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Annual Report & Accounts 2015 - INDEPENDENT AUDITOR'S REPORT
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audit risk How we responded to the risk Valuation of derivative financial instruments audit risk How we responded to the risk impairment of goodwill and intangible assets our application of materiality and an overview of the scope of our audit 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. We determined materiality for the audit of the Group financial statements as a whole to be €1.7 million, which is approximately 3.4% of earnings before taxation less exceptional costs. this benchmark is considered the most appropriate because this is a key performance measure used by the directors to report to investors on the financial position of the Group. our audit work included, but was not restricted to: • meeting with the external valuer, and assessing their qualifications and objectivity in preparing the valuations; • engaging our valuation specialists to assess the appropriateness of assumptions, inputs and methodology applied; • reviewing the disclosures in note 21 and confirming they are in compliance with the requirements of ifrs 7 "Financial Instruments: Disclosures". the Group's accounting policy on the recognition and measurement of financial derivative instruments is included in note 1.17 to the financial statements. the Group has entered into a number of contracts during the current and preceding years resulting in financial derivative instruments of €3.8 million (assets) and €0.7 million (liabilities) being recognised respectively on the statement of financial position at fair value in line with IAS 39 "Financial Instruments: Recognition and Measurement". the valuation of these instruments are often complex, involve a number of estimates, some of which derive from management information and can be highly judgemental. We have therefore identified the valuation of these instruments as a significant risk requiring special audit consideration. We tested the assumptions used by management within their annual impairment assessment to support the recoverability of the carrying value of goodwill and intangible assets. our work included, but was not restricted to: • challenging the projected future cash flow growth rates and patterns; • engaging valuation specialists to provide additional challenge regarding the calculations of the discount rate applied to these cash flows; assessing the appropriateness of the sensitivities applied by management including considering whether the scenarios represented reasonably possible changes in key assumptions; and • considering whether the disclosures on the impairment test performed by management in the financial statements are in line with those prescribed in accounting standards. the Group's accounting policy on impairment is shown in note 1.7 and the goodwill and impairment testing disclosures are included in note 8.2. the Group holds goodwill of €133 million and intangible assets of €22 million on its statement of financial position at 31 december 2015. ias 36 requires that goodwill and other intangibles with indefinite useful lives are tested for annual impairment. all other intangible assets must also be assessed annually for indicators of impairment. the impairment review process to test the recoverability of these assets arising on acquisition involves the application of judgements and estimates by management. there are particular risks regarding the judgments included in the forecasts to determine the recoverable amount, including the growth rates underlying projected future cash flows, the discount rates applied to those forecasts and the scenarios applied to test the calculations' sensitivity to reasonably possible changes in key assumptions GVC HOLDINGS PLC ANNUAL REPORT 2015 43 auditor's report and primary financial statements