We have audited the financial statements of Halfords Group Plc (the 'Parent Company') and its subsidiaries (the 'Group') for the 53 week period ended 3 April 2020 which comprise the Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated Statement of Financial Position, Consolidated Statement of Changes in Shareholders' Equity, Company Balance Sheet, Company Statement of Changes in Shareholders' Equity, Consolidated Statement of Cash Flows 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 3 April 2020 and of the Group'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; and, as regards the Group financial statements, Article 4 of the IAS Regulation.
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 public interest 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.
Conclusions Relating to Principal Risks, Going Concern and Viability Statement
We have nothing to report in respect of the following information in the annual report, in relation to which the ISAs (UK) require us to report to you whether we have anything material to add or draw attention to:
- the Directors' confirmation set out in the Viability Statement in the annual report that they have carried out a robust assessment of the Group's emerging and principal risks and the disclosures in the annual report that describe the principal risks and the procedures in place to identify emerging risks and explain how they are being managed or mitigated;
- the Directors' statement set out in Our Principal Risks and Uncertainties in the financial statements about whether the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the Directors' identification of any material uncertainties to the Group and the Parent Company's ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements;
- whether the Directors' statement relating to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or
- the Directors' explanation set out in the Viability Statement in the annual report 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.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, 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 including those which 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.
|Matter||How we addressed the matter in our audit|
The basis of preparation note to the financial statements explains how the Board has formed a judgement that it is appropriate to adopt the going concern basis of preparation for the Group and Parent Company.
That judgement is based on an evaluation of the inherent risks to the Group's and Company's business model and how those risks might affect the Group's and Company's financial resources or ability to continue operations over a period of at least a year from the date of approval of the financial statements.
The risk most likely to adversely affect the Group and Company's available financial resources over this period was considered to be the uncertainty of the future impact of COVID-19 owing to the unprecedented nature of the event, and as a result, we determined going concern to be a key audit matter.
|Our audit procedures included:|
- Assessment of assumptions within the COVID-19 adjusted cashflows: consideration of the Group's assessment of the impact of COVID-19 with reference to current year financial results and pre COVID-19 adjusted projections.
- Disclosures: evaluation of the adequacy of the disclosures in relation to the specific risks posed and scenarios the Group has considered in reaching their going concern assessment.
- Sensitivity analysis: evaluation of sensitivities over the Group's COVID-19 adjusted cashflows with reference to the financial covenants in place over the existing banking facilities. The analysis considered reasonably possible adverse effects that could arise as a result of a decrease in sales due to the impact of COVID-19 as well as a stress test to consider the level of future revenue reduction the Group could support.
- Post year end trading performance: comparison of the post year end trading results to the COVID-19 adjusted forecasts so as to evaluate the accuracy and achievability of the forecasts prepared.
Our observations in respect of this matter are set out in the Conclusions relating to principal risks, going concern and viability statement section.
|IFRS 16 – Leases|
(Accounting polices, Note 13 Leases – closing right-of-use assets £349.9m, lease liabilities £416.0m)
The Group has a large portfolio of retail and autocentre sites of which the majority are leased, the impact to the financial statements this year of adopting IFRS 16 is therefore significant.
The calculation of lease assets and liabilities involves assumptions of the lease term and the incremental borrowing rate, small changes in either of these assumptions across a number of leases could lead to a material change in the valuation of lease assets and liabilities.
Owing to the magnitude of the lease asset and liability balances and the estimation required in accurately assessing these balances, the implementation and application of IFRS16 was raised as a key audit matter.
|Our audit procedures included:|
- Technical analysis: assessing the calculation methodology driving the lease liability and right-of-use asset against the requirements of the accounting standard.
- Sample testing: testing the completeness and accuracy of the lease right-of-use asset and liability figures calculated by re-performing the calculation for a sample of leases within the transition adjustment, new leases agreed in the year and lease modifications.
- Lease length assumptions: evaluating assumed lease terms with reference to both the underlying lease agreements and consideration of the broader economics of the lease contracts.
- Valuation assumptions: corroboration of the inputs applied within the incremental borrowing rate calculation so as to confirm appropriate.
- Disclosures: Assessing the adequacy of the Group's accounting policy and disclosures.
We found the Group's approach to the adoption of and application of IFRS16 to be appropriate.
(Accounting policies, Note 15 Inventories - £173.0m)
The Group has significant levels of inventory and estimates are made over the potential net realisable value, obsolescence and shrinkage of the balance.
Given the level of judgement and estimation involved to ensure that inventory is correctly valued at the lower of cost and net realisable value, this was considered to be a key audit matter.
|Our audit procedures included:|
- Methodology applied: assessing the appropriateness of the Group's inventory provisioning policies based on our understanding of the business and the industry. This was inclusive of consideration as to the potential impact of COVID-19.
- Review of post year-end information: consideration of post year-end sales information to provide evidence as to the net realisable value of the inventory at the end of the reporting period.
- Data analytics: comparison of the retail sales and inventory costing data on a product by product basis to identify instances of sales below cost to consider if appropriately provided for within the Group's provisioning assessment.
- Shrinkage assumptions: recalculation of the retail shrinkage provision based on the Group's inventory count results.
We found the estimates and judgements made by the Group in their assessment of the carrying value of inventory to be acceptable.
(Accounting policies, Note 11 Intangible assets - £350.6m)
Goodwill in the Group balance sheet is significant and subject to an annual impairment review.
The review requires the Group to estimate the recoverable amount of its two cash generating units (retail and car servicing) which requires the forecasting and discounting of future cashflows for inclusion within a value in use model.
The value in use model is inclusive of a high degree of estimation uncertainty, particularly owing to the uncertain impact of COVID-19 on the future cashflows of the Group and the goodwill impairment review has therefore been raised as a key audit matter.
|Our audit procedures included:|
- Technical analysis: assessing the calculation methodology applied within the goodwill impairment model against the relevant accounting standards and considering the appropriate interaction of IAS36 (impairment) and IFRS16 (leases).
- Historical comparison: assessing the reasonableness of the Group's budgets by considering the historical accuracy of previous forecasts.
- Assessment of cashflows: confirmed that the cashflows modelled agreed to the COVID-19 adjusted cashflows which have been used to support the Group's going concern assessment.
- Valuation assumptions: using our internal valuation specialists to assess the reasonableness of the Group's discount rate applied, by corroborating the relevant inputs into the calculation to external sources.
- Sensitivity analysis; performing sensitivity analysis over the key assumptions and ensuring the Group considered the same reasonably possible adverse effects that could arise as a result of a decrease in sales due to the impact of COVID-19 as applied to their going concern considerations.
- Disclosures: assessing whether the Group's disclosures detail the key judgements within the impairment model and sources of estimation uncertainty.
We found the Group's assessment of goodwill impairment to be appropriate.
|Cycle Republic Closure Costs|
( Note 5 Non underlying items - £26.8m)
On 16 March 2020 the Group announced its plans to close the Cycle Republic business and Boardman Performance Centre.
Material impairments and provisioning are therefore recorded in relation to redundancies and costs associated with the planned store and website closures which also resulted in fixed assets, right of use assets and inventory having a reduced recoverable amount.
Provisioning and impairment are key areas of judgement and particularly owing to the proximity to the year end this was considered a key audit matter.
|Our audit procedures included:|
- Accounting treatment: analysis of management's assessment as to the treatment of the planned closures of the business components in accordance with IFRS5.
- Review of post year-end information: consideration of sub lease arrangements and lease surrender agreements reached following the year-end to inform the assessment of the recoverability of right-of use-assets at the balance sheet date.
- Lease testing: recalculation of a sample of lease modification adjustments with reference to the underlying lease agreement where the Group now intended to exercise the break option.
- Redundancy costs: confirmation of a communicated redundancy program prior to the year-end and recalculation of a sample of redundancy provisions.
- Corroborative work: corroboration of a number of estimates included within the provisioning with reference to comparable costs incurred by the Group during the financial year and post year end.
- Fixed asset / intangible asset impairment: evaluation of the recoverable amount of the fixed and intangible assets with reference to post year-end results and agreement of charges to the underlying asset registers.
- Disclosure: assessment of the adequacy of the Group's disclosures and consideration as to whether the closure costs met with the Group's definition of a non-underlying item owing to their size, nature and incidence.
We found the resulting estimate of the closure costs to be acceptable.
Our Application of Materiality
We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole.
Level of Materiality Applied and Rationale
We determined materiality for the Group financial statements as a whole to be £2.6m which represents 5% of profit before tax and non-underlying items. We consider profit before tax and non-underlying items to be the most appropriate benchmark as it provides a more stable measure year on year than group profit before tax.
Materiality for the parent Company financial statements as a whole was set at £1.3m, determined with reference to 50% of Group materiality.
Individual significant component audits were carried out using component materialities of between 50 - 90% of overall Group financial statement materiality.
Performance materiality is the application of materiality at the individual account or balance level set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. Performance materiality was set at 65% of materiality. In setting the level of performance materiality we considered a number of factors including the expected total value of known and likely misstatements.
We agreed with the Audit Committee that misstatements in excess of £130k, which were identified during the audit, would be reported to them, as well as smaller misstatements that in our view should be reported on qualitative grounds.
An Overview of the Scope of our Audit
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the group 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.
In establishing the overall approach to the Group audit, we assessed the audit significance of each reporting unit in the Group by reference to both its financial significance and other indicators of audit risk, such as the complexity of operations and the degree of estimation and judgement in the financial results.
All of the Group's 3 significant components (inclusive of Halfords Group Plc) were subjected to full scope audits for Group purposes. All components are located in the UK and were audited by the Group audit team.
The significant components within the scope of our work accounted for 95% of group revenues and 97% of total assets.
How the Audit was Considered Capable of Detecting Irregularities, including Fraud
We gained an understanding of the legal and regulatory framework applicable to the Group and the industry in which it operates, and considered the risk of acts by the Group which were contrary to applicable laws and regulations, including fraud. These included but were not limited to compliance with Companies Act 2006, the FCA listing and DTR rules, the principles of the UK Corporate Governance Code, and IFRSs.
We designed audit procedures to respond to the risks of material misstatement in the financial statements, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery, misrepresentations or through collusion.
We focused on laws and regulations that could give rise to a material misstatement in the Group financial statements. Our tests included, but were not limited to:
- agreement of the financial statement disclosures to underlying supporting documentation;
- enquiries of management;
- review of minutes of Board meetings throughout the year; and
- obtaining an understanding of the control environment in monitoring compliance with laws and regulations
There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. We also addressed the risk of management override of internal controls, including testing journals and evaluating whether there was evidence of bias by the Directors that represented a risk of material misstatement due to fraud.
The Directors are responsible for the other information. The other information comprises the information included in the Annual Report and Accounts, 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 the other information, we are required to report that fact.
We have nothing to report in this regard.
In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions:
- Fair, balanced and understandable set out in the Directors' Responsibilities – the statement given by the Directors that they consider 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 position, performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or
- Audit committee reporting set out in the Audit Committee Report – the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee; or
- Directors' statement of compliance with the UK Corporate Governance Code set out in the Chairman's Letter – the parts of the Directors' statement required under the Listing Rules relating to the Company's compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code.
Opinions on Other Matters Prescribed by the Companies Act 2006
In our opinion, the part of the directors' remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
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 by Exception
In the light of the knowledge and understanding of the Group and 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.
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 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.
Responsibilities of Directors
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.
Other Matters Which we are Required to Address
Following the conclusion of a formal tender process led by the Group's Audit Committee, the Board proposed appointment of BDO LLP as the Company's auditor for the financial year ending 3 April 2020 and subsequent financial periods. The appointment was approved by the Company's shareholders at the Annual General Meeting on 31 July 2019. The period of total uninterrupted engagement is 1 year.
The non-audit services prohibited by the FRC's Ethical Standard were not provided to the Group or the Parent Company and we remain independent of the Group and the Parent Company in conducting our audit.
Our audit opinion is consistent with the additional report to the audit committee.
Use of Our Report
This report is made solely to the Parent 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 Parent 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 Parent Company and the Parent Company's members as a body, for our audit work, for this report, or for the opinions we have formed.
Diane Campbell (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
6 July 2020
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).