Inventories amount to USD 11,524,663 as at the reporting date, being 25% of the Total Assets of the Company. The valuation of finished goods at cost has different components, which includes judgment in relation to the allocation of labour and overheads which are incurred in bringing the inventory to its present location and condition. Judgment has also been applied by management in determining the NRV of Finished Goods based on whether the stock items are 1st Grade or 2nd Grade.

The estimates and judgements applied by management are influenced by the amount of direct costs incurred historically, expectations of repeat orders to utilize the finished goods in stock and historically realized sales prices.

The significance of the balance coupled with the judgment involved has resulted in the Valuation of Inventories being identified as a Key Audit Matter.

To validate the valuation of inventories, we assessed historical costs recorded in the inventory valuation; testing on a sample basis with purchase invoices. We tested the reasonability of assumptions applied by the management in allocating direct labour and direct overhead costs to inventories. We have reviewed the basis applied by the management for inventory provisions, the consistency of provisioning in line with policy and the rationale for the recording of specific provisions. We also assessed management’s determination of 1st Grade and 2nd Grade inventories and the net realizable value of inventories thereon performing tests on the sales prices secured by the Company for similar or comparable items of inventories.

The Company and Group had net inventories of LKR 2,817,003,700 and LKR 4,091,206,996 respectively as at 31 March 2018, which comprised raw materials, work in progress, finished goods, engineering spares and consumables as disclosed in Note 20 to the financial statements.

The total inventories represented approximately 20% and 21% of the Company’s and Group’s total assets respectively.

The Company and Group estimates the provision for slow moving and obsolete inventory of raw materials, work in progress and finished goods based on the inventory residence period and sales performance of individual stock categories and make specific provisions by individual stock categories. The Company and Group also write down the value of such inventories based on the Net Realisable Value (NRV) of individual or group of inventories.

Further, the provision for all slow and non-moving inventories of engineering spares and consumables are based on the inventory days and specific identification of inventories through verification by management.

We focused on this area as the estimation for provisioning involve a high level of management judgement which could in turn result in measurement uncertainty and possibility for management bias.

We evaluated the significant assumptions and methodologies applied by management to identify and provide for slow moving and obsolete inventory categories. We compared the residence period and provisioning percentages used by management in the current year to those applied in prior years and checked the reasonableness of provisioning basis using our understanding of industry practices.

Further, we reviewed the year to year movement in provision for each category of inventory considering subsequent write offs, reversals on re-use and disposals. We also compared the cost of inventories as at 31 March 2018 to their net realisable value subsequent to year end.

We performed a recalculation of the inventory provision made to an individual inventory categories based on the system generated inventory ageing report, for which system reliance was places. Further, we checked for damaged and obsolete inventory, if any, that were physically identifiable during stock count observation.

Based on the procedures performed above, we consider management’s judgement and estimates in providing for slow moving and obsolete inventory to be reasonable and adequate.

The Group manufactures and sells luxury goods and is subject to changing consumer demands and fashion trends, increasing the level of judgement involved in estimating inventory provisions (inventory as at 31 March 2017: £505.3m; refer to note 16 to the financial statements). Judgement is required to assess the appropriate level of provisioning for items which may be ultimately destroyed or sold below cost as a result of a reduction in consumer demand particularly in light of the current challenging trading conditions and the one label strategy. Such judgements include
management’s expectations for future sales and inventory liquidation plans.

For both finished goods and raw materials, we critically assessed the basis for the inventory provisions, the consistency of provisioning in line with policy and the rationale for the recording of specific provisions in the context of management’s key strategies. In doing so we tested the provision calculations and determined that they appropriately took into account the ageing profile of inventory, the process for identifying specific problem inventory and historical loss rates.

As a result, we satisfied ourselves that both finished goods and raw materials inventory provisions have been prepared in line with policy and are supportable on the basis of historical trends as well as management’s expectations for future sales and inventory management plans.

The Group has a material operational asset base which may be vulnerable to impairment in the event of trading performance being below expectations.

The value-in-use models used to determine the amount of any impairment charge are based on assumptions including revenue forecasts, gross and operating margins, which are store specific, and discount rates, which are country specific (refer to note 13 to the financial statements). Such stores may be located in both emerging markets, which are typically more volatile than developed markets, as well as more established economies such as the US, where the Group is working towards consolidating its position within the market. The same judgements are used in determining whether an onerous lease provision is required and in calculating the appropriate amount of the provision. In addition, judgement is required in assessing whether there are any alternative uses for stores which may affect the amount of onerous lease provision required.

Management’s assessment resulted in the recognition of a net impairment charge for the year ended 31 March 2017 of £23.0m (2016: £45.3m), including £15.3m (2016: £24.2m) for store impairments and £7.7m (2016: £21.1m) for onerous leases.

We focused on this area because of the inherent judgement involved in determining key assumptions such as future sales growth, profit margins and discount rates, and the magnitude of the assets under consideration and the lease obligations.

We tested management’s assessment of indicators for both impairment and onerous lease provisions taking into consideration the challenging trading conditions in some territories, and are satisfied that they appropriately took into account internal and external impairment indicators, including the trading performance of each store.

We tested the value-in-use models for assets where an impairment trigger or potential requirement for an onerous lease provision has been identified, including challenging management forecasts and other assumptions including discount rates and long term growth rates, and found that these assumptions were reasonable. In particular, we focused on the forecasts for sales growth and are satisfied that they reflect reasonable expectations for each store, taking into account the maturity of each store, the market in which it is located and management’s specific plans for improving store performance.

Given the judgement inherent in the impairment and onerous lease provision calculations, particularly relating to revenue growth assumptions, management has disclosed a sensitivity analysis in the financial statements (refer to note 13 to the financial statements). Having re-performed the sensitivity calculations and considered whether any other sensitivities might be more appropriate, we are satisfied that the financial statements adequately disclose the potential risk of future impairment if the performance of the stores with indicators of impairment do not meet management’s expectations.

The directors are required to apply significant judgement when determining whether, and how much, to provide in respect of tax assessments leading to uncertain tax positions in a number of jurisdictions (refer to notes 9, 14 and 30 to the financial statements). Given the inherent uncertainty over the outcome of pending tax assessments, significant judgement is applied by the directors in estimating the final outcome of such tax assessments. We focused on this area due to the inherent complexity and judgement in estimating the amount of provision required, which is increased by the number of jurisdictions in which the Group operates. As noted in note 30 to the financial statements, the Group is subject to tax audits and claims in a number of jurisdictions.

Through discussions with management, we understood the Group’s process for identifying uncertain tax positions and the related accounting policy for provisioning against tax exposures. Based on this, we assessed the extent to which provisions are supported by underlying circumstances and determined that they are being made on a consistent basis to previous years. We assessed the appropriateness of provisions recorded in the financial statements, or the rationale for not recording a provision, by using our specialist tax knowledge, reading the latest correspondence between the Group and the various tax authorities and advisors, and by obtaining written responses from the Group’s external advisors on the material tax exposures. These procedures assisted in our corroboration of management’s position in respect of significant tax exposures, and with our assessment that the disclosures and provisions recorded in the financial statements, including whether any provisions sufficiently addressed probable penalties and interest, were appropriate and reflected the latest developments.

In the year ended 31 March 2013, the Group reacquired the licence to sell fragrance and beauty products, resulting in the recognition of a fragrance and beauty licence intangible of £70.9m, which was being amortised on a straight-line basis over the period 1 April 2013 to 31 December 2017. The licence was fully impaired during the period, resulting in a charge of £18.6m.

We have focused on this area due to the size of the fragrance and beauty licence intangible and the inherent judgement involved in forming a valuation of the intangible, and the fact that future sales and profit forecasts for this part of the business were considered to no longer support the recoverability of the asset during the period.

We challenged management’s assessment of fragrance and beauty performance by comparing actual results to forecasts. Having compared the Group’s future plans and forecasts for these products to actual results and market conditions, we are satisfied that it is appropriate to impair the fragrance and beauty licence intangible. We also considered the related disclosures and are satisfied that the financial statements adequately disclose the impairment.

The presentation of results continues to be a focus area for regulators, particularly the use of adjusted and underlying measures to explain business performance, and the classification of items as adjusting, especially where they recur each year.

There is a risk that the use of such measures means that the overall presentation of results is not fair, balanced and understandable. In the year ended 31 March 2017 the Group has identified five adjusting items, being the charge relating to the fragrance and beauty licence intangible asset, restructuring costs, revaluation of deferred consideration liability, costs relating to the transfer of the Beauty operations and the put option liability finance charge (refer to note 6 to the financial statements).

We considered management’s recognition of adjusting items and the related presentation and accompanying disclosures and are satisfied that the selection of adjusting items is consistent with prior years, in line with management’s accounting policies and adequately explained in the financial statements.

We noted no instances of inappropriate or inconsistent presentation of results and non-GAAP measures. Specifically, we are satisfied that non-GAAP measures are adequately explained and reconciled to GAAP measures.

Refer to page 37 (Audit Committee statement), page 90 (accounting policy note) and page 109 (financial statement disclosures).

Inventory is carried in the Financial Statements at the lower of cost and net realisable value. Sales in the fashion industry can be extremely volatile with consumer demand changing significantly based on current trends. As a result there is a risk that the carrying value of inventory exceeds its net realisable value.

Our procedures were designed to challenge the adequacy of the Group’s provisions against inventory by seasonal collection and included:

• Evaluated current year provision by assessing historical accuracy. We examined the Group’s historical trading patterns of inventory sold at full price and inventory sold below full price through alternative clearance routes, together with the related margins achieved for each channel. We used the information on trading patterns to assess whether the provisions held have historically been set at an appropriate level; and

We have also considered the adequacy of the Group’s disclosures in respect of the levels of provisions against inventory.

Refer to page 37 (Audit Committee statement), page 89 (accounting policy note) and pages 102 to 103 (financial statement disclosures).

The Group has invested a significant amount of capital both within and outside the UK in its retail store portfolio. Given the relative immaturity of the brand outside the UK, the payback period is typically longer than for UK stores. The Group had 462 (2016: 422) stores and 28 (2016: 26) outlets as at 28 January 2017. There is a risk that the carrying value of retail store leasehold improvements, fixtures, fittings and office equipment may be overstated if the profitability expectations for the related stores are adversely impacted by trading and other conditions that were not anticipated in the initial business case. The level of judgement involved in assessing impairment indicators on retail stores is one of the key judgemental areas that our audit is concentrated on.

Our procedures were designed to challenge whether there were any indicators of impairment and the need for any provisions against the asset carrying value and included:

We have also considered the adequacy of the Group’s disclosures in respect of impairment of retail fixed assets.