Our opinion on the financial statements is unmodified
We have audited the financial statements of Flowtech Fluidpower plc (the 'Parent Company') and its subsidiaries (the 'Group') for the year ended 31 December 2017, which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of changes in equity, the consolidated statement of cash flows, the Company income statement, the Company statement of financial position, the Company statement of changes in equity and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the Parent Company financial statements is applicable law and United Kingdom Accounting Standards including Financial Reporting Standard 101 'Reduced Disclosure Framework' (United Kingdom Generally Accepted Accounting Practice).
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 December 2017 and of the Group's profit and Parent Company's profit for the year then ended;
- the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
- the Parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
- the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the 'Auditor's responsibilities for the audit of the financial statements' section of our report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Who we are reporting to
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.
Conclusions relating to going concern
We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:
- the Directors' use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or
- the Directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group's or the Parent Company's ability to continue to adopt the going concern basis of accounting for a period of at least 12 months from the date when the financial statements are authorised for issue.
Overview of our audit approach
- Overall materiality was set at £309,000, which represents 5% of the Group's profit before taxation
- Key audit matters were identified as revenue recognition, allocation, valuation and impairment of intangible assets and goodwill and provision for impairment of inventories
- We performed full scope audit procedures on the financial statements of Flowtech Fluidpower plc (the Parent), and on the financial information of all subsidiary companies. which are considered to be material components based upon Group materiality. We performed targeted procedures on Flowtechnology Benelux BV and Hi-Power Limited.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those that had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. 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.
Key audit matter – Group
How the matter was addressed in the audit – Group
Revenue is recognised in accordance with the Group's accounting policies and International Accounting Standard (IAS) 18: 'Revenue'.
The revenue recorded by the Group is one of the key determinants of the Group's underlying profitability.
We therefore identified revenue recognition as a significant risk, which was one of the most significant assessed risks of material misstatement.
Our audit work included, but was not restricted to:
- Testing of revenue recognition policies to assess whether the policies are in accordance with International Accounting Standard (IAS) 18: 'Revenue'
- Testing of whether revenue has been accounted for in accordance with the Group's accounting policies
- Obtaining an understanding of the processes through which the business initiates, records, processes and reports revenue transactions
- Obtaining an understanding of the application of revenue recognition policies, both in general and for selected complex contracts
- Testing a sample of revenue entries for material revenue streams to supporting documentation
The Group's accounting policy on revenue is shown in note 2 to the financial statements and related disclosures are included in note 3.
We determined the recognition of revenue for the Group's material revenue streams to be acceptable. We consider the Group's accounting policies to provide sufficient information regarding the Group's material revenue streams, and to comply with International Accounting Standard (IAS) 18: 'Revenue'.
Allocation, valuation and impairment of intangible assets and goodwill
The Group holds significant intangible assets (customer relationships) and goodwill. The Group has undertaken a number of acquisitions during the year, and management have performed an assessment of the nature and value of the intangible assets acquired in the business combinations. Management have also assessed the fair value of all assets acquired in business combinations during the period.
Management have performed an impairment review of the Group's intangible assets and goodwill, including sensitivity analysis to assess the impact of changes in key assumptions.
The judgements made in respect of the valuation of intangible assets and the impairment review are subject to significant measurement uncertainty. We therefore identified allocation, valuation and impairment of intangible assets and goodwill as a significant risk, which was one of the most significant assessed risks of material misstatement.
Our audit work included, but was not restricted to:
- Testing of the Group's accounting policies to assess whether the policies are in accordance with International Accounting Standard (IAS) 38: 'Intangible Assets' and International Accounting Standard (IAS) 36: 'Impairment of Assets'
- Consideration of whether intangible assets have been accounted for in accordance with the Group's accounting policies
- Consideration of the accounting for the business combinations in the period, including assessment of the fair value of consideration and net assets acquired
- Testing of the allocation and valuation of intangible assets acquired with the acquisitions in the year, and review of the disclosures made in the financial statements to assess whether they are appropriate and complete
- Consideration of the assumptions and calculations incorporated in the impairment review of goodwill and intangible assets
- Performance of sensitivity analysis to understand the impact of any reasonably possible changes in key assumptions
The Group's accounting policies on goodwill and acquired intangibles are shown in note 2.9 to the financial statements and related disclosures are included in notes 10 and 11.
We determined the accounting for allocation and valuation of the Group's intangible assets and goodwill to be acceptable. No impairments of intangible assets or goodwill were identified from the work performed above. We concluded that the assumptions used in the valuation and impairment models were appropriate. We consider the disclosures in the financial statements to provide sufficient information regarding both the Group's business combinations and management's impairment review of goodwill and intangible assets.
Provision for impairment of inventories
|The Group trading entities holds material inventory,|
against which significant provisions have been recognised.
The provision for impairment of inventories is based on sales trends for all inventory and management's estimation of recoverability. There is significant measurement uncertainty in management's estimation.
Inventory management is one of the key challenges facing management and one of the main determinants of the Group's underlying performance.
We therefore identified provision for impairment of inventories as a significant risk, which was one of the most significant assessed risks of material misstatement.
|Our audit work included, but was not restricted to:|
- Testing of the Group's accounting policy in respect of the impairment of inventories to assess whether the policy is in accordance with International Accounting Standard (IAS) 2: 'Inventories'
- Consideration of whether the Group's inventory provisions have been accounted for in accordance with the Group's accounting policies
- Testing of the integrity of the underlying data used in the calculation of the inventory provisions
- Comparison of inventory values to sales prices for a sample of inventory lines
- Consideration of the suitability of the inventory provision, including re-performance of the calculation and consideration of historical experience
The Group's accounting policy on provision for impairment of inventories is shown in note 2.25 to the financial statements and related disclosures are included in note 15.
The results of our audit testing were satisfactory and we concur that the level of inventory provisioning 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 in determining the nature, timing and extent of our audit work and in evaluating the results of that work.
Materiality was determined as follows:
|Financial statements as a whole|
£309,000, which is 5% of the Group's profit before tax. This benchmark is considered the most appropriate because it is a prominent key performance indicator used by the Group's investors.
Materiality for the current year is higher than the level that we determined for the year ended 31 December 2016 to reflect the increase in the Group's profitability.
£232,000, which is 0.5% of the Company's total assets, capped at 75% of Group materiality. Total assets is considered the most appropriate benchmark because the Company's activities are those of a holding company which does not generate revenue.
Materiality for the current year is higher than the level that we determined for the year ended 31 December 2016 to reflect the increase in the net assets of the Company.
|Performance materiality used to drive the extent of our testing||75% of financial statement materiality.||75% of financial statement materiality.|
|Specific materiality||We have applied a specific materiality to Directors' emoluments.||We have applied a specific materiality to directors' emoluments.|
|Communication of misstatements to the Audit Committee||£16,000 and misstatements below that threshold that, in our view, warrant reporting on qualitative grounds.||£12,000 and misstatements below that threshold that, in our view, warrant reporting on qualitative grounds.|
An overview of the scope of our audit
Our audit approach was a risk-based approach founded on an understanding of the Group's business, its environment and risk profile and in particular included:
- evaluation by the Group audit team of identified components to assess the significance of that component and to determine the planned audit response based on a measure of materiality calculated by considering the component's significance as a percentage of the Group's net assets, revenues and profit;
- a full scope audit of the financial statements of the Parent Company, Flowtech Fluidpower plc;
- an evaluation of the Group's internal control environment, including performance of process walkthroughs and documentation of controls covering all of the Key Audit Matters discussed in the Key Audit Matters section above;
- performance of a full scope audit on components representing 85% of the Group's revenue, 98% of the Group's profit before tax and 97% of the Group's net assets. The entities on which full scope audits were performed were selected based upon their significance to the Group's net assets, revenues and profits, and provide an appropriate basis for undertaking audit work to address the Key Audit Matters at Group level identified above;
- performance of targeted procedures on specific balances in entities which do not require full scope audit procedures for the purposes of the Group audit opinion. Our targeted procedures cover Flowtechnology Benelux BV and Hi-Power Limited, and focus on revenue, receivables, inventory and cash. The procedures have been performed in accordance with Group performance materiality;
- performance of analytical procedures to confirm our conclusion that there was no significant risk of material misstatement of the aggregated financial information of the remaining components not subject to a full audit;
- testing of the consolidation process, including re-performance of management's formulae and confirming that the Group financial statements are consistent with the audited statutory figures; and
- the only changes in scope from the prior year relate to procedures performed in relation to the Group's acquisitions.
The Directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
Our opinion on other matters prescribed by the Companies Act 2006 is unmodified
In our opinion, based on the work undertaken in the course of the audit:
- 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.
Matters on which we are required to report under the Companies Act 2006
In the light of the knowledge and understanding of the Group and the Parent Company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the Directors' report.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:
- 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; or
- certain disclosures of directors' remuneration specified by law are not made; or
- we have not received all the information and explanations we require for our audit.
Responsibilities of Directors for the financial statements
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, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group's and the Parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.
Senior Statutory Auditor
for and on behalf of Grant Thornton UK LLP
Statutory Auditor, Chartered Accountants
16 April 2018