1. Our opinion on the financial statements is unmodified
We have audited the financial statements of Dechra Pharmaceuticals PLC for the year ended 30 June 2015 which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Shareholders' Equity, the Consolidated Statement of Cash Flows, the Notes to the Consolidated Financial Statements, the Company Balance Sheet, the Reconciliation of Movements in Shareholders' Funds and the Notes to the Company Financial Statements. 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 30 June 2015 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 as adopted by the European Union;
- the Parent Company financial statements have been properly prepared in accordance with UK Accounting Standards; 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.
2. Our assessment of risks of material misstatement
In arriving at our audit opinion above on the financial statements, the risk of material misstatement that had the greatest effect on our audit was as follows:
Valuation of Goodwill and Acquired Intangible Assets (£155.5 million)
Refer to Audit Committee Report, note 1(g) (accounting policy) and note 11 (financial disclosures).
- The risk — The Group balance sheet includes a significant amount of goodwill and other acquired intangible assets that have arisen as a result of acquisitions. There is a risk that the performance of the Cash Generating Unit (CGU), to which the assets are allocated will result in impairment to the carrying value of those assets. This could be due to weaker than forecast demand, product obsolescence, or other factors, and is particularly the case in the current year in respect of CGUs containing Food producing Animal Products.
- The recoverable amounts of the CGUs to which these intangible assets are allocated, is determined on the basis of value in use calculations. Due to the inherent uncertainty involved in forecasting future cash flows and in determining appropriate discount rates, which are the basis of the assessment of recoverability, this is the key judgemental area that our audit is concentrated on.
Our response — Our audit procedures in this area included:
- Performing certain procedures to identify indicators for impairment of amortising intangible assets. These included reviewing Board meeting minutes, reviewing forecast performance and enquiring as to whether they are aware of any indicators of impairment;
- Checking that the valuation methodology used and allocation of cash flows between cash generating units is consistent year on year;
- Agreeing the cash flows in the models to detailed forecasts prepared by the Group and assessing the appropriateness of the assumptions, primarily revenue and cost growth rates and the assumed asset lives, used in the models including whether they are reasonable in light of historical growth rates. Agreeing that the long term growth rates in the model do not exceed industry published data determined by reference to published growth rates of comparable companies;
- Performing our own assessments of the key estimates and assumptions used to estimate the discount rate applied and challenging the Group's judgements if there are differences; and
- Performed our own sensitivity analysis, including assessing the effect of a reasonably possible change in growth rates, forecast cash flows and discount.
We also assessed whether the Group's disclosures in respect of the impairment review and the sensitivity of the outcome of the impairment review to changes in key assumptions reflected the risks inherent in the valuation.
3. Our application of materiality and an overview of the scope of our audit
The materiality for the Group financial statements as a whole was set at £1.2 million (2014: £1.7 million), determined with reference to a benchmark of Group profit before taxation from continuing operations (of which it represents 4.7% (2014: 8.0%)). Our assessment of materiality has decreased to reflect changes in market expectations of audit materiality in our audit reports. The reduction in materiality does not result in a significant change to audit procedures as component audits are performed to lower, statutory materiality in most locations.
We report to the Audit Committee any corrected or uncorrected misstatements exceeding £60,000, in addition to other identified misstatements that warranted reporting on qualitative grounds.
Of the Group's 23 reporting components, we subjected 13 to audits for Group reporting purposes. These audits covered 97% of Group revenue, 98% of Group profit before taxation and 99% of Group total assets. The Group audit team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group audit team approved component materiality, which ranged from £0.3 million to £1.0 million, having regard to the size and risk profile of the Group across the components.
The Group audit team visited nine components in the UK, US and Denmark. Telephone conference meetings were also held with the component auditors in Denmark, Germany and the Netherlands. At these visits and meetings, the findings reported to the Group audit team were discussed in more detail, and any further work required by the Group audit team was then performed by the component auditor.
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; and
- 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:
We have nothing to report in respect of the above responsibilities.
Scope and Responsibilities
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. A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at www.frc.org.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/uk/auditscopeukco2014a, 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.
Graham Neale (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Snow Hill Queensway
7 September 2015