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 2017 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 that we have audited comprise:

  • the Group income statement;
  • the Group and Company statements of comprehensive income;
  • the Group and Company balance sheets;
  • the Group and Company statements of changes in equity;
  • the Group and Company cash flow statements; and
  • the related notes 1 to 56.

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.

Summary of our audit approach

Key risks

The key risks that we identified in the current year were:

  • carrying value of goodwill and other intangible assets;
  • cancellation provision and revenue deferrals; and
  • the acquisition of Utility Service Partners Inc (“USP”).

Materiality

The materiality that we applied in the current year was £7.2m which was determined on the basis of 7.5% of profit before tax.

Scoping

As in the prior year, we focused our Group audit scope primarily on the audit work at the following components:

  • UK;
  • North America;
  • France; and
  • Spain.

All of these were subject to a full audit, whilst the New Markets segment was subject to specific audit procedures.

Significant changes in our approach

In comparison to the prior year, we highlight the following changes:

  • we identified a new key risk in relation to the Group’s acquisition of USP for consideration of £60.9m on 1 July 2016; and
  • we no longer consider regulatory risk to be a key risk as a result of a reduced level of regulatory scrutiny from local regulatory bodies across the Group in recent years.

Other than the change in key risks as described above, there were no other significant changes in our approach.

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 within note 2 to the financial statements and the directors’ statement on the longer-term viability of the Group contained within the strategic report, on page 50.

We are required to state whether we have anything material to add or draw attention to in relation to:

  • the disclosures on pages 42-49 that describe the principal risks and explain how they are being managed or mitigated;
  • the directors’ confirmation on page 51 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 directors’ statement in note 2 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; and
  • the directors’ explanation on page 50 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 confirm that we have nothing material to add or draw attention to in respect of these matters.

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 confirm that we are independent of the Group and we have fulfilled our other ethical responsibilities in accordance with those standards.

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 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.

Carrying value of goodwill and other intangible assets

Risk description

The carrying value of goodwill and other intangible assets is £590.5m (2016: £457.7m).

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-generatingunit and associated discount rates, growth rates, selling prices and direct costs based on management’s view of future business prospects.

The key judgements in relation to other intangible assets relate to the expected future cash flows assigned to each intangible asset and the value of costs to capitalise in relation to the new CRM system which will be fully implemented within the UK business in FY18. The cumulative value of costs capitalised to date in relation to the CRM system is £60.8m.

There is a risk that the management information used to make these judgements is either incomplete or inaccurate, and costs that do not meet the criteria for capitalisation are included within other intangible assets.

Further detail on the key judgements involved is set out within the Audit and Risk Committee report on page 77, 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.

How the scope of our audit responded to the risk

We assessed the design and implementation of controls that the Group has in place to assess the carrying value of goodwill and other intangible assets, specifically the management review process to assess the accuracy and completeness of key assumptions within the impairment assessment.

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 cashgenerating- 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 macro-economic 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, and tested a sample of costs capitalised during the year in relation to the CRM system to assess whether they met the recognition criteria for capitalisation.

Key observations

We concluded that the key assumptions used within management’s goodwill impairment assessment were reasonable.

The key assumptions used within the carrying value of goodwill assessment were consistent with the Group’s longer term-viability and going concern assessment.

We are satisfied that the costs capitalised in relation to the CRM system meet the recognition criteria for inclusion as an intangible asset.

Cancellation provision and revenue deferrals

Risk description

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 total amount of revenue deferred at 31 March 2017 in respect of the Group’s future claim handing obligations is £76.7m (2016: £54.4m) and the amount of revenue provided in respect of future cancellations is £18.0m (2016: £16.0m).

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 Audit and Risk Committee report on page 77, 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.

How the scope of our audit responded to the risk

We first understood management’s process and key controls around the cancellation provision and revenue deferrals by undertaking a walk-through. Following identification of the key controls we evaluated the associated design and implementation of such controls. Specifically, we assessed the implementation of controls that the Group has in place to manage the risk of inappropriate assumptions being used within the cancellation provision and revenue deferrals.

We assessed the Group’s policy for deferring 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.

Key observations

We were satisfied that appropriate revenue deferral policies have been adopted and complied with across the Group.

We identified no issues with the key controls that we identified within the UK business. We found the models used by management to determine the cancellation provision and revenue deferrals to be working as intended and the underlying assumptions were reasonable.

Acquisition of USP

Risk description

The most significant business combination during the year was the acquisition of USP on 1 July 2016 for total consideration of £60.9m. The acquisition of USP resulted in goodwill of £33.2m, intangible assets of £34.8m and deferred tax assets of £11.4m.

Management are required to calculate the fair value of the acquired assets and liabilities, including identification of any intangible assets. We focussed our assessment on the recognition and valuation of acquired intangible assets, namely the acquired customer back book and acquired partner relationships. Key assumptions in valuing the intangible assets included the expected future cash flows and the discount rate applied to these cash flows. Changes to these assumptions can have a material impact on the intangible assets recognised, as well as the resulting level of goodwill identified.

There is also a risk that deferred tax assets in relation to acquired net operating losses are not recognised appropriately, which is dependent on the Group being able to access and utilise these losses over a number of years.

Further detail on the Group’s approach to accounting for business combinations is set out within the significant accounting policies in note 2, the associated key judgements involved in the valuation of acquisition intangibles are set out in the critical accounting judgements and key sources of estimation uncertainty in note 3 and a full breakdown of the identifiable assets and liabilities acquired is included within note 35.

How the scope of our audit responded to the risk

We assessed the design and implementation of controls that the Group has in place to manage the risk of inappropriate assumptions being used within the fair value assessment.

We reviewed the Group’s methodology for accounting for the business combination and assessed whether it has been performed in accordance with IFRS 3, as well as the approach adopted to the identification of the fair value of assets and liabilities.

Internal valuation specialists were engaged to support our assessment of the Group’s approach to the fair value assessment, including the identification of acquisition intangibles. As part of this, an assessment of the appropriateness of key assumptions used to derive the expected future cash flows and discount rate was performed.

Internal tax specialists were engaged to assess the appropriateness of the recognition of the deferred tax asset in relation to acquired net operating losses by considering the expected future profitability of the North America business as well as the Group’s ability to access and utilise acquired losses.

Key observations

We concluded that management’s acquisition accounting for USP was performed in accordance with IFRS 3 and the key assumptions used within management’s fair value assessment were reasonable.

We are satisfied that the recognition of a deferred tax asset in relation to acquired net operating losses is appropriate.

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.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Group materiality
£7.2m (2016: £6.1m).

Basis for determining materiality
7.5% (2016: 7.5%) of profit before tax.

Rationale for the benchmark applied
We determined materiality using profit before tax as we considered this to be the most appropriate measure to assess the performance of the Group.


We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £360,000 (2016: £122,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. The change in the reporting threshold has been made following our reassessment of what matters require communicating. We also report to the Audit 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;
  • North America;
  • 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 acquisition of USP is included within the North America component and was therefore subject to a full audit.

The UK, North America, France and Spain components account for 97.9% (2016: 96.9%) of the Group’s revenue and 100% (2016: 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 ranging from £3.1m to £4.7m (2016: £3.0m to £4.6m).

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 UK, North America, France and Spain at least once a year. This included participation in their audit close meetings and reviewing documentation of the findings from their work.

Opinion on other matters prescribed by the Companies Act 2006

In our opinion, based on the work undertaken in the course of the audit:

  • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006;
  • 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; and
  • the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements.

In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report and the Directors’ Report.

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 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
23 May 2017