3 Revenue and cost of sales recognition over time on Content contracts (Group), Existence of bank and cash (Group) and Loan refinancing (Group) are new Key Audit Matters this year. As we emerge from the pandemic, because of the relatively insignificant financial and operational impact of the covid-19 pandemic on the Group’s activities in the year under audit, we have no longer included a Key Audit Matter on the Impact of covid-19 (Group and Parent). Key Audit Matter How our audit addressed the Key Audit Matter Purchase price allocation and acquisition accounting We obtained the sale and purchase agreements (SPAs) for for significant acquisitions (Group) each acquisition in the period and read them to ensure that Refer to Note 2D (Critical accounting estimates and we understood the substance of the transaction, including the judgments), 3H (Intangible assets) and Note 4 (Acquisitions). consideration and the assets and liabilities acquired. We tested cash consideration to bank statements and checked that any During the year the Group made a number of acquisitions for deferred and/or contingent consideration had been correctly a total consideration of £219.7 million (see Note 4). As a result recognised in line with the acquisition agreements. of the 2021 acquisitions, the following intangible assets were We reviewed the purchase price allocation reports provided recognised: customer relationships £86.6 million; brands by management’s expert and considered the expert’s ability £2.8 million; order backlog £3.5 million, software £0.8 million, to prepare an analysis to reasonably estimate the value of the and goodwill of £135.0 million. The Group also finalised acquired intangible assets. We assessed the completeness of the the purchase price allocation of Decoded Advertising, intangible assets recognised by management and the valuation Metric Theory, Brightblue and Orca Pacific resulting in the methodologies used, to consider if these were appropriate methods recognition of intangible assets for customer relationships of valuation for these types of assets. We utilised our valuations of £56.5 million, brand names of £1.8 million, order backlog experts in performing the audit of purchase price allocation and of £3.0 million and software of £2.5 million. acquisition accounting, including the assessment of the valuation Accounting for business combinations can be complex, methodologies and assumptions applied by management and particularly in relation to the identification of intangible their expert. assets and accounting for deferred and/or contingent We recalculated the 2021 and prior year restated amounts as a consideration. Management used an expert to assist them result of the finalisation of prior year acquisition accounting in with the acquisition accounting. We focused on the judgments accordance with IFRS 3 Business Combinations included within the management made in these respects, particularly in relation financial statements. We tested the accuracy and completeness of to the identification and valuation of intangible assets and the the models used for calculating the separately identified intangible critical estimates that could lead to a material misstatement assets by checking for consistency and comparing them to of intangible assets. models used on prior acquisitions within the Group and to those typically used in the industry. We challenged management in particular on the recognition of customer relationships and were able to corroborate these to historical customer data or acquisition specific circumstances. We agreed the underlying projections to management’s cash flow models signed off by the Board as part of their due diligence to ensure both consistency and actual cash flows being in line with those predicted. We challenged the key assumptions used including terminal growth rates and discount rates. We agreed the current assets and liabilities acquired, which consisted mainly of cash and debtor balances, by vouching them to supporting documentation such as bank statements and confirming that they had been treated in line with the terms of the contract. The recognition of intangible assets is judgmental, but we are satisfied that the assumptions and models used by management are reasonable and consistent with prior years. We are satisfied that the treatment of consideration is in line with IFRS 3 and concur with management’s assumption that budgeted profit targets will be met on those acquisitions with contingent consideration. Fraud in revenue recognition (Group) To address the occurrence risk, testing for 23 components Refer to Note 3C (Revenue recognition). was completed to identify unusual revenue journal postings. We reviewed the working papers of the component teams, attended As the Group has ambitious growth plans, we considered calls and discussions to ensure the correct approach was adopted the incentive for management to perpetrate fraud by posting and no issues were noted. The Group audit team also audited Group fictitious journals to revenue or by accelerating revenue from adjustments to revenue and completed the testing for components 2022 into the 2021 financial year in order to achieve targets. directly under the Group team’s scope. Consequently, we considered there to be a risk of material misstatement in relation to revenue. For 23 components, we determined that this risk related to the occurrence of revenue through posting fictitious journal entries with material revenue amounts and for components with material open contracts, to the accuracy of percentage of completion revenue on open contracts at the year-end (see Revenue recognition over time on content contracts (Group)) below. S4Capital Annual Report and Accounts 2021 101