Page 71 - NZPM Annual Report 2020

Key audit matter How our audit addressed the key audit matter

Revenue Recognition relating to rights to return Our audit procedures included the following:
The Group’s Statement of Financial Position includes • We gained an understanding of the Group’s processes
a refund liability and right to returned goods asset of and procedures surrounding returns for goods sold.
$1.5m and $1m respectively as at 31 March 2020. • We obtained management’s calculation of items
These are disclosed in Note 21 and 13 of the financial recognised in the financial year which are expected to
statements. be returned subsequent to year end.
• We tested the mathematical accuracy of the
Revenue is recognised when control transfers to the calculation including the gross margin on returns.
customer, however the Group allows sales returns for an
indeterminate period. Due to this practice, there is a risk • We tested the source data of the calculation,
that revenue may be recognised for which the company comprising the actual credit notes issued throughout
the year, and the period of the original sale being
expects such items to be returned. credited.
This was an area of focus due to the amount of audit • We evaluated and challenged management’s key
effort applied and the estimates involved in determining assumptions. In assessing the reasonableness of the
the level of returns. estimated level of future returned goods, we reviewed
the level of ‘goods returned’ credit notes issued during
the year.

Provision for impairment of inventories Our audit procedures included the following:
Inventory held by the Group as 31 March 2020 totalled • We gained an understanding of processes and
$36.8 million (gross) including $34.6 million of finished procedures surrounding the calculation of the
goods. inventory provision including how management
identifies inventory that should be provisioned.
As at 31 March 2020, the Group had a provision for • We evaluated managements key assumptions used in
impairment of inventories of $0.7 million as set out in determining the inventory provision.
Note 14 of the financial statements.
• We tested the mathematical accuracy of the provision
Inventory is valued at the lower of cost or net realisable calculation.
value. • We assessed the reasonableness of the slow moving
and excess stock balance which is used to determine
The inventory provision was determined based upon the provision by corroborating the purchases, sales
management’s assessment of slow moving and excess and inventory data.
stock.
• We performed our own independent assessment of
This was an area of focus due to the significance of inventory provision, including a retrospective review of
the inventory balance and the judgements involved in inventory write offs.
determining the appropriate level of provisioning.

Adoption of new accounting standards – IFRS 16 Our audit procedures included the following:
This is the first year of adoption for NZ IFRS 16: Leases • We gained an understanding of the Group’s processes
(‘NZ IFRS 16’) which will require all operating leases to and controls with respect to NZ IFRS 16.
be recognised on the balance sheet. At 1 April 2019, the • We tested the completeness of management’s
group recognised $40.5 million of right-of-use assets and calculation by reconciling the Group’s existing lease
$40.8 million of lease liabilities on the balance sheet so commitments as at 31 March 2019 to management’s
application of NZ IFRS 16 has had a significant impact on calculation.
the financial statements. The Group applied the standard • Evaluated and challenged the assumptions used in
using the modified retrospective method of application. determining the impact of NZ IFRS 16 which included:
Refer to notes 2, 18 and 24 of the financial statements • Determining lease terms including extension options
for lease disclosures. that are reasonably certain to be exercised; and
The adoption of NZ IFRS 16 is an area of focus because • Assessing the appropriateness and consistency of
of the significance of the right-of-use asset and lease the incremental borrowing rates used.
liability balances to the financial statements as a whole • We agreed a sample of leases to the original lease
and the level of judgement that was required when contract terms or other supporting documentation. We
applying the requirements, these judgements being: recalculated the expected right-of-use asset and lease
liability for each of those leases included in our sample
• Determining whether extension or termination to assess the accuracy of management’s calculation as
options are reasonably certain to be exercised when at 1 April 2019.
identifying the lease term, and
• Determining the incremental borrowing rate to be
used to discount each lease.

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NZPM GROUP LIMITED ANNUAL REPORT 2020