We have audited the financial statements of Inland Homes plc (the 'Parent Company') and its subsidiaries (the 'Group') for the year ended 30 June 2018 which comprise the Group Income Statement, the Group and Company Statement of Financial Position, the Group and Company Statement of Changes in Equity, the Group Statement of Cash Flows and the 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 30 June 2018 and of the Group'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 Practice; 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 12 months from the date when the financial statements are authorised for issue.
Key audit matters
Key audit matters are those matters that, in our professional judgement, 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) we identified, 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. 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.
|Valuation of investment properties and carrying value of trading properties (Notes 13 and 17)|
|Key audit matter||How we addressed the key audit matter|
The Group owns a portfolio of properties which are held as either investment properties or trading properties.
Investment properties, including those in the course of development, are held at fair value in the Group financial statements. Trading properties are carried in the Group Statement of Financial Position at the lower of cost and net realisable value and are remeasured to fair value for the purposes of calculating EPRA NAV (see note 11).
Determination of the fair value of investment properties and the carrying amount and fair value of trading properties is considered a significant audit risk due to the subjective nature of certain assumptions and the potential for management bias inherent in each valuation.
Each valuation requires consideration of the individual nature of the property, its location, its cash flows and comparable market transactions. The majority of the Group's property interests are in the course of development. The valuation of these properties requires estimation of the expected sales value the completed developments will achieve with deductions for future build costs to completion, which requires significant judgements. Judgements in relation to future sales values and build costs in particular are impacted by the political and economic uncertainty arising from the result of the EU referendum.
The valuation of the Group's income generating investment properties requires significant judgements to be made in relation to the appropriate market capitalisation yields and estimated rental values.
Our audit work in relation to stock included, but was not restricted to, the following:
- We agreed a sample of data used by valuers, both internal and external, back to source documentation, including title deed and tenancy agreements.
- We assessed the movement in the valuation of the property portfolio against our own expectations and challenged the Directors or external valuers, as appropriate, for those valuations which fell outside of our range of expectations.
- Where relevant we obtained any post year end sales agreements for whole sites to support the carrying value at the year end.
- We obtained all copies of any planning permission documents received in the year to support the uplift in land values.
- We obtained project appraisals prepared by the Directors for each development and:
- reviewed and assessed costs to complete and compared these to developments of a similar nature;
- considered the historic accuracy of cost and sales forecasts;
- for a sample of properties that have been exchanged, reserved or sold post year end we obtained supporting documentation and compared the prices achieved to those in the development appraisals. Where no activity has occurred, we performed a comparison of prices achieved on similar properties sold or comparable market transactions; and
- we visited the Group's development sites at Lily's Walk, Castle House, Wilton Park and The Pheasant and considered the stage of the development compared to the costs to complete in the project appraisal.
Our audit work included, but was not restricted to, the following:
- We obtained the valuation schedules prepared by the Directors and;
- evaluated the competence and capability of the Director;
- confirmed that the basis of the valuation was in accordance with requirements of accounting standards; and
- discussed the basis of the valuation, the assumptions used and the valuation movements in the year with the Director;
- We considered whether movements in the valuations are consistent with our own expectations based upon market comparable transactions and changes in industry benchmarks and challenged those valuations which fell outside of our expectations.
- We compared the significant valuation inputs used by the Directors against our own expectations, underlying supporting evidence and, where relevant, market data.
- We obtained external support used by the Directors in preparing their valuations. We tested the inputs of this support and compared them to the inputs used in the valuations prepared by the Directors.
- For a sample of investment properties we corroborated the rental income to supporting leases.
|Revenue and profit recognition (Note 4)|
|Key audit matter||How we addressed the key audit matter|
The Group has numerous sources of revenue out of which we consider the sale of land and contract income to pose specific risks.
Proceeds from the sale of land and buildings should only be recognised once the risks and rewards of ownership have passed to the buyer, which is considered to be completion. There is a risk that revenue and profits on house sales could be recognised before completion and also through management incorrectly allocating costs on different phases on multi-phase developments.There were a significant number of completions that occurred in June 2018 and we therefore also identified cut off as a significant audit risk.The accounting for the revenue from contract income is inherently complex and involves significant judgement, particularly with regard to assessing the stage of completion of the project. Revenue from long term contracts is recognised based upon management's assessment of the value of works carried out, with regard to external quantity surveyor reports, having considered the anticipated programme of works and the costs incurred and to complete. Profit is recognised once the Directors are able to make an estimate of the outcome with reasonable certainty.
|Our audit work included, but was not restricted to, the following:|
Sale of land and buildings
- We agreed a sample of sales to completion statement and the proceeds to bank. To address cut off, we tested a sample of sales that occurred in June 2018 and checked that completion took place pre year end. For post year end receipts we obtained the completion statement for the associated sale and checked that it was recognised in the correct period.
- We reviewed the realised margin on the land and building sales in the year compared to the expected margin obtained from the original development appraisal.
For each development contract we obtained copies of the construction contract and performed the following:
- We agreed the total value of the development to the signed contract.
- We discussed the forecast profitability with management.
- We verified the underlying stage of completion to the valuation certificate provided by each external quantity surveyor engaged to certify the value of the work completed.
- We compared the key assumptions within each development appraisal against the contract terms and agreed details to supporting documentation where relevant.
- We compared the stage of completion against the proportion of profit recognised to date.
Our application of materiality
We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatement on the audit and in forming our opinion. Materiality is assessed on both quantitative and qualitative grounds.
|Group – Financial Statement materiality||Group – Specific materiality|
|Clearly trivial threshold||£60,000||£31,600|
We consider materiality to be the magnitude by which misstatements, individually or in aggregation, could reasonably be expected to influence the economic decisions of the users of the financial statements.
We determined that Group total assets would be the most appropriate basis for setting overall financial statement materiality, as we consider this to be one of the principal considerations for members of the Company in assessing the financial performance of the Group. As such, the materiality for the Group financial statements as a whole was determined to be £3,000,000, which represents 1% of the Group's total assets.
We also determined that for other classes of transactions, balances or disclosures that impact adjusted earnings (being profit before tax adjusted for investment property valuations), a misstatement of less than materiality for the financial statements as a whole could influence the economic decisions of the users of the financial statements. As a result, we applied a specific materiality of £1,580,000 to these areas which represents 8% of adjusted earnings.
In the prior year we applied a single financial statement materiality based on 7% of profit before tax. The prior year financial statement materiality was £1,080,000.
We determined that a measure of financial statement materiality alone for the Parent Company was appropriate, given that its principal activity is that of an investment company. The materiality applied was £1,160,000 which represents 2% of the Company's total assets.
Whilst materiality for the financial statements as a whole was £3,000,000, each component of the Group was audited to a lower level of materiality. Component materiality ranged from £1,000 to £2,180,000.
The application of materiality at the individual account or balance level is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.
On the basis of our risk assessment together with the Group's overall control environment our judgement was that overall performance materiality for the Group should be 60% of overall materiality. As such, performance financial statement materiality was set at £1,800,000 and specific performance materiality was set at £948,000.
We determined that the same measure as the Group was appropriate for the Parent Company, and the performance materiality applied was £696,000.
An amount below which identified misstatements are considered as being clearly trivial.
We agreed with the Audit Committee that we would report to them all individual audit differences in excess of £60,000 for all items audited to financial statement materiality, and £31,600 for items audited to specific materiality. We also agreed to report on any other differences that, in our view, warranted reporting on qualitative grounds.
The reporting threshold applied for the Parent Company was set at £23,000.
We evaluate any uncorrected misstatements against both the qualitative measures of materiality discussed above and in the light of other relevant qualitative considerations.
An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including the Group's system of internal control, and assessing the risks of material misstatement at the Group level. Audit work to respond to the assessed risks was performed directly by the Group audit engagement team which performed full scope audit procedures on each of the Group's component entities. Our audit work at each of these components was executed at levels of materiality applicable to the relevant component, which in each instance was lower than Group materiality. BDO LLP audited all significant components. All components are based in the UK.
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.
Opinions on other matters prescribed by the Companies Act 2006
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 by exception
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.
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, 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
As explained more fully in the Directors' responsibilities statement set out in the Director's report, 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 Parent 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 Parent 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 Parent Company and the Parent Company's members as a body, for our audit work, for this report, or for the opinions we have formed.
Thomas Edward Goodworth (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
19 September 2018
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).