraft log books maintained by the engineering department and understanding any which are significant provision releases.

The above procedures are illustrative of some of the procedures performed and differed across the component reporting teams. Our procedures did not identify any aircraft that had been incorrectly classified or any material misstatements within the associated aircraft provision.

Refer to page 116 (Accounting policies) and page 124 (notes).

The value of separately disclosed items which are presented within a separate table on the face of the income statement are significant. These items are excluded from the Directors’ reporting of the underlying results of the business.

The nature and use of separately disclosed items is explained in the Group’s accounting policy and principally includes costs associated with the Group’s New Operating Model programme (including redundancy, consultancy, personnel and other related costs).

We focused on this area because separately disclosed items are not defined by IFRSs as adopted by the European Union and therefore judgement is required by the Directors to identify such items. Consistency in identifying and disclosing items as separately disclosed is important to maintain comparability of the reporting year-on-year.

We challenged the Directors’ rational for the presentation of separately disclosed items, assessing this against the Group’s accounting policy, the Board approved plans for the New Operating Model and consistency of treatment with prior periods.

We also considered whether there were any items that were recorded within underlying profit that we considered should have been presented within separately disclosed items.

We assessed the appropriateness, consistency and balance of the Directors’ presentation of these items within the financial statements. We discussed the consistency of the items within separately disclosed items, both with the prior year and the Group accounting policies, with the Audit Committee and concluded that the disclosure was appropriate.

Refer to page 118 (Critical accounting estimates and judgements).

Significant prepayments to hoteliers are held on the balance sheet. The recoverability of these balances requires judgement, including consideration of current booking levels, historical trend data and adherence to payment plans, future forecast bookings, the credit-worthiness of the hoteliers and the impact of external factors.

The procedures performed differed across the component teams. We discussed the recoverability of hotel prepayments with local and group management teams and also with the Group hotel procurement team.

We assessed the ability of the Group to utilise the hotel deposits and prepayments based on actual and forecast bookings at the hotels. We examined contracts and evaluated plans regarding certain aged prepayments, with particular focus on those deemed to be at higher risk due to geographic location, together with consideration of any security over the hotel held by the Group. We challenged the recoverability of certain prepayments and whether appropriate provisions had been recorded.

Our work did not identify any material hotel prepayments that we did not consider to be recoverable.

Refer to pages 113 to 114 (Accounting policies) and pages 138 to 141 (notes).

The Group uses a number of hedging structures including options to manage its exposure to adverse movements in fuel prices and foreign exchange rates.

The accounting for options and related derivatives is complex and we therefore focused on this area to assess whether hedge accounting had been appropriately applied and the impact of hedging had been properly presented.

We used our specialist treasury knowledge to test the valuations for fuel and foreign currency derivatives by recalculating their fair value using observable market data.

We evaluated the values held in the hedging reserve and tested manual adjustments made to correct for timing differences between the maturity of the hedging instrument and the underlying exposure.

We examined the hedge documentation and the hedging structures in place to check whether they had been accounted for in accordance with the Group’s accounting policies and presented appropriately in the Annual Report and Accounts. Our work performed did not identify any material misstatements.

This was considered to be an area of audit focus due to the difficult trading conditions during the year as a result of external factors, specifically the impact on the market of terrorist attacks.

External market shocks, together with the underlying seasonality of the business can put pressure on the Group’s covenant and liquidity headroom under its funding arrangements.

We agreed the forecasts used by Management within the Going Concern assessment to Board approved forecasts. As detailed above we performed certain procedures to assess the quality and accuracy of the forecasting process.

We challenged the key judgements within the Group’s forecasts including underlying trading, expected cost savings, the impact of the EU referendum and the seasonal nature of the Group’s cash flows. We examined the Group’s funding agreements and performed downside sensitivity analysis over the Group’s headroom assessment in respect of its liquidity and compliance with its bank covenants.

Our conclusion on the directors’ Going Concern statement is set out below.

We have focused on this risk due to the size of the net deficit, £288.1m (2015: £553.8m). The actuarial assumptions, such as discount rate, inflation and mortality, used to value the defined benefit pension scheme obligation are judgmental, and a small change in assumptions outside of the requirements of IAS 19(R) Employee Benefits may result in a material difference to the liability.

The Group engages independent actuaries to assist in its assessment of the defined benefit obligation. See Note 31, page 144.

To address this risk we performed the following procedures:

•Actuarial assumptions: our actuarial audit specialists challenged the key assumptions used by the Group’s actuaries in the valuation of the pension scheme by using external data to benchmark against market practice to assess their appropriateness in calculating the scheme assets and liabilities.

This included comparison of the discount rate and inflation assumption with external market data and benchmarking mortality assumptions against standard mortality tables. We also tested the information provided to the actuaries; and

•Asset values: we have verified pension plan assets and values held to external confirmations from relevant fund managers. We have tested the roll–forward of plan asset values to the year–end date. We have re–performed valuations of quoted funds.

• our tax audit specialists assessed the principles applied to compute the deferred tax balances and performed detailed testing of the deferred tax balance with consideration of the judgements made;

• analysis of adjustments to revenue (separately identified as a significant risk — please see above); and

• challenge and assessment of journal postings exhibiting key characteristics of fraud and/or management override to determine whether they represent valid journals.

We considered each of these areas individually for evidence of management bias in the context of the Group’s control environment and IT systems, and also performed an overall assessment as to whether there was any cumulative bias across the consolidated financial statements.

We focused on this area due to the significant value of revenue to the Group, £2.9bn (2015: £2.6bn). The main revenue streams comprise a high volume of low value transactions in accommodation, restaurants and food and beverage sales. The risk around revenue is focused on adjustments to revenue outside of these transactional amounts, for example in respect of loyalty schemes and franchise fees.

See Note 3, page 116.

To address this risk we have performed the following procedures:

• Significant risk areas: we tested a sample of manual journal entries posted to revenue and verified to supporting documentation to confirm the entry was valid and appropriate. For loyalty schemes we have tested the redemption rate calculation, agreed the number of loyalty points outstanding to third–party evidence and re–performed the liability calculation. For franchise income we have recalculated the deferred revenue based on agreements with franchisees.

We have also performed the following other procedures over revenue:

• Controls testing: we tested the controls over revenue including those in the IT systems that support the recording of revenue;

• Analytical reviews: we have performed substantive analytical procedures on the major revenue streams; and

• Tests of details: we used analytical software to perform substantive tests of detail for a sample of the revenue balance by reconciling source data for each sample to the general ledger and cash receipts.

There are a number of judgements across the consolidated financial statements which are not significant individually, but which could be in combination.

We therefore focused on management override of controls in particular in relation to potential management bias in key judgements which include:

• residual values and Useful Economic Lives (UELs) of fixed assets (Note 2);

• fixed asset impairments (Note 15);

• property provisions (Note 23);

• valuation of the defined benefit pension liability (Note 31);

• assessment of deferred tax (Note 9); and

• judgemental items in revenue (Note 4).

Certain of these are included in the Group’s assessment of the significant accounting judgements and estimates as disclosed in Note 2 of the consolidated financial statements.

To address the risk we have performed the following procedures:

• we have sample tested the residual values and UELs associated with categories of assets, including benchmarking to industry data and using information provided by the Whitbread property department, and tested the mechanical accuracy of the depreciation model and assumptions;

• we tested fixed asset impairments by assessing the assumptions in the business plans, growth rates, discount rates (with the assistance of valuations experts) and key risks to the plan that could impact fixed asset impairment;

• we agreed property provisions to underlying contracts and purchase prices to valuers’ reports and performed sensitivity analysis on the main assumptions, including discount rates, estimates of future sub– lease income and periods of non–use;

• we benchmarked the key assumptions used in the valuation of the defined benefit pension liability (separately identified as a significant risk — please see above);

• our tax audit specialists assessed the principles applied to compute the deferred tax balances and performed detailed testing of the deferred tax balance with consideration of the judgements made;

• analysis of adjustments to revenue (separately identified as a significant risk — please see above); and

• challenge and assessment of journal postings exhibiting key characteristics of fraud and/or management override to determine whether they represent valid journals.

We considered each of these areas individually for evidence of management bias in the context of the Group’s control environment and IT systems, and also performed an overall assessment as to whether there was any cumulative bias across the consolidated financial statements.