Independent Auditor’s report

Opinion on financial statements of HomeServe plc

In our opinion:

  • the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 March 2016 and of the Group’s profit for the year then ended;
  • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union;
  • the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and
  • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.

The financial statements comprise the Group income statement, the Group and Company statements of comprehensive income, the Group and Company balance sheets, the Group and Company cash flow statements, the Group and Company statements of changes in equity and the related notes 1 to 52. The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

Going concern and the directors’ assessment of the principal risks that would threaten the solvency or liquidity of the Group

As required by the Listing Rules we have reviewed the directors’ statement regarding the appropriateness of the going concern basis of accounting contained on page 35 to the financial statements and the directors’ statement on the longer-term viability of the Group contained on page 34.

We have nothing material to add or draw attention to in relation to:

  • the directors’ confirmation on page 34 that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity;
  • the disclosures on pages 28-35 that describe those risks and explain how they are being managed or mitigated;
  • the directors’ statement on page 35 to the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the Group’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements;
  • the directors’ explanation on pages 34 and 35 as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

We agreed with the directors’ adoption of the going concern basis of accounting and we did not identify any such material uncertainties. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s ability to continue as a going concern.

Independence

We are required to comply with the Financial Reporting Council’s Ethical Standards for Auditors and we confirm that we are independent of the Group and we have fulfilled our other ethical responsibilities in accordance with those standards. We also confirm we have not provided any of the prohibited non-audit services referred to in those standards.

Our assessment of risks of material misstatement

The assessed risks of material misstatement described below are consistent with the prior year and are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team.

Risk How the scope of our audit responded to the risk
Regulatory risk  

As a home emergency and repair services provider, the Group operates within a regulated marketplace. Each component is subject to its own local country regulatory regime, resulting in varying degrees of regulatory complexity and oversight.

The Group is required to ensure that its sales and marketing, controls and governance, and complaints handling processes are structured in a manner which is compliant with the local countries’ regulatory regimes. To the extent this is not the case, the Group may be exposed to customer remediation, fines, reputational damage, or disclosures being made within the financial statements.

Further details of the regulatory risk are discussed in the Principal risks and uncertainties section of the Strategic report.

For each of the Group’s four main components we have assessed the design and implementation of management’s controls in place to monitor and respond to regulatory risks at a local level.

As part of our assessment we have held discussions with senior individuals in the risk, compliance and legal functions of the Group as well as considering the frequency of reporting of regulatory risk to the Group Audit & Risk Committee.

Where available, we have reviewed any regulatory correspondence between the component and local regulator.

In the UK we have spoken directly with the FCA’s supervisory team to obtain an independent view of the relationship with the FCA, as well as any immediate concerns that the FCA may have with the UK business.

Carrying value of goodwill and intangible assets  

The carrying value of goodwill and intangible assets is £457.7m (2015: £403.1m).

The Group’s assessment of the carrying value of goodwill is a judgemental process which requires estimates concerning the future cash flows of each cash generating unit and associated discount rates, growth rates, selling prices and direct costs based on management’s view of future business prospects.

The key judgement in relation to other intangible assets relates to the expected future cash flows assigned to each relationship.

There is a risk that the management information used to make these judgements is either incomplete or inaccurate. For goodwill and other intangibles the risk being that the financial budgets and plans do not appropriately predict actual future cash flows.

Further detail on the key judgements involved is set out in the critical accounting judgements and key sources of estimation uncertainty in note 3 to the financial statements.

We challenged management’s assessment of whether there are any impairment indicators by considering the performance of each cash generating unit as well as any notable business developments during the year.

We challenged management’s key assumptions relating to the estimated future cash flows, growth rates, selling prices, direct costs and the discount rates applied to each cash generating unit. Our procedures included reviewing forecast cash flows with reference to historical trading performance, assessing the Group’s ability to accurately forecast business performance, consideration of future prospects of the business and benchmarking assumptions such as the discount rate to external macroeconomic and market data using our internal valuations specialists.

We have reviewed the consistency of the key assumptions used in the carrying value of goodwill assessment to the budget used by the Group to assess longer term-viability and going concern.

For other intangible assets we have assessed the key assumptions used within the expected future cash flow assessment including the expected retention rates.

Cancellation provision and revenue deferrals  

The Group has recognised revenue of £633.2m during the year (2015: £584.2m).

The recognition of revenue requires significant judgement by management to determine key assumptions, particularly regarding the level of revenue to defer in order to satisfy the Group’s obligations for future claims handling and policy cancellations.

The key assumptions used by management for claims handling are the monthly exposures to policy claims, frequency of claims per policy type and the average cost per claim. For policy cancellations the key assumptions are retention rates and average revenue per policy.

Further detail on the Group’s revenue recognition policy is set out within the significant accounting policies in note 2 and the associated key judgements involved are set out in the critical accounting judgements and key sources of estimation uncertainty in note 3 to the financial statements.

We tested controls over the revenue recognition process within the UK business.

We assessed the Group’s policy for recognising revenue, including considering whether the policy is in accordance with current accounting standards.

We challenged and tested the methodology used for calculating the claims handling revenue deferral by comparing the inputs and assumptions used by reference to policy agreements, industry data provided by the underwriter and costs incurred in satisfying claims in the current financial year.

For the policy cancellations provision we have challenged the key assumptions by reference to the Group’s previous and recent retention experience and the level of revenue earned per policy agreement originated in the current financial year.

Sensitivity analysis was also performed in relation to the key assumptions in order to assess the potential for management bias.

Additionally we have assessed if the calculations are consistent across the membership businesses worldwide and in line with Group policy.

The description of risks above should be read in conjunction with the significant issues considered by the Audit & Risk Committee discussed on page 57.

These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Our application of materiality

We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.

We determined materiality for the Group to be £6.1m which is 7.5% of profit before tax and exceptional items. In 2015 materiality for the Group was £5.4m and represented 7.5% of profit before tax and exceptional items.

There are no exceptional items in the current year and the exclusion of exceptional items in the previous year was consistent with the Group’s internal and external reporting to facilitate a better understanding of the underlying trading performance.

We agreed with the Audit & Risk Committee that we would report to the Committee all audit differences in excess of £122,000 (2015: £100,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit & Risk Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.

An overview of the scope of our audit

Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level. Based on that assessment, as in the prior year, we focused our Group audit scope primarily on the audit work at the following components:

  • UK;
  • USA;
  • France; and
  • Spain.

All of these were subject to a full audit, whilst the New Markets segment was subject to specific audit procedures where the extent of our testing was based on our assessment of the risks of material misstatement and of the materiality of the Group’s operations at this location.

The UK, USA, France and Spain components account for 96.9% (2015: 97.7%) of the Group’s revenue and 100% (2014: 100%) of the Group’s profit before tax from profit-making components (there was a loss for the year in the New Markets segment which is not subject to a full audit). They were also selected to provide an appropriate basis for undertaking audit work to address the risks of material misstatement identified above. Our audit work at the four components was executed at levels of materiality applicable to each individual entity which were lower than Group materiality and ranged from £3.0m to £4.6m (2015: £2.7m to £4.1m).

At the Parent entity level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to audit or audit of specified account balances.

The Group audit team continued to follow a programme of planned visits that has been designed so that a senior member of the Group audit team visits the USA, France, Spain and the UK at least once a year. In years when we do not visit a significant component we include the component audit team in discussions about the risk assessment, participate in their audit close meetings and review documentation of the findings from their work.

Opinion on other matters prescribed by the Companies Act 2006

In our opinion:

  • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
  • the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exception

Adequacy of explanations received and accounting records

Under the Companies Act 2006 we are required to report to you if, in our opinion:

  • we have not received all the information and explanations we require for our audit; or
  • adequate accounting records have not been kept by the Parent company, or returns adequate for our audit have not been received from branches not visited by us; or
  • the Parent company financial statements are not in agreement with the accounting records and returns.

We have nothing to report in respect of these matters.

Directors’ remuneration

Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been made or the part of the Directors’ Remuneration Report to be audited is not in agreement with the accounting records and returns. We have nothing to report arising from these matters.

Corporate Governance Statement

Under the Listing Rules we are also required to review part of the Corporate Governance Statement relating to the company’s compliance with certain provisions of the UK Corporate Governance Code. We have nothing to report arising from our review.

Our duty to read other information in the annual report

Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is:

  • materially inconsistent with the information in the audited financial statements; or
  • apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or
  • otherwise misleading.

In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors’ statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the Audit & Risk Committee which we consider should have been disclosed. We confirm that we have not identified any such inconsistencies or misleading statements.

Respective responsibilities of Directors and auditor

As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team and independent partner reviews.

This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the Parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Matthew Perkins
(Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
Birmingham, UK
24 May 2016