The acquisition of the LH Assets was a material acquisition completed in the second half of 2015 and spanned 11 countries. The fair value of the identifiable net assets acquired was €4.7 billion and the transaction resulted in the recognition of €2.3 billion of goodwill. Due to both the timing of when the acquisition was completed and the size and scale of the acquisition, the allocation of the purchase price and the determination of the fair values of identifiable assets acquired and liabilities assumed were only provisional as of 31 December 2015.

Under IFRS 3 Business Combinations, CRH is permitted to revise its preliminary purchase price allocation during the 12 month measurement period following the date of the acquisition.

Because of the significant scale of this acquisition, we identified a risk over the finalization of the provisional accounting adjustments to the purchase price allocation and the opening balance sheet assets and liabilities relating to the LH Assets. The accounting treatment of certain assets and liabilities recognized under IFRS 3 may involve significant estimates and judgements to be made by management.

The emphasis related to the risk concerning the purchase price allocation for the LH Assets has been revised in 2016 to focus on where we deem the risk to reside in relation to this significant transaction which took place in 2015.

Refer to the Audit Committee Report (page 64); Accounting policies (page 125); and note 30 of the Consolidated Financial Statements (page 188).

We audited the final opening balance sheets for each location acquired and purchase price allocation for material adjustments at both Group and component levels. We provided an independent challenge to key judgements, assumptions and calculations made by management. We obtained an understanding of the adjustments identified by management and management’s specialists and we assessed the reasonableness of the adjustments by way of reference to IFRS 3. We performed an evaluation of any experts engaged by management and utilized our own specialists where necessary.

In respect of the fair value adjustments to PP&E, we performed an evaluation of valuation methodologies, assessed the appropriateness of the underlying data used, and tested significant assumptions in conjunction with our valuations specialists. We performed corroborative procedures including examining relevant external third party benchmarks and performing sensitivity analyses on key assumptions, being the useful lives, direct costs inputs and economics of relevant countries. We also held discussions with the experts employed by management to assist in this area and evaluated the findings and conclusions in their valuation report. These procedures were predominantly performed by the Group audit team and our valuations specialists, although we also leveraged the knowledge and expertise of our component teams.

We also determined whether adjustments to the preliminary opening balance sheet and preliminary purchase price allocation fell within the measurement period as defined under IFRS 3 and were correctly recognized/not recognized in goodwill.

Measurement period adjustments to the preliminary opening balance sheet and preliminary purchase price allocation as defined under IFRS 3 were deemed to be reasonable.

The impairment review of goodwill, with a carrying value of €7.4 billion, is considered to be a risk area due to the size of the balance as well as the fact that it involves significant judgement by management.  Judgmental aspects include assumptions of future profitability, revenue growth, margins and forecast cash flows, and the selection of appropriate discount rates, all of which may be subject to management override.

There has been no change in this risk from the prior year.

Refer to the Audit Committee Report (page 64); Accounting policies (page 125); and note 14 of the Consolidated Financial Statements (page 153).

Our specialist valuations team performed an independent assessment against external market data of key inputs used by management in calculating appropriate discount rates, principally risk-free rates, country risk premium and inflation rates.

We challenged the determination of the Group’s 25 cash-generating units (CGUs) including the integration of prior year acquisitions for which goodwill was unallocated at 31 December 2015, and flexed our audit approach relative to our risk assessment and the level of excess of value-in-use over carrying amount in each CGU. For all CGUs selected for detailed testing, we corroborated key assumptions in the models and benchmarked growth assumptions to external economic forecasts and construction activity measures.

We challenged management’s sensitivity analyses and performed our own sensitivity calculations to assess the level of excess of value-in-use over the goodwill carrying amount in place based on reasonably expected movements in such assumptions.

We considered the adequacy of management’s disclosures in respect of impairment testing and whether the disclosures appropriately communicate the underlying sensitivities.

The above procedures were performed predominantly by the Group audit team.

We completed our planned audit procedures with no exceptions noted.

Consistent with the previous year, two CGUs had allocated goodwill balances of between 10% and 25% of total goodwill which the Group considered significant and therefore warranted separate disclosure. An impairment charge of €23 million was recorded in respect of the total goodwill of one CGU. One additional CGU was determined to be sensitive in respect of the excess of value-in-use over its carrying value, compared to 4 in the previous year.

The impairment review of PP&E and financial assets, with a carrying value of €12.7 billion and €1.3 billion respectively, is considered to be a risk area due to the size of the balances as well as the judgmental nature of key assumptions, which may be subject to management override, similar to that noted in the assessment of the carrying value of goodwill above.

There has been no change in this risk from the prior year.

Refer to the Audit Committee Report (page 64); Accounting policies (page 125); and note 13 and note 15 of the Consolidated Financial Statements (pages 152 and 157).

In respect of the discount rate, we performed similar procedures to those noted above for goodwill.

The Group operates a variety of business models and as a result the identification of CGUs for testing is based on these business models and management’s assessment of impairment indicators.

Similar audit procedures to those noted under goodwill above are performed in respect of the key assumptions underpinning the impairment models.

We performed the above procedures in 37 components representing 94% of total PP&E and financial asset carrying values.

There are significant accounting judgements including determining the stage of completion, the timing of revenue recognition and the calculation under the percentage-of-completion method, made by management in applying the Group’s revenue recognition policies to long-term contracts entered into by the Group. The nature of these judgements results in them being susceptible to management override.

The majority of the Group’s construction contracts have a maturity within one year. There is significant seasonality to when services are rendered under these construction contracts, with the majority of the work historically performed in the summer months and, consequently, most are completed prior to the year-end.

Total revenue for construction contracts was €5.1 billion which represents 19% of the Group’s revenue in 2016.

There has been no change in this risk from the prior year.

Refer to the Audit Committee Report (page 64); Accounting policies (page 125); and note 1 of the Consolidated Financial Statements (page 136).

We performed a range of audit procedures which included obtaining a sample of contracts, reviewing for change orders, retrospectively reviewing estimated profit and costs to complete and enquiring of key personnel regarding adjustments for job costing and potential contract losses.

We performed the above procedures in 8 components representing 97% of construction contract revenue recognized during the year.

As a result of our audit procedures, we believe that revenue has been appropriately recognized in relation to construction contracts and that the judgements made by management in recognizing revenue, margin and provisioning on loss-making contracts are reasonable.

As described in the Audit Committee report on page 51 and the Accounting policies in the notes to the Financial Statements on page 78, the Group recognizes a reduction in cost of sales as a result of amounts receivable from suppliers in the form of rebate arrangements. Where the rebate arrangements are flat rate, there is limited judgement. However, a proportion of the rebate arrangements comprise annual volume rebates, for which the end of the period is often not coterminous with the Group’s year-end.

Additionally, in some cases the rebate rises as a portion of purchases as higher quantities or values of the purchases are made.

Judgement is required in estimating the expected level of rebates for the rebate year, driven by the forecast purchase volumes.

This requires a detailed understanding of the specific contractual arrangements themselves as well as complete and accurate source data to apply the arrangements to.

We assessed the design and implementation of manual and automated controls over the recording of supplier rebate income.

Our procedures on supplier rebates included:

• we interviewed a sample of Wolseley’s internal buyers to supplement our understanding of the key contractual rebate arrangements;

• we tested the accuracy of the amounts recognized by agreeing a sample to individual supplier agreements. We circularized a sample of suppliers to test whether the arrangements recorded were complete;

• we tested the completeness and accuracy of the inputs to the calculations for recording supplier rebates by agreement to supporting evidence, including historical volume data. We challenged the assumptions underlying management’s estimates
of purchase volumes including looking at the historical accuracy of previous estimates and historical purchase trends and recalculation of rebates for a sample of suppliers;

• we performed margin analysis to understand trends 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; and

• we also tested post year-end cash receipts, where relevant, to test the recoverability of amounts recorded.

The carrying value of goodwill and intangible assets at 31 July 2016 was £1,104m. Details of the valuation is included by management in the Audit Committee report on page 51 and the Accounting policies and critical estimates and judgements in note 1 to the accounts.

Management performs an impairment review under IAS 36 “Impairment of Assets” on an annual basis and whenever an indication of impairment exists.

A significant risk of material misstatement exists over certain cash generating units (“CGU”) as a result of the application of management judgement and estimates in performing the impairment review, in particular in relation to the forecasting of future cash flows used in the value in use calculation. In the current year the risk has been identified over CGUs where market conditions have been challenging (UK CGUs) and/or where there has previously been limited headroom (Nordic region, Canada PVF and Tobler).

Challenge was given to management’s identification of CGUs. Our audit work on management’s impairment review, for the CGUs specified above, included:

• assessment of the design and implementation of the controls relating to the preparation and review of management’s impairment models;

• determining whether the forecasts used had been challenged by the Board and approved by it;

• challenge of the reasonableness of the assumptions which underpin management’s forecasts with reference to recent performance, market conditions and historical trend analysis;

• assessment of the historical forecasting and budgeting accuracy;

• testing the integrity of the model using data analytic tools with specific review and challenge, involving our internal valuation specialists, of the discount rates applied for each of the CGUs against the Group weighted average cost of capital and third party data relating to adjustments to be considered to take account of cash flows arising in overseas locations;

• challenge of management’s assessment of the assets’ recoverable amount and assumptions in determining value in use; and

• sensitivity analysis on key assumptions based on comparison to readily available economic data, industry data and using our own professional skepticism.

The Group had inventory of £2,017m at 31 July 2016, held in distribution centres, warehouses and numerous branches, and across multiple product lines. Details of its valuation are included in the Audit Committee report on page 51 and the Accounting policies and critical estimates and judgements in the note 1 to the accounts.

Inventories are carried at the lower of cost and net realizable value. As a result, the Directors apply judgement in determining the appropriate values for slow-moving or obsolete items. Inventory is net of a provision of £124m which is primarily driven by comparing the level of inventory held to future projected sales.

The provision is calculated within the Group’s accounting systems using an automated process. Where local systems require manual interfaces and inputs, there is a risk that inappropriate management override and/or error may occur.

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

• evaluating the design and implementation of key inventory controls operating across the Group, including those at a sample of distribution centres, warehouses and branches;

• attending 89 inventory counts and reconciling the count results to the inventory listings to test the completeness of data;

• comparing the net realisable value, obtained through a detailed review of sales subsequent to the year-end, to the cost price of a sample of inventories and comparison to the associated provision to assess whether inventory provisions are complete;

• reviewing the historical accuracy of inventory provisioning, and the level of inventory write-offs during the year; and

• challenging the completeness of inventory provisions through assessing actual and forecast sales of inventory lines to assess whether provisions for slow-moving/obsolete stock are valid and complete.

We refer to accounting principles and notes 1.4 and 13.

The Group is required to annually test the amount of goodwill for impairment. At the balance sheet date 31 December 2016, the value of goodwill amounted to 63,8 M€ representing 24 % of the total assets and 36 % of the total equity (2015: 58,3 M€, 22% of the total assets, 34 % of the total equity). Procedures over management’s annual impairment test were significant to our audit due to the complexity of the assessment process and significant judgments and assumptions involved. The Group management uses assumptions in respect of future market and economic conditions such as, economic growth, discount rates, expected inflation rates, revenue and margin developments.

Our audit procedures included, among others, involving valuation specialists to assist us in evaluating and comparing to the relevant peer group the assumptions and methodologies used by the Group, in particular those relating to the weighted average cost of capital. We compared the market expectations management used to the external market forecast providers to gain an understanding of the assumptions used. We focused on the sensitivity in the available headroom by Cash Generating Unit and whether any reasonably possible change in assumptions could cause the carrying amount to exceed its recoverable amount. We also assessed the historical accuracy of managements’ estimates but due to the very high volatility and distressed market situation within the industry, we performed also our own sensitivity analysis based on a prolonged poor market conditions.

We assessed the Group’s disclosures in notes 1.4 and 13 in the financial statements about the assumptions to which the outcome of the impairment tests were more sensitive.

We refer to accounting principles and note 21.
The provision for rehabilitation and decommissioning costs relates to mines and processing facilities. At the balance sheet date 31 December 2016, the value of the provision amounted to 9,6 M€ (2015: 8,2 M€). The calculation of the provisions require significant management’s judgment because of the inherent complexity in estimating future costs. These costs are provided at the present value of expected costs to settle the obligation using estimated cash flows. The provisions are subject to the effects of any changes in local regulations, management’s expected approach to decommissioning and discount rates, along with the effects of changes in exchange rates.

As at 31 December 2016, we reviewed the assumptions used by management in their calculations and inspected the calculations and assessed the assumptions used. We also recalculated the provision based on these assumptions used by management for the discount rates, areas to be rehabilitated, the nature of expenses to be incurred (i.e. related to asset or expense). We assessed the competence of the work of management’s expert, who produced the cost estimates.

We assessed the Group’s disclosures in the financial statements in respect of environmental and rehabilitation provisions.

We refer to accounting principles and note 15.

The total value of inventory as of December 31, 2016 amounted to 48,4 M€ representing 19 % of the total assets (2015: 45,2 M€, 17 % of the total assets). Inventories are measured the lower of cost and net realizable value, taking into consideration also the usage based depreciation of the mineral resources originating from the business combination. The inventory is material to our audit because the inventory is exposed to price and exchange rate fluctuation due to which the net realizable value of inventory can fluctuate significantly, increasing the risk of inventory overvaluation. Inventory costing was considered a significant risk also because variable and fixed costs are allocated to inventory.

Our audit procedures involved assessing the Group’s accounting policies over recognizing inventory in compliance with applicable accounting standards.

We tested the costing of the inventory and performed net realizable value testing to assess whether the cost of the inventory exceeds net realizable value and whether the variable and fixed costs are allocated to the inventory based on normal capacity of the production. An analytic review was also performed on inventory.

We assessed the Group’s disclosures in the financial statements in respect of inventory.