Opinion

Our opinion on the financial statements is unmodified

We have audited the financial statements of Flowtech Fluidpower plc (the 'parent company') and its subsidiaries (the 'Group') for the year ended 31 December 2018 which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of changes in equity, the consolidated statement of cash flows, the company income statement, the company statement of financial position, the company statement of changes in equity 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 31 December 2018 and of the Group's profit and parent company'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; and
  • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

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 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 going concern

We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:

  • the directors' use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or
  • the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group's or the parent company's ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.
Grant Thornton

Grant Thornton

Overview of our audit approach

  • Overall materiality: £346,000, which represents 5% of the Group's profit before taxation
  • Key audit matters were identified as revenue recognition, allocation, valuation and impairment of intangible assets and goodwill, provision for impairment of inventories, implementation of new IT system and sufficiency of reconciliation procedures, and impairment of the parent Company's investments in its subsidiaries and amounts due from subsidiary undertakings.
  • We performed full scope audit procedures on the financial statements of Flowtech Fluidpower plc (the Parent) and on the financial information of all subsidiary companies, which are considered to be significant components based upon Group materiality. We performed specified procedures on Flowtechnology Benelux BV and Hydraulic Group BV

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. These matters included those that 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.

Key audit matter – GroupHow the matter was addressed in the audit – Group

Revenue recognition

Revenue is recognised in accordance with the Group's accounting policies and International Financial Reporting Standard (IFRS) 15: 'Revenue from contracts with customers'.

The revenue recorded by the Group is one of the key determinants of the Group's underlying profitability.

We therefore identified revenue recognition as a significant risk, which was one the most significant assessed risks of material misstatement.

Our audit work included, but was not restricted to:

  • Consideration of revenue recognition policies to assess whether the policies are in accordance with International Financial Reporting Standard (IFRS) 15: 'Revenue from contracts with customers';
  • Assessment of whether revenue has been accounted for in accordance with the Group's accounting policies;
  • Obtaining an understanding of the processes through which the business initiates, records, processes and reports revenue transactions; and
  • Agreement of a sample of revenue entries for material revenue streams to supporting documentation.

The Group's accounting policy on revenue is shown in note 2.15 to the financial statements and related disclosures are included in note 3.

Key observations

Our procedures did not identify any material misstatements in respect of the recognition of revenue for the Group's material revenue streams. We are satisfied that the Group's accounting policies provide sufficient information regarding the Group's material revenue streams and that they comply with International Financial Reporting Standard (IFRS) 15: 'Revenue from contracts with customers'.

Allocation, valuation and impairment of intangible assets and goodwill

The Group holds significant intangible assets and goodwill. The Group has undertaken an acquisition during the year and performed an assessment of the nature and value of the intangible assets acquired in the business combination. Management have also assessed the fair value of all assets acquired in the business combination.

Management have performed an impairment review of the Group's intangible assets and goodwill, including sensitivity analysis to assess the impact of changes in key assumptions.

The judgements made in respect of the valuation of the intangible assets and the impairment review are subject to significant measurement uncertainty. We therefore identified allocation, valuation and impairment of intangible assets and goodwill as a significant risk, which was one of the most significant assessed risks of material misstatement.

Our audit work included, but was not restricted to:

  • Consideration of the Group's accounting policies to assess whether the policies are in accordance with International Accounting Standard (IAS) 38: 'Intangible Assets' and International Accounting Standard (IAS) 36: 'Impairment of Assets'
  • Assessment of whether intangible assets have been accounted for in accordance with the Group's accounting policies;
  • Assessing management's impairment review and challenging the valuation approach used;
  • Assessing the accuracy of management's forecasting through a comparison of historical data to actual results and projections for following periods;
  • Challenging the appropriateness of management's assumptions, including the growth rate and discount rate used;
  • Performance of sensitivity analysis to understand the impact of any reasonably possible changes in assumptions, and evaluate the headroom available from different outcomes so as to assess whether goodwill and intangible assets could be impaired;
  • Assessing the adequacy of the disclosures in the financial statements for the requirements of IAS 36 'Impairment of Assets'.

The Group's accounting policy on goodwill and intangibles are shown in note 2.9 to the financial statements and related disclosures are included in notes 10 and 11.

Key observations

Our procedures did not identify any material misstatements in respect of the allocation and valuation of the Group's intangible assets and goodwill. No impairments of intangible assets or goodwill were identified from the work performed. The assumptions used in the valuation and impairment model were considered appropriate. We consider the disclosures in the financial statements to provide sufficient information regarding both the acquisition in the year and management's impairment review of goodwill and intangible assets.

Provision for impairment of inventories

The Group trading entities hold material inventory, against which significant provisions have been recognised.

The provision for impairment of inventories is based on sales trends for all inventory and management's estimation of recoverability. There is significant measurement uncertainty in management's estimation.

Inventory management is one of the key challenges facing management and one of the main determinants of the Group's underlying performance.

We therefore identified provision for impairment of inventories as a significant risk, which was one of the most significant assessed risks of material misstatement.

Our audit work included, but was not restricted to:

  • Consideration of the Group's accounting policy in respect of the impairment of inventories to assess whether it is in accordance with International Accounting Standard (IAS) 2: 'Inventories'
  • Consideration of whether the Group's inventory provisions have been accounted for in accordance with the Group's accounting policies
  • Testing of the integrity of the underlying data used in the calculation of the inventory provision
  • Comparison of inventory values to sales prices for a sample of inventory lines
  • Consideration of the reasonableness of the inventory provision, including re-performance of the calculation of the provision and consideration of historical performance.

The Group's accounting policy on provision for impairment of inventories is shown in note 2.11 to the financial statement and related disclosures are included in note 15.

Key observations

We consider the inventory provision to be reasonable.

Implementation of new IT system and sufficiency of reconciliation procedures

The Group introduced a new IT system into several of its subsidiaries during the year. The implementation of the new IT system proved challenging due to difficulties experienced with an IT interface and insufficient reconciliation procedures performed during the year. In particular, this gave rise to concerns regarding the completeness of payables and accruals and the accuracy of payables cut off. The implementation of the new system also resulted in the requirement to process a higher than expected number of manual transactions and journals, particularly at the year end.

Management has assessed the impact of the challenges presented by the implementation of the new system by performing a detailed review of trade payables, accruals and cut off. Management has also performed a detailed review of the reconciliations performed at the year end, including associated journals.

The challenges presented by the implementation of the new IT system and sufficiency of the reconciliation procedures, and the resulting requirement for a higher than expected number of manual transactions and journals, increase the risk of material misstatement of the financial statements. These matters were initially brought to our attention by management at the planning stage of the audit. However, the full extent of the challenges presented by these matters did not become apparent until later in the audit process. We accordingly reassessed the risk of material misstatement of the financial statements based upon our revised understanding. We consequently identified the implementation of the new IT system and sufficiency of the reconciliation procedures as a significant risk, and therefore one of the most significant assessed risks of material misstatement.

Our work included, but was not restricted to:

  • Assessment of management's reconciliation process and investigation of unusual reconciling items.
  • Investigation and agreement of transactions processed post year end, to determine whether liabilities recorded at 31 December 2018 were materially complete.
  • Consideration of payables cut off and agreement of transactions processed at the year end, to determine whether liabilities were recorded in the correct period.
  • Assessment of payables ledgers and accruals which involved consideration of large or unusual balances, testing a sample of debit balances to assess whether they had been accounted for appropriately and using analytical procedures in evaluate the reasonableness of payables and accruals.
  • Agreement of a sample of payables and accruals to underlying records, to assess the accuracy of the information and calculations prepared by management.
  • Identification and investigation of unusual journals associated with these processes.

Key observations

We determined management's response to the challenges presented by the system implementation and reconciliation processes to be appropriate. No material unrecorded liabilities or cut off errors were identified from the audit procedures listed above. Our testing of unusual journals and transactions did not identify any material misstatements.

Key audit matter – ParentHow the matter was addressed in the audit – Parent

Impairment of investments in subsidiaries and amounts due from subsidiary undertakings

The parent Company holds significant investments in subsidiary undertakings. The parent Company also has significant amounts due from subsidiary undertakings.

Management have performed an impairment review of the parent Company's investments in subsidiary undertakings. Management have also assessed whether amounts owed by subsidiary undertakings to the parent Company are impaired at the year end.

The judgements made in respect of the impairment review are subject to significant measurement uncertainty. We therefore identified impairment of investment in subsidiaries and amounts due from subsidiary undertakings as a significant risk, which was one of the most significant assessed risks of material misstatement.

Our audit work included, but was not restricted to:

  • Assessing management's impairment review and challenging the valuation approach used;
  • Assessing the accuracy of management's forecasting through a comparison of historical data to actual results and projections for following periods;
  • Challenging the appropriateness of management's assumptions, including the growth rate and discount rate used;
  • Performance of sensitivity analysis to understand the impact of any reasonably possible change in key assumptions; and
  • Assessing the adequacy of the disclosures in the financial statements for the requirements of IAS 36 'Impairment of Assets'.

The company's accounting policy on impairment is shown in note B to the parent Company financial statements and related disclosures are included in note J to the parent Company financial statements.

Key observations

No impairment of investment in subsidiary undertakings and amounts owed by subsidiary undertakings were identified from the work performed.

Our application of materiality

We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality in determining the nature, timing and extent of our audit work and in evaluating the results of that work.

Materiality was determined as follows:

Materiality measureGroupParent
Financial statements as a whole

£346,000, which is 5% of the Group's profit before tax. This benchmark is considered the most appropriate because it is a prominent key performance indicator used by the Group's investors.

Materiality for the current year is higher than the level that we determined for the year ended 31 December 2017 to reflect the increase in the Group's profit before tax.

£260,000, which is based on 2% of the company's net assets, capped at Group performance materiality.

Materiality for the current year is higher than the level that we determined for the year ended 31 December 2017 to reflect the increase in the Group's profit before tax, which is the key driver of Parent materiality.

Performance materiality used to drive the extent of our testing75% of financial statement materiality.75% of financial statement materiality.
Specific materialityWe have applied a specific materiality to Directors' emoluments.We have applied a specific materiality to Directors' emoluments.
Communication of misstatements to the audit committee£17,300 and misstatements below that threshold that, in our view, warrant reporting on qualitative grounds.£13,000 and misstatements below that threshold that, in our view, warrant reporting on qualitative grounds.

The graph below illustrates how performance materiality interacts with our overall materiality and the tolerance for potential uncorrected misstatements.

Overall materiality – Group

Audit materiality

Overall materiality – Parent

Audit materiality

Tolerance for potential uncorrected mis-statements

Performance materiality

An overview of the scope of our audit

Our audit approach was a risk-based approach founded on a thorough understanding of the Group's business, its environment and risk profile and in particular included:

  • Evaluation by the Group audit team of identified components to assess the significance of that component and to determine the planned audit response based on a measure of materiality calculated by considering the component's significance as a percentage of the Group's total assets, revenues and profit before tax;
  • A full scope audit of the financial statements of the Parent Company, Flowtech Fluidpower plc;
  • An evaluation of the Group's internal control environment, including performance of process walkthroughs and documentation of controls covering all of the Key Audit Matters discussed in the Key Audit Matters section above;
  • Performance of a full scope audit on components representing 84% of the Group's revenue, 94% of the Group's profit before tax and 62% of the Group's total assets. The entities on which full scope audits were performed were selected based upon their significance to the Group's net assets, revenues and profits;
  • Performance of specified procedures on specific balance in entities which do not require full scope audit procedures for the purposes of the Group audit opinion. Our specified procedures covered Flowtechnology Benelux BV and Hydraulics Group BV, and focused on revenue, receivables, inventory and cash. The procedures have been performed in accordance with Group performance materiality.
  • Performance of analytical procedures to confirm our conclusion that there was no significant risk of material misstatement of the aggregated financial information of the remaining components not subject to a full audit; and
  • Testing of the consolidation process, including re-performance of management's formulae and confirming that the Group financial statements are consistent with the audited statutory figures.

The only changes in scope from the prior year relate to specified procedures being performed in respect of Hydraulic Group BV and procedures performed in relation to the Group's acquisitions.

Other information

The directors are responsible for the other information. The other information comprises the information included in the annual report, 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 this other information, we are required to report that fact.

We have nothing to report in this regard.

Our opinion on other matters prescribed by the Companies Act 2006 is unmodified

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 under the Companies Act 2006

In the light of the knowledge and understanding of the Group and the 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.

Matters on which we are required to report by exception

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 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 for the financial statements

As explained more fully in the directors' responsibilities statement set out on page 46, 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.

Use of our report

This report is made solely to the 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 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 company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Michael Frankish
Senior Statutory Auditor
for and on behalf of Grant Thornton UK LLP
Statutory Auditor, Chartered Accountants
Manchester

29 April 2019