Page 58 - Paragon Annual Report 2

54 | Group financial statements
Independent auditor’s report (continued) to the members of Paragon Group Limited
Risk of impairment of intangible assets, including goodwill
Risk
Our response to the risk
Key observations communicated to the Board of Directors
The company holds a significant value in intangible assets and goodwill arising from the acquisition of a number of subsidiaries during the current financial year and in previous financial years.
We identified a risk of misstatement attributed to incorrect accounting treatment of additions and the potential requirement for impairment, in accordance with IAS 38 ‘Intangible assets’ and IAS 36 ‘Impairment of assets’.
• Goodwill €74.929m (2016: €43.240m)
• Other intangible assets €26.918m (2016: €1.562m)
Acquisitions and related intangibles
IFRS 3 ‘Business Combinations’ requires the acquirer to undertake a review to ensure the identification of assets and acquired liabilities is complete, and that measurements appropriately reflect consideration of all available information, before recognising
any bargain purchase gain is in the income statement.
A significant gain on bargain purchase has been recognised during the year €12.107m (2016: €662,000), largely arising from the acquisition of DST Output Ltd.
The risk is that the fair value of the assets and liabilities have not been measured appropriately, resulting in a material impact on the gain on bargain purchase.
We performed a fully substantive audit. We do not place reliance on internal controls and processes. However, we perform walkthrough procedures for significant classes of transactions to understand the controls in place to address the significant risks identified. We evidenced that controls are implemented as designed.
We substantively tested the valuation of intangibles, including customer relationships and performed an independent review of Management’s third party valuation, including corroborating the length of key customer contracts, and comparing ratios and discount rates against peers, allowing for market conditions and profile of the company.
We substantively tested valuation of software to supporting calculations and source documentation and verified rates and amounts used in internally generated software to third party evidence and reviewed the criteria for capitalisation of development costs, in accordance with IAS 38.
We obtained evidence of the book values attributed to each of the material acquisitions and reviewed client calculations supporting the fair value movements. We also obtained third party evidence supporting fair values of property, plant and equipment, inventories and intangible assets (referred to in the above key risk).
We reviewed supporting third party documentation in respect of the consideration paid (in shares or otherwise) to allow us to recalculate any gain on acquisition/gain on bargain purchase and did not identify a material difference.
We assessed the control environment through our walkthroughs and conclude that the controls are operating as designed.
We challenged management with regards to the length of certain key customer contracts and discount rates applied, resulting in an increase in customer intangibles.
We conclude that goodwill and other intangibles have been recognised in accordance with the requirements of IAS 38.
The calculations are consistent with the methodology applied in the previous year and in accordance with IFRS 3.
Based on the procedures performed, we did not identify any evidence of material misstatement in relation to the recorded gain on bargain purchase.
Paragon Group Limited – 05258175