72 Ladbrokes PLC Annual Report and Accounts 2014 Financial statements INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF LADBROKES PLC REPORT ON THE FINANCIAL STATEMENTS Our opinion In our opinion: Ladbrokes plc s Consolidated financial statements and Company financial statements (the financial statements ) give a true and fair view of the state of the Group s and of the Company s affairs as at 31 December 2014 and of the Group s profit and cash flows for the year then ended; the Consolidated financial statements have been properly prepared in accordance with International Financial Reporting Standards ( IFRSs ) as adopted by the European Union; the Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and the Consolidated and Company financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Consolidated financial statements, Article 4 of the IAS Regulation. What we have audited Ladbrokes plc s financial statements comprise: the Consolidated balance sheet as at 31 December 2014; the Consolidated income statement and Consolidated statement of comprehensive income for the year then ended; the Consolidated statement of cash flows for the year then ended; the Consolidated statement of changes in equity for the year then ended; and the Company balance sheet as at 31 December 2014; the notes to the Consolidated and Company financial statements, which include a summary of significant accounting policies and other explanatory information. Certain required disclosures have been presented elsewhere in the Annual Report and Accounts 2014 (the Annual Report ), rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited. The financial reporting framework that has been applied in the preparation of the Consolidated 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 Company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). Our audit approach Overview AUDIT SCOPE MATERIALITY AREAS OF FOCUS Overall Group materiality: 5.6 million which represents 5% of profit before tax and exceptional items. We conducted full scope audit work at four reporting units UK Retail, UK Digital and two reporting units included within Corporate costs. Specific audit procedures on revenue and receivables were performed on High Rollers. Our audit scope addressed over 80% of the Group s revenue and profit before tax and exceptional items. Impairment assessments for: goodwill and Company investments in subsidiaries; retail licences and property, plant and equipment ( PPE ); and software assets. Compliance with laws and regulations given the developing nature of the digital gaming sector. Accounting for the acquisition of Betstar and the fair value of the contingent consideration relating to the business combinations made in 2013 (Playtech, Betdaq and Gaming Investments Pty Ltd). The provision for uncertain tax positions and the recognition and disclosure of tax losses. The nature and presentation of exceptional items.
Ladbrokes PLC Annual Report and Accounts 2014 73 The scope of our audit and our areas of focus We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) ( ISAs (UK & Ireland) ). We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud. The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as areas of focus in the table below. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the financial statements as a whole, and any comments we make on the results of our procedures should be read in this context. This is not a complete list of all risks identified by our audit. Area of focus Impairment assessments for: goodwill and Company investments in subsidiaries; retail licences and property, plant and equipment ( PPE ); and software assets Refer to page 47 (Audit Committee Report), note 4 (Significant accounting policies), note 14 (Impairment testing of goodwill and indefinite life intangible assets) and note 6 of the Company financial statements (Fixed asset investments) Retail licence intangible assets and PPE The Group has retail licence intangibles of 447.1 million, primarily in UK Retail, which have an indefinite life. An impairment assessment is performed on an annual basis to assess whether the carrying value of these assets and the related PPE exceed the recoverable amount. Following this assessment, the directors determined that an impairment charge of 20.8 million was required. Our focus is on the sufficiency of this impairment charge, we focused on UK Retail given the industry regulatory developments in Machine Games Duty and in player protection measures. This meant considering the impact of these developments on future cash flow forecasts and whether the directors have made appropriate assumptions for these in their cash flow models, or if any additional impairment charge is needed. Software assets The Group has software assets of 96.6 million. As a result of the impairment assessment, the directors determined that an impairment charge of 23.1 million was required reflecting the decision to decommission a platform for desktop sportsbook. As with the retail licences and related PPE, our focus is on the sufficiency of this impairment charge. Goodwill and Company investment in subsidiaries The Group has goodwill of 159.2 million including amounts relating to the business combinations of Playtech ( 34.9 million), Betdaq ( 31.5 million) and Gaming Investments Pty Ltd ( 23.0 million). An annual impairment assessment is performed by the directors to determine whether the value of these investments is less than the carrying value and, as such, goodwill is impaired. The Company (Ladbrokes plc) has investments in subsidiaries of 3,883.7 million, which when considered net of intercompany creditors totals 2,113.8 million. An impairment charge of 92.4 million was recorded at 31 December 2014 in respect of certain investments in subsidiaries for which the carrying amount exceeded the recoverable amount. Our focus is on the sufficiency of this impairment charge. How our audit addressed the area of focus We evaluated the directors future cash flow forecasts supporting the impairment assessments for goodwill, retail licence intangibles, PPE and Company investment in subsidiaries. We compared the forecasts with the latest Board approved budgets. We also compared the actual results for 2014 against forecast to verify their reliability. We found that actual performance was lower than originally forecast. We obtained evidence to support the directors explanations for this and evaluated the potential impact of these variances on forecasts for 2015 and subsequent years. We determined that through a combination of the directors explanations and external sports results data that these were reasonable and that the forecasts to be appropriate for the purposes of the impairment assessments. We evaluated the appropriateness of the key assumptions in the forecasts in particular the short term and long term growth rates and the impact of regulatory changes to Machine Games Duty and player protection measures. We verified that forecasts for Digital, UK Retail and European Retail appropriately reflected these items in each business. We challenged the discount rates applied by comparing to the cost of capital for the Group. We found this to be consistent and in line with our expectations. Retail licence impairment assessment We obtained evidence that corroborated the directors grouping for those shops that they had determined do not operate independently. Where we considered management s assumptions to be less conservative than we would expect we performed sensitivity analysis to satisfy ourselves that any difference would not be material. Software assets We tested the appropriateness of costs capitalised in the year, and challenged the continued utilisation for a sample of assets and considered the support for asset impairment charges. We did not identify any further assets for impairment. Goodwill and investment in subsidiaries We performed sensitivity analysis around the key assumptions to ascertain the extent of change in those assumptions that either individually or collectively would be required for an additional impairment change. We were satisfied that a material change in those assumptions would be required to trigger an impairment.
74 Ladbrokes PLC Annual Report and Accounts 2014 Financial statements INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF LADBROKES PLC CONTINUED Area of focus Compliance with laws and regulations given the developing nature of the digital gaming sector The international legal and licencing framework for digital gaming is territory specific. Regulations are developing and this evolving environment makes compliance an increasingly complex area. Given the potential for litigation and licence withdrawal, the risk of non-compliance with digital gaming laws and licence regulations could give rise to material fines, penalties, legal claims or market exclusion. Accounting for the acquisition of Betstar and the fair value of the contingent consideration relating to the business combinations made in 2013 (Playtech, Betdaq and Gaming Investments Pty Ltd) Refer to page 47 (Audit Committee Report), note 4 (Significant Accounting Policies), notes 24 (Financial instruments and fair value disclosures) and 33 (Business combinations) During the year, the Group acquired the Betstar business in Australia. The accounting for the Betstar business combination resulted in the recognition of 3.2 million of customer relationships and brand of 1.4 million and goodwill of 8.0 million which are collectively material and subject to judgement regarding the identification and recognition of intangible assets, namely customer relationships and the brand name. The Group is required to fair value the contingent consideration associated with the business combinations of Playtech and Betdaq made in 2013 at each balance sheet date. At 31 December 2014 the total contingent consideration was 32.1 million with a fair value movement of 3.1 million recognised in the income statement for the year. This is determined through a cash flow forecast model. The inputs to these models are subject to judgement regarding the determination of cashflow forecasts, discount rates and the Ladbrokes multiple. The contingent consideration associated with Gaming Investments Pty Ltd has been settled during the year and therefore the fair value equals the agreed settlement of 18.4 million. The provision for uncertain tax positions and the recognition and disclosure of tax losses Refer to page 47 (Audit Committee Report), note 4 (Significant Accounting Policies) and note 10 (Income tax expense) The Group has unresolved tax positions in the UK, the valuation of which is a judgemental area. There is significant judgement applied in determining the Group s deferred tax assets relating to tax losses, in terms of both recognition and disclosure. How our audit addressed the area of focus We evaluated the controls and risk management process in operation in respect of compliance with digital licencing regulations covering player registration controls customer deposits and withdrawals. We assessed how the Group monitors legal and regulatory developments and their assessment of the potential impact on the business. We read the summary of litigation matters provided by management and discussed each of the material cases noted in the report to determine the Group s assessment of the likelihood and magnitude of any liability that may arise. We also read, where required, external legal or regulatory advice sought by the Group. No significant issues were noted from our work. We obtained the directors assessment of the identification and valuation of the intangible assets acquired as part of the Betstar acquisition. We considered whether there were any other identifiable assets acquired by using our knowledge of the industry and reviewing the terms of the acquisition and did not identify any further material identifiable assets. We performed sensitivity analysis over key drivers within the cash flow forecasts, including amounts staked and churn rates as well as the key assumptions around discount rates. We then considered the likelihood of such movement in these key assumptions arising in assessing the appropriateness of the overall valuations. No significant issues were noted from our work. For the contingent consideration on Playtech and Betdaq, we obtained the directors models. We assessed the appropriateness of the models by testing the integrity, comparing the data in the models to the relevant agreements and testing key inputs to third party sources and publically available information where appropriate. The key inputs we focused on were the forecast results for each business, the probability range associated with future EBITDA forecasts and the discount rate. We compared the forecast results with the latest Board approved budgets and considered the results of the testing performed on the same forecasts for the impairment area of focus above. The nature of the valuation of the contingent consideration results in a number of scenarios where a reasonably probable change in the assumptions may materially impact the fair value. We therefore considered directors proposed disclosures and found them to be reasonable in light of our procedures. We assessed the key judgements with respect to open positions and settlements and read correspondence with the taxation authorities. We obtained evidence to support the provisions and consider these to reflect the directors best estimates. We assessed whether there was evidence to determine that additional deferred tax assets should be recognised or disclosed, taking into account forecast profits and the Board s approved tax strategy. We concluded that the position adopted in the financial statements was reasonable.
Ladbrokes PLC Annual Report and Accounts 2014 75 Area of focus Nature and presentation of exceptional items Refer to page 47 (Audit Committee Report), note 2 (Basis of Preparation) and note 6 (Exceptional items) The financial statements include certain items which are disclosed as exceptional. The most significant of these exceptional charges are: Impairment loss of 44.5 million; Loss on shop closures of 30.7 million; and A provision for indirect tax liabilities of 5.7 million Total exceptional items amounted to 74.5 million. We focused on this area because exceptional items are not defined by IFRSs and it therefore requires judgement regarding their size and nature by the directors to identify such items. Consistency in identifying and disclosing items as exceptional is important to maintain comparability of the results year on year. How our audit addressed the area of focus We assessed the appropriateness and application of the Group s accounting policy in respect of those items classified as exceptional in nature. We tested the presentation of the exceptional items in the financial statements by assessing whether the classification was in line with the Group s accounting policy on exceptional items set out in note 2 of the financial statements and whether, in our view it was reasonable for these items to be separately disclosed as exceptional. We found that the Group s accounting policy had been followed. How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the Group, the accounting processes and controls, and the industry in which the Group operates. The Group is structured into five reportable segments being UK Retail, European Retail, Digital, Core Telephone Betting and High Rollers. The Consolidated financial statements are a consolidation of reporting units that make up the five reportable segments and Corporate costs. We identified four of the Group s reporting units (UK Retail, UK Digital and two reporting units included within Corporate costs) to require an audit of their complete financial information, due to their size or risk characteristics. In addition we performed specified procedures on revenue and receivables in the High Rollers reportable segment due to risk of fraud in revenue recognition. All work was undertaken by the Group engagement team. The Group consolidation and a number of complex areas were audited centrally. This included tax, share based payments and pensions. Our audit scope addressed over 80% of the Group s revenue and profit before tax and exceptional items. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Overall Group materiality How we determined it Rationale for benchmark applied 5.6 million 5% of profit before tax and exceptional items We applied this benchmark because, in our view, this is the metric against which the performance of the Group is most commonly measured and because in our view this is the most relevant measure of recurring performance. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above 0.3 million as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. Going concern Under the Listing Rules we are required to review the directors statement, set out on page 31, in relation to going concern. We have nothing to report having performed our review. As noted in the directors statement, the directors have concluded that it is appropriate to prepare the financial statements using the going concern basis of accounting. The going concern basis presumes that the Group and Company have adequate resources to remain in operation, and that the directors intend them to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the directors use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group s and Company s ability to continue as a going concern.
76 Ladbrokes PLC Annual Report and Accounts 2014 Financial statements INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF LADBROKES PLC CONTINUED OTHER REQUIRED REPORTING Consistency of other information Companies Act 2006 opinions In our opinion: 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 information given in the Corporate Governance Statement set out on page 44 with respect to internal control and risk management systems and about share capital structures is consistent with the financial statements. ISAs (UK & Ireland) reporting Under ISAs (UK & 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 and Company acquired in the course of performing our audit; or otherwise misleading. The statement given by the directors on page 71, in accordance with provision C.1.1 of the Code, that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group s performance, business model and strategy is materially inconsistent with our knowledge of the Group acquired in the course of performing our audit. The section of the Annual Report on page 47, as required by provision C.3.8 of the Code, describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. We have no exceptions to report arising from this responsibility. We have no exceptions to report arising from this responsibility. We have no exceptions to report arising from this responsibility. Adequacy of accounting records and information and explanations received 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 Company, or returns adequate for our audit have not been received from branches not visited by us; or the Company financial statements and the part of the Directors remuneration report to be audited are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Directors remuneration Directors remuneration report Companies Act 2006 opinion In our opinion, the part of the Directors Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. Other Companies Act 2006 reporting Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors remuneration specified by law are not made. We have no exceptions to report arising from this responsibility. Corporate governance statement Under the Companies Act 2006 we are required to report to you if, in our opinion, a corporate governance statement has not been prepared by the Company. We have no exceptions to report arising from this responsibility. Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to the Company s compliance with ten provisions of the UK Corporate Governance Code. We have nothing to report having performed our review. RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS AND THE AUDIT Our responsibilities and those of the directors As explained more fully in the Statement of directors responsibilities set out on page 71, 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 ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. What an audit of financial statements involves 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 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. We primarily focus our work in these areas by assessing the directors judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements.
Ladbrokes PLC Annual Report and Accounts 2014 77 We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. 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. Stuart Newman (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 25 February 2015