Opinion on the financial statements
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 2 April 2021 and of the Group's profit for the 52 weeks then ended;
- the Group financial statements have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006;
- the Group financial statements have been properly prepared in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in 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; and, as regards the Group financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements of Halfords Group Plc (the 'Parent Company') and its subsidiaries (the 'Group') for the 52 weeks ended 2 April 2021 which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Shareholders' Equity, the Company Balance Sheet, the Company Statement of Changes in Shareholders' Equity, the Consolidated Statement of Cash Flows and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and international accounting standards in conformity with the requirements of the Companies Act 2006 and international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in 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).
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 believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our audit opinion is consistent with the additional report to the audit committee.
Independence
Following the recommendation of the audit committee, we were appointed by the Board of Directors on 13 July 2019 to audit the financial statements for the year ended 3 April 2020 and subsequent financial periods. In respect of the year ended 2 April 2021, we were reappointed by the Parent Company's members on 15 September 2020 at the Annual General Meeting. The period of total uninterrupted engagement including retenders and reappointments is two years, covering the years ending 3 April 2020 to 2 April 2021. We remain 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 public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. The non-audit services prohibited by that standard were not provided to the Group or the Parent Company.
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the Directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of the Directors' assessment of the Group and the Parent Company's ability to continue to adopt the going concern basis of accounting included:
- Assessment of assumptions within the projected cash flows: we evaluated the reasonableness of the assumptions and future plans modelled within the Board approved going concern forecasts, covering the period to 30 June 2022 and including the impact of strategic initiatives (including store closures and planned investments in FY22) as well as the ongoing and uncertain impact of COVID-19. We considered whether the forecasts aligned with how the Group had traded through the pandemic and post year end.
- Financing: confirmed the Group had financing facilities in place throughout the period of the going concern review as modelled in its forecasts. We also confirmed the calculations supporting covenant compliance and headroom throughout the going concern period.
- Sensitivity analysis: evaluation of sensitivities of the Group's cash flow forecasts with reference to the financial covenants in place over the existing financing facilities. The analysis considered reasonably possible adverse effects that could arise as well as a stress test to consider the level of future revenue reduction the Group could support.
- Post year end trading performance: comparison of the post year end trading results to the forecasts so as to evaluate the accuracy and achievability of the forecasts prepared.
- Disclosures: evaluation of the adequacy of the disclosures in relation to the risks posed and scenarios the Group has considered in reaching their going concern assessment.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group's and Parent Company's ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.
In relation to the Parent Company's reporting on how it has applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the Directors' statement in the financial statements about whether the Directors considered it appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant sections of this report.
Overview
| Coverage1 | 93% (FY20: 98%) of Group profit before tax and non-underlying items
91% (FY20: 95%) of Group revenue
94% (FY20: 97%) of Group total assets |
| Key audit matters | | FY21 | FY20 | | Going Concern | | ✓ | | Goodwill impairment | | ✓ | | Inventory valuation | | ✓ | | Cycle Republic closure costs | | ✓ | | IFRS16 – leases | ✓ | ✓ | | Costs related to store and autocentre closure programme | ✓ | | FY20 included key audit matters in relation to going concern, goodwill impairment and inventory valuation principally owing to the increased management judgement and higher estimation uncertainty required as a result of the onset of the COVID-19 pandemic. However owing to the Group's FY21 performance and financial position, whilst these remain audit risk in these areas, they are no longer considered key audit matters.
The closure of Cycle Republic was a one off non-recurring event. |
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| Materiality | Group financial statements as a whole
£3.4m (2020: £2.6m) based on 5% of normalised (3 year average) profit before tax and non-underlying items. (2020: 5% of profit before tax and non-underlying items). |
1. These are areas which have been subject to a full scope audit by the group engagement team.
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 in the financial statements. We also addressed the risk of management override of internal controls, including assessing whether there was evidence of bias by the Directors that may have represented a risk of material misstatement.
In establishing the overall approach to the Group audit, we assessed the audit significance of each reporting unit in the Group by reference to both its financial significance and other indicators of audit risk, such as the complexity of operations and the degree of estimation and judgement in the financial results.
All of the Group's three significant components (inclusive of Halfords Group Plc) were subjected to full scope audits for Group purposes. All components are located in the UK and were audited by the Group audit team. The remaining components were not significant and subject to analytical review procedures by the Group audit team.
The significant components within the scope of our work accounted for 91% of group revenues and 94% of total assets.
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) that 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.
| Key audit matter | | How the scope of our audit addressed the key audit matter |
IFRS 16 – Leases
(Accounting polices, Note 14 Leases – closing right-of-use assets £282.8m, lease liabilities £344.3m) | The Group has a large portfolio of retail and autocentre sites, with the majority of properties being leased. The ongoing impact to the financial statements of IFRS 16 is therefore significant.
The calculation of right-of-use assets and lease liabilities involves adjustments relating to changes in lease arrangements and assumptions over the lease term and the incremental borrowing rate. Small changes to lease arrangements and management applied assumptions across a number of leases could lead to a material change in the valuation of right-of-use assets and lease liabilities.
Owing to the magnitude of the right-of-use assets and lease liability balances and the estimation and judgement required in accurately assessing these balances, the application of IFRS16 was raised as a key audit matter. | Our audit procedures included:
- Technical analysis: assessing the calculation methodology driving the lease liability and right-of-use asset against the requirements of the accounting standard.
- Sample testing: testing the completeness and accuracy of the right-of-use asset and lease liability figures calculated by re-performing the calculation for a sample of new leases agreed in the year, lease modifications, and lease exits. To confirm completeness we agreed the brought forward balances to the prior year closing balances in the consolidated financial statements.
- Lease length assumptions: evaluating assumed lease terms with reference to both the underlying lease agreements and consideration of the broader economics of the lease contracts, including enquiry of management and review of historical trends.
- Valuation assumptions: corroboration of the inputs applied within the incremental borrowing rate calculation with assistance from BDO Valuations specialists to confirm the approach to compiling the incremental borrowing rate was in line with the requirements of IFRS 16 and based on appropriate inputs reflective of the lease portfolio.
Key observations: As a result of the testing above we did not find any material matters to report. |
Costs related to store and autocentre closure programme
(Note 5 Non underlying items - £28.5m) | During FY21 the Group announced plans to close a number of stores and autocentres.
Material impairments and provisions are recorded in relation to redundancies and other costs associated with the closures which also resulted in property plant and equipment and right of use assets having a reduced recoverable amount.
Provisioning and impairment are key areas of judgement and particularly owing to the proximity to the year end this and the associated disclosure within the financial statements was considered a key audit matter. | Our audit procedures included:
- Discussions with management: to understand the nature, extent and timing of the store closure programme.
- Technical analysis: evaluation as to whether costs were appropriately provided in accordance with IAS 37.
- Lease testing: recalculation of a sample of lease modification adjustments with reference to the underlying lease agreement where the Group intended to exercise the break option. Our work also considered the sublease assumptions applied by management within the right of use asset impairment and other property cost provisioning assessments.
- Redundancy costs: confirmation of a communicated redundancy program prior to the year-end and recalculation of a sample of redundancies payments.
- Corroborative work: corroboration of management's estimates of the costs associated with the planned exit of store leases with reference to comparable costs previously incurred by the Group or estimates the Group have received for the work required. We also assessed the completeness of the provision by comparing to our expectations the cost categories and stores that had been included within management's workings.
- Property plant and equipment impairments: Agreement of charges incurred to the underlying asset registers and evaluation of the assumptions made by management in relation to the recoverability of the carrying value of store and autocentre property plant and equipment, which was largely estimated to be £Nil.
- Disclosure: assessment of the adequacy of the Group's disclosures concerning both the income statement, inclusive of consideration as to whether the closure costs met with the Group's definition of a non-underlying item owing to their size, nature and incidence and provisions on the balance sheet, with reference to relevant accounting standard requirements.
Key observations: As a result of the testing above we did not find any material matters to report. |
Our application of materiality
We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements.
In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality level, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole and performance materiality as follows:
| Group financial statements | Parent company financial statements |
| 2021
£m | 2020
£m | 2021
£m | 2020
£m |
| Materiality | 3.4 | 2.6 | 1.7 | 1.3 |
| Basis for determining materiality | 5% of normalised (3 year average) profit before tax and non-underlying items. | 5% of profit before tax and non-underlying items. | Determined with reference to 50% of Group materiality. | Determined with reference to 50% of Group materiality. |
| Rationale for the benchmark applied | We consider profit before tax and non-underlying items to be the most appropriate benchmark as it provides a more stable measure year on year than group profit before tax.
For FY21 a normalised (3 year average) has been taken owing to the significant impact of the COVID-19 pandemic on the FY21 financial year. | We consider profit before tax and non-underlying items to be the most appropriate benchmark as it provides a more stable measure year on year than group profit before tax. | Considered appropriate in the context of both the Group financial statements and Halfords Group Plc Company balance sheet. | Considered appropriate in the context of both the Group financial statements and Halfords Group Plc Company balance sheet. |
| Performance materiality | 65% of materiality. |
| Basis for determining performance materiality | Performance materiality is the application of materiality at the individual account or balance level set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.
Performance materiality was set at 65% of materiality. In setting the level of performance materiality we considered a number of factors including the expected total value of known and likely misstatements. |
Component materiality
We set materiality for each component of the Group based on a percentage of between 50% and 90% of Group materiality dependent on the size and our assessment of the risk of material misstatement of that component. Component materiality ranged from £1.7m to £3.1m. In the audit of each component, we further applied performance materiality levels of 65% of the component materiality to our testing to ensure that the risk of errors exceeding component materiality was appropriately mitigated.
Reporting threshold
We agreed with the Audit Committee that we would report to them all individual audit differences in excess of £70k (2020:£52k). We also agreed to report differences below this threshold that, in our view, warranted reporting on qualitative grounds.
Other information
The directors are responsible for the other information. The other information comprises the information included in the annual report and accounts 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. 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 course of 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 this gives rise to a material misstatement in the financial statements themselves. 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.
Corporate governance statement
The Listing Rules require us to review the Directors' statement in relation to going concern, longer-term viability and that part of the Corporate Governance Statement relating to the parent company's compliance with the provisions of the UK Corporate Governance Statement specified for our review.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements or our knowledge obtained during the audit.
| Going concern and longer-term viability | - The Directors' statement with regards to the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified set out in the Our Principal Risks and Uncertainties; and
- The Directors' explanation as to its assessment of the entity's prospects, the period this assessment covers and why the period is appropriate set out in the Viability Statement.
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| Other Code provisions | |
Other Companies Act 2006 reporting
Based on the responsibilities described below and our work performed during the course of the audit, we are required by the Companies Act 2006 and ISAs (UK) to report on certain opinions and matters as described below.
| Strategic report and Directors' report | 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.
In the light of the knowledge and understanding of the Group and 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. |
| Directors' remuneration | In our opinion, the part of the Directors' remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. |
| 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 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.
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Responsibilities of Directors
As explained more fully in the Directors' responsibilities, 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.
Extent to which the audit was capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below:
- We gained an understanding of the legal and regulatory framework applicable to the Group and the industry in which it operates, and considered the risk of acts by the Group which were contrary to applicable laws and regulations, including fraud. These included but were not limited to compliance with Companies Act 2006, the FCA listing and DTR rules, the principles of the UK Corporate Governance Code, and IFRSs.
- We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.
- We assessed the susceptibility of the Group's financial statements to material misstatement, including understanding where and how fraud might occur.
- We obtained an understanding of the procedures and controls that the Group has established to address risks identified, or that otherwise prevent, deter and detect fraud. Where the risk was considered to be higher, we performed audit procedures to address each identified fraud risk. These procedures were designed to provide reasonable assurance that the financial statements were free of fraud or error.
- Based on the understanding obtained we designed audit procedures to identify non-compliance with the laws and regulations, as noted above. This included enquiries of in-house legal counsel, Management, the Audit Committee, review of Board minutes, and correspondence with legal counsel and regulators.
- We tested journal entries, focusing on journal entries containing characteristics of audit interest, year end consolidation journals, journals processed by users with privileged IT access rights and those relating to revenue.
- We tested and challenged the key estimates and judgements made by management in preparing the financial statements for indications of bias or management override when presenting the results and financial position of the Group, including the costs related to store and autocentre closure programme identified as a key audit matter.
Our audit procedures were designed to respond to risks of material misstatement in the financial statements, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery, misrepresentations or through collusion. There are inherent limitations in the audit procedures performed and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we are to become aware of it.
A further description of our responsibilities is available 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.
Diane Campbell (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
London, UK
16 June 2021
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).