3

Audit Committee meetings held

Committee Composition

During the year, the Committee comprised:

Tom Singer (appointed 16 September 2020)

Helen Jones

Jill Caseberry

David Adams resigned 31 December 2020

Chair's Letter

I am pleased to present the report of the Audit Committee for the 52 weeks ended 2 April 2021. I was appointed as a Non-Executive Director on 16 September 2020 and became Chair of the Committee on 1 January 2021 on the retirement of David Adams. I would like to thank David for his work as a member and Chair of the Committee and, specifically, for his help and guidance as I was inducted into the business.

This report describes how the Committee has carried out its responsibilities during the year. The Committee reviews financial reporting judgements and monitors risk and the effectiveness of the system of internal control through engagement with executive management, internal audit and the external Auditor.

During the year, the Committee considered a number of key issues, most significantly:

• the impact of COVID-19 on the Group, and specifically whether the business remained a Going Concern;
• the refinancing of the Group's revolving credit facility;
• judgements in respect of M&A and disposal activity in the year;
• the carrying value of investments, tangible and intangible assets;
• the recent BEIS proposals for Audit and Corporate Governance reform, considering the impact on our reporting and control environment;
• the acceleration of our business and financial controls programme;
• the ongoing review of the legal entity restructure across the Group;
• review of the Financial Reporting Council's correspondence in respect of the Annual Report and Accounts for the period ended 3 April 2020; and
• updates to the Group's Tax and Treasury policy in relation to foreign exchange and hedging requirements in light of the evolving Brexit position

The advent of COVID-19 has highlighted the importance of a robust control environment and, accordingly, during the year, the Audit Committee has engaged across a wide number of themes to satisfy itself that the system of risk management and control continued to operate within the challenging external environment.

The Committee focused heavily on the impact of COVID-19, specifically ensuring that the application of the Going Concern principle was appropriate. This included a detailed review of the refinancing of the Group's Revolving Credit facility, recommending the proposed structure to the Board.

The Group undertook a number of transactions during the year, including the purchase of The Universal Tyre Company (Deptford) Limited ("Universal") and the closure of a number of stores and garages. The Committee reviewed the accounting treatment of each transaction, ensuring that the necessary accounting judgements made were appropriate.

Prior to and post the financial year-end, the Group started to undertake a legal entity reduction exercise, to simplify the corporate structure. The Committee reviewed the outcome of the restructure, ensuring that distributable reserves were adequate to support future dividend payments.

In March 2021, the Department for Business, Energy and Industrial Strategy (BEIS) published a consultation paper on its proposals for significant reform to UK audit and corporate governance. The Committee discussed the early proposals and, as the consultation develops, will review the implications for the Group and the way in which the Committee operates. Ahead of the consultation, the Group had recognised the likely requirement for an enhanced control environment and an internal team has been set up dedicated to the enhanced documentation and implementation of robust processes and controls. The Committee will continue to monitor progress in this regard.

Finally, the Committee reviewed the company's principal risks, ensuring that robust risk mitigation was in effect during the year and that emerging risks were identified and flagged appropriately.

I would like to thank the members of the Committee, the management team and our external Auditor for the open discussions that take place at our meetings and their contribution and support during the year.

Three scheduled Committee meetings were held during the year and attended by all members. After each Committee meeting, the Audit Committee Chair reported to the Board on the key issues discussed.

Although the Company Chair, CEO and CFO are not members of the Committee, they do attend meetings regularly and so contribute to the work of the Committee, assisting with the fulfilment of its oversight functions.

Membership and Remit of the Audit Committee

During the year, the members of the Audit Committee were considered to be independent Non-Executive Directors.

Tom Singer was appointed as Chair of the Audit Committee on 1 January 2021, taking over from David Adams. Tom is a Non-Executive Director of Mediclinic International plc and was, until recently, the Senior Independent Director and Chair of the Audit and Remuneration Committees at DP Eurasia NV. Previously, Tom served as CFO of InterContinental Hotels Group plc and Group Finance Director of British United Provident Association ("BUPA"), and, as such, is considered by the Board to have recent and relevant financial experience to chair the Committee. Each of the other independent Non-Executive Directors has, through their other business activities, significant experience in financial matters. The Audit Committee is considered to have competence relevant to the sector in which the Company operates. The effectiveness of the Audit Committee is reviewed at least annually through discussions at the Board and Audit Committee and through a formal Board survey.

The Company's Chair, Executive Directors, senior managers and key advisors are invited to attend meetings, as appropriate, in order to ensure that the Committee maintains a current and well-informed view of events within the business and reinforce a strong risk management culture. The Audit Committee meets according to the requirements of the Company's financial calendar. The meetings of the Audit Committee also provide the opportunity for the independent Non-Executive Directors to meet without the Executive Directors present and to raise any issues of concern with the internal audit team and external Auditor. There have been three such meetings in the period ended 2 April 2021 and nothing of note was reported.

Principal Responsibilities

Financial Reporting

• Review the interim and final financial statements of the Group and assess whether appropriate suitable accounting policies have been adopted, and whether management has made appropriate estimates and judgements. Assess the appropriateness of disclosures in the Annual Report and Accounts and ensure that it is fair, balanced and understandable.

Risk and Control Environment

• Assist the Board in achieving its obligations under the UK Corporate Governance Code in areas of risk management and internal control, focusing particularly on compliance with legal requirements, accounting standards and the Listing Rules.
• Review the risk management framework and the principal risks and mitigation strategies, including the investigation of fraudulent activity.

Internal Audit

• Review reports from Internal Audit on developments in the internal control framework to ensure that an effective system of internal financial and non-financial control is maintained on an ongoing basis.

External Audit

• Make recommendations to the Board on the reappointment of the external Auditor, including on effectiveness, independence, non-audit work undertaken (against a formal policy) and remuneration.

Policies

• Approve a formal Whistleblowing Policy whereby colleagues may, in confidence, disclose issues of concern about possible malpractice or wrongdoings by any of the Group's businesses or any of its employees without fear of reprisal, including arrangements to investigate and respond to any issues raised.
• Approve the Company's systems and controls for the prevention of bribery and corruption, including the receipt of any reports on non-compliance.
• Approve the Group's Tax Policy and published tax strategy.
• Approve the Group's Treasury Policy, including foreign currency and interest rate exposure.

The Audit Committee has reviewed its Terms of Reference and its composition during the year and believes that both remain appropriate.

Copies of the full Terms of Reference are available on the Company's website or on request from the Company Secretary.

The Terms of Reference for the Committees are available at www.halfordscompany.com/investors/governance

Matters Considered in Relation to the Financial Statements

In order to discharge its responsibility to consider accounting integrity, the Committee carefully considers key judgements applied in the preparation of the consolidated financial statements which are set out in the Consolidated Income Statements.

The Committee has considered the following key accounting judgements during the year:

Impairment of Goodwill Associated with the Group's Retail and Car Servicing Cash Generating Units (CGU):

• Following a number of business combinations across both CGUs, the Group holds significant goodwill. There are a number of factors that could impact on the future profitability of the business (e.g. loss of key customers, change in market behaviour) and, therefore, there is a risk that the business may not meet the growth projections necessary to support the carrying value of the intangible asset (see Note 11 of the Financial Statements); and
• The Audit Committee has received detailed reports from Halfords' finance team and reports from the external Auditor addressing this issue. The finance team has undertaken detailed work to consider the impairment of goodwill associated with the CGUs. Consideration has been given to ensuring that cash flow models, discount rates, sensitivity analysis and store and centre profitability are all reasonable. It was concluded that no impairment is required. The Committee concluded that it is satisfied with the accounting treatment of impairment of goodwill.

Valuation of Inventory Within the Retail Division:

• With the business holding a wide range of stock and changing consumer demands, some lines will not be sold or will be sold at below the carrying value. Provisions are made to reflect this. Given the difficulties in forecasting market trends, there is a risk that inventory provisions made will be inappropriate or incomplete (see Note 15 of the Financial Statements). Management has fully reviewed the inventory provision in the current year, with particular regard to the impact of COVID-19 and the effect this has had on differing stock categories, and believe the level of provisioning is appropriate. Range reviews are regularly undertaken to ensure that all discontinued inventory is identified; and
• The Audit Committee has received detailed reports from Halfords' finance team addressing this issue. The finance team has undertaken detailed work around the valuation of inventory within the Retail division. After consideration of the accuracy of the provisioning model, the completeness and accuracy of range reviews, and the reflection of these reviews within the provisions, the Committee concluded that it is satisfied with the accounting treatment of the valuation of inventory.

IFRS 16 'Leases'

The Group initially applied IFRS 16 Leases as at 30 March 2019. The work to collect the relevant data, implement a new accounting system and agree the appropriate adoption method, accounting policies and disclosures has been significant. During both the previous and current period, the Committee and external Auditor received regular updates to ensure that the Committee reviewed all aspects of IFRS 16 adoption and application and is satisfied that the methodology used, and the judgements and assumptions applied, are fair and reasonable. A number of adjustments have been required this year, these have been reviewed by the Audit Committee.

Group Reorganisation

The Group has undergone a review of its legal entity structure, with the primary objective of eradicating a dividend block arising in some of the intermediate holding legal entities across Halfords Group. This has resulted in streamlining the Companies across the Group and the first stage of the reorganisation has been accounted for in the plc accounts as at 2 April 2021.

Non-underlying Costs Related to the Closure of Non-Profit Making Stores and Centres

Following the strategic review of the Group's stores and centres, the decision was made to close 40 stores across the Retail business and 15 centres across the Autocentres business. The Committee reviewed the treatment of the costs related to these closures and is satisfied with the estimation of all associated costs and their relevant inclusion as a non-underlying item for the period.

External Auditor

BDO UK LLP present their audit plan, risk assessment, and audit findings to the Committee, identifying their consideration of the key audit risks for the year, and the scope of their work. These reports are discussed throughout the audit cycle.

Effectiveness of External Audit

The effectiveness of the external audit is considered throughout the year through, amongst other factors: assessment of the degree of the audit firm's challenge of key estimates and judgements made by the business; feedback from any external or internal quality reviews on the audit; and the wider quality of communication with the Committee.

During the year, the FRC conducted an Audit Quality Review of BDO's audit of the Group financial statements for the year ended 3 April 2020. The resulting assessment was "Limited improvements required", with no key findings. The Audit Committee has reviewed the FRC report and supports the actions proposed by BDO.

In addition, at its meeting in March 2021, the Committee reviewed the External Audit Planning document prepared by BDO. Following this, the Committee concluded that:

• The overall audit approach, materiality, threshold, and areas of audit focus were appropriate to the business; and
• The audit team possessed the necessary quality, expertise and experience to provide an independent and objective audit.

Approach to Appointment or Reappointment

BDO UK LLP was appointed as external Auditor to the Group in 2019 following a formal tender process. The Audit Committee considers that the relationship with the Auditor is working well and is satisfied with its independence, objectivity and effectiveness and has not considered it necessary to require BDO UK LLP to re-tender for external audit work this year. The Audit Committee has recommended to the Board, for approval by shareholders at the Annual General Meeting on 8 September 2021, the reappointment of BDO UK LLP as external Auditor. The Audit Committee monitors, and will continue to comply with, best practice and external guidance in respect of the frequency of audit tenders.

Approach to Safeguarding Objectivity and Independence if Non-Audit Services are Provided

The Audit Committee has established a policy to ensure that any non-audit services delivered by the external Auditor will not jeopardise objectivity and independence. The policy is consistent with the Ethical Standards for Auditors.

The policy specifies:

"The external Auditor can be used to provide non-audit services subject to any non-audit engagement proposal provided by the external Auditor being formally approved by the Audit Committee before contractual arrangements are entered into, except for activities set out in a list of prohibited activities. Other than for these, for each separate service proposed to be provided by the external Auditor, the Group Chief Financial Officer will prepare a note either to be tabled and minuted at an Audit Committee meeting or to be circulated via email to the Audit Committee members and the Chief Executive Officer giving a description of the work to be undertaken, the reasons why the external Auditor is involved in the proposal and how objectivity and independence has, and is seen to be, safeguarded.

In addition, the fees for any proposal for non-audit services will not exceed 70% of the three-year average statutory audit fees when taken into consideration with total fees for non-audit services already committed in the financial year.

Consent is required from the Audit Committee Chair, on behalf of the Audit Committee, before the external Auditor can be engaged for non-audit services."

In addition, the external Auditor follows its own ethical guidelines and continually reviews its audit team to ensure that its independence is not compromised.

An analysis of the fees earned by the external Auditor is disclosed in Note 3 to the Financial Statements.

Role and Effectiveness of Internal Audit

Internal Audit follows an annual risk-based programme of audits to review the effectiveness of the control environment. The Audit Committee reviews the annual audit programme for coverage and may revise it according to changing business circumstances or requirements. The Audit Committee ensures that there are sufficient resources to undertake the audit programme.

The Head of Internal Audit attends each Committee meeting, providing a summary of audit findings and an update on progress against the plan. The Committee also reviews the status of implementation of audit recommendations ranked by age and level of risk to the business. All internal audit reports are shared upon completion with the external Auditor. During the year, internal audits were carried out on AEO compliance (Authorised Economic Operator), Goods For Resale expenditure controls, Halfords for Business, Cycle to Work, Insurance and IT General Controls.

Alongside the Internal Audit programme, the team also continued to drive the Group's risk management framework, with key areas of progress outlined below. Internal Audit reports to the Chief Financial Officer but maintains direct and regular communication to the Audit Committee Chair outside of Committee meetings.

The Audit Committee is satisfied that the Internal Audit team has the quality, experience, and expertise appropriate for the business.

Whistleblowing

A Whistleblowing Policy and procedure (the "Policy") enables colleagues to report concerns on matters affecting the Group or their employment, without fear of recrimination. Posters publicising whistleblowing channels are distributed to all stores, Autocentres, Distribution Centres and the Support Centre.

The Policy was reviewed and approved by the Audit Committee and the Company Secretary provides the Audit Committee with a regular summary of whistleblowing contacts and resolutions.

Anti-Bribery and Corruption Policy

The Group's Anti-Bribery and Corruption Policy statement reinforces that the Halfords Board is committed to conducting its business affairs in a way that ensures it does not engage in or facilitate any form of corruption. It is Halfords' policy to prohibit all forms of corruption amongst its colleagues, suppliers and any associated parties acting on its behalf. The Group has a detailed Anti-Bribery and Corruption Policy and maintains a Gifts and Hospitality Register. Anti-bribery expectations are set out in standard purchasing terms and conditions. Face-to-face and online training has been provided to colleagues to raise awareness of anti-bribery and corruption legislation.

The Audit Committee has requested that anti-bribery and corruption safeguards are periodically reviewed by Internal Audit.

Internal Control and Risk Management

The Board is responsible for the Group's risk management processes and the system of internal control. The Audit Committee contributes to this purpose by providing oversight and challenge to the Group's risk management framework. A newly formed Executive Risk Committee reports to the Audit Committee on the risk management framework, providing insight on principal and emerging risks, risk appetite and ongoing updates on regulatory and compliance risk.

At each meeting during the year, the Committee received a presentation on the Group's control framework in preparation for changes in the UK's governance and reporting.

Further details of the Group's internal control and risk management framework are set out in the Our Principal Risks and Uncertainties.

CMA Order 2014

Statement of Compliance

The Group confirms that it was compliant with the provisions of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 during the financial year ended 2 April 2021.