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To the Members of Redrow plc

 

The Auditors have reported on the content of the PDF Annual Report link. This is a reproduction of their opinion.

 

 

Independent Auditors' Report

1. Our opinion is unmodified

We have audited the financial statements of Redrow plc (“the Company”) for the period ended 28 June 2020 which comprise the Consolidated Income Statement, the Group and Company Statement of Comprehensive Income, the Group and Company Balance Sheets, the Group and Company Statement of Changes in Equity, the Group and Company Statement of Cash Flows and the related notes, including the accounting policies on pages 130-135.

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 28 June 2020 and of the Group’s profit for the period then ended;

- the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU);

- the parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; 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 are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the audit committee.

We were first appointed as auditor by the audit committee on 13 November 2019. The period of total uninterrupted engagement is for the one financial period ended 28 June 2020. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard were provided.

Overview
Materiality: £15.4m
group financial statements as a whole 5% of normalised Group profit before tax
Coverage 100% of Group profit before tax
Key audit matters                                         
Audit risks Cost of sales recognition and carrying amount of both land held for development and work in progress
Valuation of defined benefit obligation
Brexit
 Event driven Going concern

2. Key audit matters: our assessment of risks of material misstatement

Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, 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. We summarise below the key audit matters, in decreasing order of audit significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.

The risk Our response
Cost of sales recognition and carrying amount of both land held for development and work in progress
Subjective estimates  Our procedures included: 
Cost of sales (£1,097 million; 2019: £1,608 million), carrying amount of land held for development (£1,538 million; 2019: £1,547 million) and work in progress (£972 million; 2019: £790 million)

Refer to page 65 (Audit Committee Report), page 133 (accounting policy) and pages 153 (financial disclosures).
The carrying value of land and work in progress is determined by reference to a number of estimates, which are subject to levels of estimation uncertainty including the likelihood of favourable planning applications, and forecasts of future build costs and sales prices. Changes in any of the key estimates could lead to a material change in the carrying value of land and work in progress.

For certain sites, typically large, multi-phased sites or other sites where significant infrastructure costs are incurred towards the latter stages of site completion, cost of sales for completed sales includes estimates of these future costs. The level of estimation uncertainty can be material where the future infrastructure requirements are large and complex.

The effect of these matters is that as part of our risk assessment we determined that the cost of sales of £1,097 million and the carrying amount of land held for development (£1,538 million) and work in progress (£972 million) have a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole.



 
Test of details: For a sample of undeveloped land sites and capitalised pre development costs, we corroborated explanations received from management as to their planning status by assessing underlying planning and legal documents and compared the latest estimates of site profitability to budget; to determine if any provisions are required against the undeveloped land bank.

Test of details: For a sample of sites which due to either their size and/or complexity we considered at higher risk of misstatement we:  

• compared the period end carrying value recorded to that determined by the Quantity Surveyor and performed a comparison to the actual costs incurred to verify that any abnormal costs or build variances incurred, including those related to COVID 19 disruption, have been appropriately identified and accounted for in the period.

•  For a sample of costs. we assessed the accuracy of the site build cost budgets, which are used by the company to both estimate the net realisable value of WIP and calculate and allocate cost of sale on sale of a unit, by comparing the inputs to the budgets to supporting documents such as invoices and quotations.   
Sector expertise: We used our own Quantity surveyor specialist to challenge areas of risk within the build cost forecasts, particularly in respect of incomplete site-wide infrastructure and development works, to assess whether the risk was appropriately reflected in both forecast costs and cost of sales for sold units.

Test of details: We identified low and negative margin sites and assessed the completeness and accuracy of related net realisable value provisions recorded. 

Historical comparisons: For a sample of completed sites, we performed a retrospective review to compare the overall build cost budget (including central infrastructure and development costs) and sales forecasts to actual costs and selling prices achieved to determine the accuracy of site budgets and forecasts.
Test of details: We recalculated the write down recorded on the London sites which the company now plans to exit by comparing forecast sales proceeds to carrying amount and used our valuation specialist to assess the determination of expected sales proceeds.
Assessing transparency: Assessing the adequacy of the Group's disclosures about the degree of estimation involved in calculating cost of sales and carrying value of land and work in progress.
Going concern including the impact of Covid-19 Disclosure quality Our procedures included: 
Refer to page 47 (Going Concern and Viability statement), page 65 (Audit Committee), page 111 (Directors’ Report) page 130 (accounting policy) and page 153 (financial disclosures). The financial statements explain 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 parent Company’s business model and how those risks might affect the Group’s and parent 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’s and Company’s available financial resources over this period was the impact of Coronavirus on the economy as a whole leading to a significant decrease in revenue and cash inflows.

There are also less predictable but realistic second order impacts, such as the impact of Brexit on the supply of building materials, demand for housing and cost price inflation, which could result in a reduction of available financial resources.

The risk for our audit was whether or not those risks were such that they amounted to a material uncertainty that may have cast significant doubt about the ability to continue as a going concern. Had they been such, then that fact would have been required to have been disclosed.  
• Funding assessment: We assessed whether the directors’ view of the availability of borrowings and covenant terms is consistent with our understanding of the facility agreement and remains appropriate for the Group’s requirements.

• Test of detail: We evaluated the models the directors used in their assessment and whether the assumptions used are realistic, achievable and consistent with external information such as industry and economic forecasts. We also assessed assumptions against post period end actual performance, our understanding of the sector as well as any other matters identified in the audit.

• Historical comparisons: We evaluated the reliability of the Group’s cash flow forecasts and average selling prices by assessing previous forecasts made by the Group against actual performance.  

• Sensitivity analysis: We considered sensitivities over the level of available financial resources and headroom over debt covenants indicated by the Group’s financial forecasts taking account of reasonably possible (but not unrealistic) adverse effects that could arise from the rapidly changing and uncertain Coronavirus situation.

• Assessing transparency: We assessed the completeness and accuracy of the matters covered in the going concern disclosure with reference to the outcome of the procedures detailed above. 
Our results:

• We found the going concern disclosure without any material uncertainty to be acceptable.
Valuation of the defined benefit obligation Subjective estimate Our procedures included: 
Group and Company: (£151 million; 2019: £130 million)

Refer to page 65 (Audit Committee Report), page 134 (accounting policy) and page 144 (financial disclosures).
Small changes in the assumptions used to determine the liabilities of The Redrow Staff Pension scheme, in particular those relating to price inflation rate, the discount rate and post retirement mortality rates, can have a significant impact on the valuation of the liabilities.

The effect of these matters is that, as part of our risk assessment for audit planning purposes, we determined that that valuation of defined benefit obligation of £151 million had a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole. The financial statements (note 7e) disclose the sensitivity estimated by the Group and Company.



 
• Benchmarking Assumptions: We used our actuarial specialists to challenge the key assumptions applied in the calculation of the liability, including those relating to price inflation rate, the discount rate and post retirement mortality rates against externally derived market data;.

• Assessing actuaries’ credentials: We assessed the competence, independence, and integrity of Group’s actuarial expert and third party expert fund managers.

•  Assessing transparency: We considered the adequacy of the Group’s disclosures relating to the sensitivity of the obligation to the assumptions.
Our results: 

Overall, the results of our testing were satisfactory and we consider the carrying amount of defined benefit obligation to be acceptable.

3. Our application of materiality and an overview of the scope of our audit

Materiality for the Group financial statements as a whole was set at £15.4 million determined with reference to a benchmark of profit before tax, normalised by averaging over the last three years due to impact of COVID-19 on the financial performance in the period to 28 June 2020, of which it represents 5%. The averaging of the benchmark as a result of the impact of COVID-19 reflected a revision to our initial materiality set for planning purposes, which was based on current year forecast profit before tax.

Materiality for the parent company financial statements as a whole was set at £15.3 million, determined with reference to a benchmark of net assets, of which it represents 1.6%.

We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £0.77 million, in addition to other identified misstatements that warranted reporting on qualitative grounds.

Of the group’s 55 reporting components, we subjected 3 to full scope audits for group purposes.

The components within the scope of our work accounted for the percentages illustrated below.

Auditors graphs

4. We have nothing to report on going concern

The Directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Company or the Group or to cease their operations, and as they have concluded that the Company’s and the Group’s financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the financial statements (“the going concern period”).

Our responsibility is to conclude on the appropriateness of the Directors’ conclusions and, had there been a material uncertainty related to going concern, to make reference to that in this audit report. However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of reference to a material uncertainty in this auditor's report is not a guarantee that the Group and the Company will continue in operation.

We identified going concern as a key audit matter (see section 2 of this report). Based on the work described in our response to that key audit matter, we are required to report to you if:

- we have anything material to add or draw attention to in relation to the directors’ statement on page 130 of the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and parent Company’s use of that basis for a period of at least twelve months from the date of approval of the financial statements; or

- if the same statement is materially inconsistent with our audit knowledge.

We have nothing to report in these respects.

5. We have nothing to report on the other information in the annual report

The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon.

Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information.

Strategic report and directors’ report

Based solely on our work on the other information: 

- we have not identified material misstatements in the strategic report and the directors’ report;

- in our opinion the information given in those reports for the financial period is consistent with the financial statements; and

- in our opinion those reports have been prepared in accordance with the Companies Act 2006.

Directors’ remuneration report

In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.
 

Disclosures of principal risks and longer-term viability

Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to:

- the directors’ confirmation within the viability statement page 47 that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity;

- the risk management report describing these risks and explaining how they are being managed and mitigated; and

- the directors’ explanation in the viability statement of how they have assessed the prospects of the Group, over what period they have done so and why they considered 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. 

Under the Listing Rules we are required to review the viability statement. We have nothing to report in this respect.

Our work is limited to assessing these matters in the context of only the knowledge acquired during our financial statements audit. As we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgments that were reasonable at the time they were made, the absence of anything to report on these statements is not a guarantee as to the Group’s and parent Company’s longer-term viability. 

Corporate governance disclosures

We are required to report to you if:

- we have identified material inconsistencies between the knowledge we acquired during our financial statements 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 position and performance, business model and strategy; or

- the section of the annual report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee;

We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the eleven provisions of the UK Corporate Governance Code specified by the Listing Rules for our review.

We have nothing to report in these respects. 

6. We have nothing to report on the other matters on which we are required to report by exception 

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.

We have nothing to report in these respects.

7. Respective responsibilities

Directors’ responsibilities

As explained more fully in their statement set out on page 116, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and 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 they 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 

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 other irregularities (see below), or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.

Irregularities – ability to detect

We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our general commercial and sector experience, and through discussion with the directors and other management (as required by auditing standards), and from inspection of the group’s regulatory and legal correspondence and discussed with the directors and other management the policies and procedures regarding compliance with laws and regulations. We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit. The potential effect of these laws and regulations on the financial statements varies considerably.

Firstly, the group is subject to laws and regulations that directly affect the financial statements including financial reporting legislation (including related companies legislation), distributable profits legislation, and taxation legislation. We assessed the extent of compliance with these laws and regulations as part of our procedures on the related financial statement items. 

Secondly, the group is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation. We identified the following areas as those most likely to have such an effect: health and safety and other relevant construction legislation as well as consumer rights legislation. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and other management and inspection of regulatory and legal correspondence, if any. Through these procedures, we became aware of actual or suspected non-compliance and considered the effect as part of our procedures on the related financial statement items.The identified actual or suspected non-compliance was not sufficiently significant to our audit to result in our response being identified as a key audit matter.

Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the financial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further removed non-compliance with laws and regulations (irregularities) is from the events and transactions reflected in the financial statements, the less likely the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. We are not responsible for preventing non-compliance and cannot be expected to detect non-compliance with all laws and regulations.

8. The purpose of our audit work and to whom we owe our responsibilities

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.

NICK PLUMB (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor

Chartered Accountants
8 Princes Parade
Liverpool
L3 1QH

16 September 2020

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