Opinion on financial statements of SIG 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 December 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 United Kingdom Generally Accepted Accounting Practice, including FRS 101 "Reduced Disclosure Framework"; 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 financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and 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 (United Kingdom Generally Accepted Accounting Practice), including FRS 101 "Reduced Disclosure Framework".

Summary of our audit approach

Key risks

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

  • the valuation of the goodwill and intangible assets of UK Distribution, UK Exteriors, Larivière and Poland;
  • the valuation of supplier rebate receivables and the completeness of management's listing of supplier rebates;
  • the classification of Other items in the Consolidated Income Statement; and
  • going concern.

Materiality

The materiality that we used in the current year was £3.1m which was determined on the basis of 5% of adjusted pre-tax profit. Adjusted pre-tax profit is defined as profit before tax before adding back goodwill and intangible impairment charges, profit and loss on agreed sale or closure of non-core businesses, net operating losses attributable to businesses identified as non-core and net restructuring costs.

Scoping

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. The Group audit and audit of the consolidation is performed at the Group's head office in Sheffield. The accounting records of the trading businesses within the Group are spread across the countries in which the Group operates. We perform audit work in each of the eight principal countries of operation.

Significant changes in our approach

We have identified one new risk in the current year which has been detailed below: Going concern.

This was identified due to the profit warning announced in November 2016 and the related sensitivity to banking covenants in the upcoming 12 months.

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 and the Directors' statement on the longer-term viability of the Group contained within the strategic report in the Treasury risk management section.

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

  • the Directors' confirmation in the Treasury risk management section 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 in the Principal risks and uncertainties section that describe those risks and explain how they are being managed or mitigated;
  • the Directors' statement contained within the strategic report in the Treasury risk management section 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 12 months from the date of approval of the financial statements; and
  • the Directors' explanation in the Treasury risk management section 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.

We have refined the risks that were reported in our audit report in the prior year as explained in each of the respective risk sections below. We have not reported on the recognition and measurement for trade receivables in the current year as this did not have the greatest effect on the allocation of resources and directing the efforts of the engagement team.

The valuation of the goodwill and intangible assets of UK Distribution, UK Exteriors, Larivière and Poland

Risk description

The goodwill and intangible assets (excluding computer software) of UK Distribution, UK Exteriors, Larivière and Poland of £315.5m represent 21.1% of total assets and 54.6% of non-current assets and therefore the judgments over the carrying value are significant. The downturn in profitability in the year has heightened this risk for these CGUs.

Management's judgments in relation to the financial forecasts of the business units, discount rates and perpetuity growth rates used to determine the value in use of the CGUs are subjective and are described in the Critical Accounting Judgments and Key Sources of Estimation Uncertainty and Note 12 to the financial statements.

How the scope of our audit responded to the risk

  • We evaluated the design and implementation of key controls relating to the assessment of the carrying value of goodwill and intangible assets;
  • We challenged management's assumptions used in the impairment model for goodwill and intangible assets, including specifically the cash flow projections, changes to the discount rates applied and perpetuity rates used;
  • We performed sensitivity analysis against these assumptions. We have compared these to industry forecasts, the Group's historical performance, budgeting accuracy, benchmarking against comparator groups and our understanding of the future prospects of the business;
  • We utilised specialists in assessing the appropriateness of the methodology applied by management in calculating the value in use for each CGU;
  • We assessed whether the disclosures in Note 12 of the financial statements appropriately disclose the key judgments taken so that the reader of the accounts is aware of the impact of the financial statement of changes to key assumptions that may lead to impairment; and
  • We tested the integrity of management's model using our computer assisted analytical tools.

Key observations

Whilst we note further actions are required by the Group to achieve these forecasts over the medium term, we concluded that the assumptions applied in the impairment models are within an acceptable range and that the overall level of net impairment recognised in respect of Larivière and Poland of £110.6m was reasonable.

We also agree that the disclosure of the impairment in Other items meets the Group's definition for separate presentation and is reasonable.

The valuation of supplier rebate receivables and the completeness of management's listing of supplier rebates

Risk description

As described in the Statement of Significant Accounting Policies, the Group has agreements with suppliers whereby volume-related allowances and other discounts are received in connection with the purchase of goods for resale from those suppliers.

In accordance with IFRS, supplier rebate receivables should only be recognised as a deduction from trade payables, when the performance conditions associated with it have been met.

In some cases, supplier rebate calculations are complex and span non-coterminous trading periods. Judgment is therefore required in determining estimates of future volumes and the related receivables.

As a result of the wide range of products and suppliers to the Group, there are a significant number of complex purchase agreements in place. There is a risk that rebates are therefore not accounted for.

Further explanation is given in Critical Accounting Judgments and Key Sources of Estimation Uncertainty. The consideration made by the Audit Committee is set out in the Audit Committee report.

How the scope of our audit responded to the risk

  • We evaluated the design and implementation of key controls related to the valuation of supplier rebate receivables where the receivables are significant, and the completeness of the listing of rebate suppliers;
  • We discussed significant rebate arrangements with the commercial managers to understand the complexities and judgments that may exist over valuation of supplier rebate balances;
  • We circularised suppliers in business units where supplier rebate receivables are significant to confirm a sample of amounts receivable, including high value balances. Where supplier rebate responses were not returned, we reviewed further correspondence between the Group and the supplier to verify the position taken;
  • We reperformed a sample of management's calculations of supplier rebate receivables, agreeing purchase volumes for the year through to purchasing records and correspondence from suppliers or to other available documentation;
  • We agreed supplier rebate percentages applied through to a signed contract where available or to other supplier correspondence;
  • We compared post year end cash receipts to identify any misstatement in the year end receivable;
  • We challenged whether the recognition policies and estimates were appropriate, particularly when there were non-coterminous trading periods and renegotiated rebate agreements; and
  • We compared the listing of suppliers where rebate agreements exist to the previous year's listing and reviewed third party confirmations of creditor balances at year end for credit notes.

Key observations

We consider the receivable balances recognised, and related disclosures given, to be appropriate on the Group's balance sheet at 31 December 2016.

The classification of Other items in the Consolidated Income Statement

Risk description

The Company and Group has consistently used a three column approach for the classification of the Consolidated Income Statement to separately identify certain income/costs which are non-underlying in nature. The inappropriate or inconsistent inclusion of income/costs within Other items could distort the underlying profit disclosed.

The Company and Group's definition for separate presentation within Other items is set out in the Statement of Significant Accounting Policies. The net loss associated with Other items is £176.6m as shown in Note 2.

How the scope of our audit responded to the risk

  • We evaluated the design and implementation of key controls related to the classification of Other items;
  • We assessed the nature of the income/costs included in Other items and challenged whether they met the Company and Group's definition for separate presentation;
  • Where income/costs have been presented as Other items, we obtained evidence to assess whether this presentation is appropriate;
  • We performed detailed substantive testing for a sample of the income/costs by verifying these against supporting invoices, agreements and other records as appropriate; and
  • Particular focus has been given to net restructuring costs of £13.3m as set out in the Financial review to assess whether they arise from restructuring and changing the shape and operations of the business.

Key observations

We consider the items recognised in Other items to meet the Company and Group's definition for separate presentation and the related disclosures are appropriate.

Going concern

Risk description

Group net debt at 31 December 2016 is £259.9m (2015: £235.9m), with financing comprising a revolving credit facility and private placement notes which are subject to debt covenants. The covenants restrict net debt to three times EBITDA, interest cover to minimum of three times EBIT and consolidated net worth to be greater than £400m, subject to certain adjustments. Any breach of these financial covenants could impact the Group's access to financing which in turn could impact the going concern basis under which the financial statements have been prepared. In assessing the future covenant compliance and liquidity, the Directors are required to prepare cash flow projections. Headroom on the covenants decreased at 31 December 2016 due to the profit warning in November 2016. The Group normally sees its leverage increase with seasonality at the half year and therefore particular attention has been placed on the next covenant reporting period ending on 30 June 2017.

Further explanation is given within the Strategic Report in the Principal risks and uncertainties section and in the Audit Committee Report.

How the scope of our audit responded to the risk

  • We evaluated the design and implementation of key controls related to the assessment of going concern;
  • We obtained and reviewed management's budget and viability model, challenging the key assumptions based on industry forecasts, the Group's historical performance, budgeting accuracy and our understanding of the future performance of the business;
  • We performed sensitivity analysis in relation to the key assumptions used to consider the extent of changes that either individually or collectively would result in a covenant breach scenario, in particular relating to the sales and gross margin performance, cost savings, short-term working capital measures and possible mitigating actions;
  • We assessed the mitigating actions that management can take if performance is worse than plan. We paid particular attention to the mitigating actions identified to evaluate whether they are achievable and commercially viable within the forecast period;
  • We tested the integrity of management's viability model using our computer assisted analytics tools, and tested the accuracy and completeness of the underlying data and formulae used; and
  • We evaluated the adequacy of disclosures provided in the Treasury Risk Management section of the Strategic Report in relation to the preparation of the financial statements on a going concern basis.

Key observations

Based on the work performed we are satisfied that the disclosures in the Treasury Risk Management section of the Strategic Report are appropriate.

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.

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

Group materiality£3.1m (2015: £4.25m)
Basis for determining materiality5% of adjusted pre-tax profit (2015: 5% underlying pre-tax profit)
Rationale for the benchmark appliedWe previously used underlying pre-tax profit as the benchmark for determining materiality, however for 2016 we have used adjusted pre-tax profit (as defined above) as this better reflects the underlying performance of the business.
Pre-tax profit is a key metric for users of the financial statements.

We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £0.15m (2015: £0.1m), 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.

The component materiality applied ranged from 50% to 95% of Group materiality (£1.5m to £2.9m) (2015: 50% to 95% or £2.1m to £4.0m), dependent on our assessment of risks specific to each location and based on the component's revenue and underlying pre-tax profit contribution.

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. The Group audit and audit of the consolidation is performed at the Group's head office in Sheffield. The accounting records of the trading businesses within the Group are spread across the countries in which the Group operates. We perform audit work in each of the eight principal countries of operation.

Full scope audits were performed for the principal business units in the United Kingdom, Germany, France, Poland and Ireland covering 84% of the Group's total revenue (2015: 90%) and 79% of pre-tax profit (2015: 84%). A further 13% of the Group's total revenue (2015: 5%) and 19% pre-tax profit (2015: 6%) were subject to specified 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 those locations. They were also selected to provide an appropriate basis for undertaking audit work to address the risks of material misstatement identified above. Our full scope audits and the specified audit procedures were executed at levels of materiality applicable to each individual entity which were lower than Group materiality.

At the parent entity level we also tested the consolidation process, including testing on the acquisitions which are significant to the Group's result 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 followed a programme of planned visits that has been designed so that a senior member of the Group audit team visits each of the locations which were significant to the Group audit scope at least twice a year. During 2016 and 2015 a senior member of the Group audit team visited Germany, France and the United Kingdom at least twice.

Going forward, we will continue to visit all key components at least on an annual basis.

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 in respect of 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.

Simon Manning Sig

Simon Manning FCA
(Senior statutory auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor Leeds, UK 13 March 2017