Opinions and conclusions arising from our audit continuedcontinued
The risk Our response
Carrying value of certain non-current assets which aggregate to £11.2bn Refer to page 106 (Note 3 (iii)) and pages 122 to 127 (Notes 13 and 14) and pages 169 to 171 (A1 Accounting Policy).
The recovery of certain non-current assets, including power generation assets, gas reserves (both included within property plant and equipment), goodwill and development assets (both included within intangible assets), depends on achieving sufficiently profitable business in the future. As these non-current assets mainly relate to the production of electricity, the assessment of future profitability is dependent on many factors. Those factors include the operating efficiency and the input costs of running the relevant plant relative to others and the expected electricity prices, all of which are impacted by political and economic factors in the UK and globally. In addition there have been significant impairments in prior years and the current year largely in relation to the group’s power generation assets (principally in the UK Generation cash generating unit (“CGU”).)
Assets are reviewed, either on a stand-alone basis or as part of a wider cash-generating unit, for impairment using either a value in use or fair value less costs to sell model, as further detailed in Note 13. The outcome of these impairment reviews could vary significantly if different assumptions were applied in the model. Therefore this is considered a key audit risk.
In this area our audit procedures included, among others, the following: we challenged the group’s calculation of value in use or fair value less costs to sell, as appropriate and the value of impairment charged to income during the year. This included seeking support for key assumptions such as earnings and cashflow forecasts included in the impairment review for each CGU or asset tested on a stand-alone basis, and the terminal value and discount rate assumptions used by management. We compared the Group’s assumptions, where possible, to externally derived data (for example by comparing the discount rate to those applied by companies operating in a similar environment to the group), we compared earnings forecasts with budgets used within the business for other purposes and we applied sensitivities in assessing whether the Group’s assessment was reasonable. We also considered the adequacy of the group’s disclosures in this area.
Accounting for legal and other contractual claims
Refer to page 71 (Audit Committee statement), page 107 (Note 3 (iv)) and page 173 (A1 Accounting Policy).
The group’s operations expose it to the risk of litigation and contractual claims (particularly in relation to significant capital projects) from third parties. Due to the range of potential outcomes and the considerable uncertainty around the resolution of various claims, the determination of the amount, if any, to be recorded in the financial statements as a provision is inherently subjective and therefore this is considered a key audit risk.
In this area our audit procedures included, among others, the following: we considered claims raised against the group by third parties, inspected relevant legal advice received by the group in connection with such claims and obtained formal confirmation from the group’s solicitors on the status of any legal claims with which the group is dealing. We also considered the group’s disclosures relating to provisions and/or contingent liabilities for legal and other contractual claims.
Accounting for the group’s pension obligations (the Group reflects a net defined pension liability of £0.6bn)
Refer to page 71 (Audit Committee statement), page 106 (Note 3(v), pages 140-144 (Note 31) and page 172 (A1 Accounting Policy).
The valuation of the group’s pension obligations requires significant judgment and estimation to be applied across numerous assumptions. The matter is considered to be a significant risk as small changes in the assumptions can have a material financial impact on the results and financial position of the Group given the size of the deficit.
In this area our audit procedures included, among others, the following: we considered the group’s valuation methodology to assess its
compliance with accounting standards and alignment to market practices, we challenged the key assumptions supporting the Group’s retirement benefit obligations valuation, with input from our own actuarial specialists. This included a comparison of the discount and inflation rates used against benchmarks developed by our internal actuaries and similar assumptions used by other groups with defined benefit pension schemes and consideration of other assumptions such as mortality and life expectancy.
In addition, our procedures included, among others, obtaining confirmation of the pension schemes assets as at 31 March 2014 by agreeing the asset values to investment statements and confirmations provided by the scheme actuaries. Further, we considered the adequacy of the group’s disclosures in the area of pension obligations.
Opinions and conclusions arising from our audit
Opinions and conclusions arising from our audit continuedcontinued
3 Our application of materiality and an overview of the scope of our audit
In establishing the overall audit strategy, and performing the audit, materiality for the Group financial statements as a whole was set at £104 million in aggregate. This has been determined with reference to a benchmark of group profit before taxation, which we consider to be one of the principal considerations for members of the company in assessing the financial performance of the group. Materiality represents 17.6% of group profit before tax and 7.1% of group profit before tax adjusted for exceptional items and certain remeasurements (movements on derivatives) as disclosed on the face of the income statement.
We agreed with the Audit Committee to report to it all corrected and uncorrected misstatements we identified through our audit with a value in excess of £5 million for income statement items in addition to other audit misstatements we believe warranted reporting on qualitative grounds.
Audits for group reporting purposes were performed by KPMG auditors at the key reporting components in the UK and Ireland. These audits covered 99% of Group revenue, 98% of profit before tax adjusted for exceptional items and certain remeasurements (movements on derivatives) as disclosed on the face of the income statement; and 90% of Group total assets.
The audits undertaken for group reporting purposes at the key reporting components of the group were all performed to materiality levels set by, or agreed with, the group audit team. These materiality levels were set individually for each component and ranged from £10 million to £25 million due to the lower profits in these components and the need to consider statutory materiality for these components.
Detailed audit instructions were sent to the KPMG auditors of those components based in Ireland. These instructions covered the significant audit areas that should be covered by these audits (which included the relevant risks of material misstatement detailed above) and set out the information required to be reported back to the group audit team. Telephone meetings were held during the year with the KPMG audit team in Ireland in relation to these components. The remaining UK components were covered by three audit teams under direct or indirect control of the UK audit partner.
Statutory audits are performed as required for the group’s statutory entities in the UK and Ireland but these are completed after the date of this report. 4 Our opinion on other matters prescribed by the Companies Act 2006 is unmodified
In our opinion:
•
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.5 We have nothing to report in respect of the matters on which we are required to report by exception
Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other information in the annual report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading.
In particular, we are required to report to you if:
•
we have identified material inconsistencies between the knowledge we acquired during our audit and the directors’ statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the group’s performance, business model and strategy; or•
the Audit Committee Report does not appropriately address matters communicated by us to the audit committee. Under the Companies Act 2006 we are required 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 and the part of the Directors’ Remuneration Report to be audited 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. Under the Listing Rules we are required to review:•
the directors’ statement, set out on page 93, in relation to going concern; and•
the part of the Corporate Governance Statement on pages 58 to 73 relating to the company’s compliance with the nine provisions of the UK Corporate Governance Code specified for our review.Financial Statements
Independent auditor’s report continued
to the members of SSE plc
Opinions and conclusions arising from our audit
Opinions and conclusions arising from our audit continuedcontinued
Scope of report and responsibilities
As explained more fully in the Directors’ Responsibilities Statement set out on page 94, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.orq.uk/auditscopeukprivate. This report is made solely to the company’s members as a body and is subject to important explanations and disclaimers regarding our responsibilities, published on our website at www.kpmg.com/uklauditscopeukco2013a, which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions.
John Luke (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants
191 West George Street Glasgow
Shareholder Solutions,
34 Beckenham Road, Beckenham, Kent BR3 4TU
Telephone: 0845 143 4005 Email: [email protected]
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