REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS

Opinion
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 3 December 2017 and of the group’s profit for the 53 week period then ended;
  • the group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union;
  • the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; 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 Ocado Group plc (the ‘parent company’) and its subsidiaries (the ‘group’) which comprise:
  • the consolidated income statement;
  • the consolidated statement of comprehensive income;
  • the consolidated and parent company balance sheets;
  • the consolidated and parent company statements of changes in equity;
  • the consolidated and parent company statement of cash flows; and
  • the related Notes 1 to 5.5 to the consolidated financial statements and the related Notes 1 to 5.2 of the parent company financial statements.
The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions 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 public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC’s Ethical Standard were not provided to the group or the parent company.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Summary of our audit approach
Key audit mattersThe key audit matters that were identified in the current and prior year are:
  • accounting for commercial income arrangements – there is significant judgement as to the quantum and timing of income recognised from volume rebates and there is a risk that promotional or media campaigns may not be delivered at all or in the agreed timeframe; and
  • capitalisation of internal development costs – there is significant judgement in assessing if the criteria of IAS 38 Intangible Assets are met. In particular, we focus on the technical feasibility of projects, the probability of future economic benefits and whether assets are impaired.
The key audit matters that were identified in the current year are:
  • accounting for Ocado Solutions contracts – the range of deliverables in these agreements is complex and requires judgement, particularly in respect of the timing of revenue recognition.
Changes to key audit matters from the prior yearThe previous auditor’s report included two key audit matters that are not included as key audit matters in our audit report this year: share-based payments and deferred tax asset recognition. We concluded they were not key audit matters for the following reasons:
  • for share-based payments, no new material schemes were introduced in the year and the charge for the year was consistent with the prior period £6.9m (2016: £7.1m); and
  • as set out in Note 2.8 to the financial statements, Ocado has an unrecognised deferred tax asset of £40.5m (2016: £45.8m). Management’s approach to recognition and the expected future levels of profitability was appropriately consistent with the prior year.
MaterialityWe determined materiality to be £6m based on revenue, consistent with the approach adopted by the previous auditor.
Scoping

The scope of our group audit includes all significant trading companies in the UK, whose results taken together account for over 97% of the group’s revenue, profit after tax and net assets. All entities are managed from one central location in the UK and all audit work is completed by the group audit team. We performed analytical procedures over the remaining trading entities, the group’s captive insurance company in Malta and development operations in Poland and Spain.

The group audit team also audit the group’s joint venture with Wm Morrisons Supermarkets Plc ("Morrisons").

Conclusions relating to principal risks, going concern and viability statement

Going concern

We have reviewed the directors’ statement in Note 1.5 to the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and their identification of any material uncertainties to the group’s and company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements.

We are required to state whether we have anything material to add or draw attention to in relation to that statement required by Listing Rule 9.8.6R(3) and report if the statement is materially inconsistent with our knowledge obtained in the audit.

We confirm that we have nothing material to report, add or draw attention to in respect of these matters.

Principal risks and viability statement

Based solely on reading the directors’ statements and considering whether they were consistent with the knowledge we obtained in the course of the audit, including the knowledge obtained in the evaluation of the directors’ assessment of the group’s and company’s ability to continue as a going concern, we are required to state whether we have anything material to add or draw attention to in relation to:

  • the disclosures in How We Manage Our Risks that describe the principal risks and explain how they are being managed or mitigated;
  • the directors' confirmation in How We Manage Our Risks that they have carried out a robust assessment of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity; or
  • the directors’ explanation in How We Manage Our Risks as to how they have assessed the prospects of the group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

We are also required to report whether the directors’ statement relating to the prospects of the group required by Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit.

We confirm that we have nothing material to report, add or draw attention to in respect of these matters.

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. These matters included 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.

 
Accounting for commercial income arrangements

Key audit matter description

Key audit matter

The value recognised in relation to commercial income arrangements (volume rebates, promotional allowances and media income) is significant in relation to the results for the period with the judgements applied giving rise to a risk of potential fraud or error.

Volume rebates

There is significant judgement as to the quantum and timing of income recognised from volume rebates in particular the specific contractual terms negotiated through the sourcing agreement with Waitrose referred to in the Directors’ Report.

Waitrose has supplier agreements which span the Ocado period end and which are not typically settled for several months after the Ocado period end, as a result there is a judgement over the amount to recognise as income. This has been identified as a Key Source of Estimation Uncertainty in Note 1.4.

Promotional allowances and media income

The volume and quantum of arrangements and real time delivery increase the risk that campaigns may not be delivered at all or in the agreed timeframe.

Refer to the Audit Committee statement and Note 2.1 (financial statement disclosures including the related Critical Accounting Judgements and Key Sources of Estimation Uncertainty in Note 1.4).

How the scope of our audit responded to the key audit matter

Response to risk

Our audit procedures included a range of tests as set out below:

Volume rebates

Our audit procedures in relation to the Waitrose year end accrual included:

  • meeting Waitrose management to assess the controls and processes in place over the tracking of rebate income;
  • assessing Ocado Management’s controls over their calculation of the year end rebate accrual which included obtaining a detailed analysis of Waitrose supplier agreements, their contractual terms and previous settlements;
  • obtaining a confirmation directly from Waitrose of the information used by Management in their year-end estimate;
  • testing the accuracy of the accrual and agreeing the inputs to supporting documentation;
  • agreeing the terms of a sample of agreements to underlying contracts and then to the terms used in the calculation of the rebate accrual;
  • testing a sample of invoices to Waitrose to confirm cash settlement; and
  • analysing historic trends in the settlement of the Waitrose rebate accrual and using sensitivity analysis to assess whether the accrual was reasonable.

Promotional allowances and media income

We focused our procedures on whether an agreement for the promotional or media income recognised existed, whether the relevant promotion or media advertising had taken place, and whether the value was recorded in the appropriate period.

Our testing procedures included:

  • assessing the controls over the process for recognising such income including the requirement for an approved media plan or supplier agreement and detailed margin analysis on product categories highlighting unusual variances;
  • holding meetings with the principal buyers to corroborate our understanding;
  • agreeing a sample of media campaigns and promotions from the promotions and media systems to the underlying agreements; and
  • circulating a sample of independent confirmations to suppliers.

Key observations

Key observations

Based on the audit procedures performed, we are satisfied that commercial income has been recognised appropriately and reflects the substance of the arrangements.

Capitalisation of internal development costs

Key audit matter description

Ocado invests significantly in developing the software it uses to operate its retail business, to increase capacity and efficiency of Customer Fulfilment Centres (“CFCs”), and to enhance its Ocado Solutions technology and distribution capability.

This year Ocado has capitalised internal development costs of £42.7m (2016: £34.9m) to intangible assets and £11.8m (FY16: £10.1m) to property, plant and equipment.

We identified this as a key audit matter due to the significant amounts invested and the potential for fraud or error as a result of the judgement involved in assessing whether the criteria for capitalisation under IAS 38 Intangible Assets are met.

We focused our audit procedures on the risks:

  • that capitalised costs relate to projects that are not currently technically feasible or for which the probability of future economic benefits is not yet proven;
  • of impairment of existing assets, where new technology supersedes previously capitalised projects or inappropriate amortisation rates are used; and
  • of potential for fraud or error inherent in judgements over appropriate capitalisation.
Refer to Audit Committee statement, Notes 3.1 and 3.2 to the financial statements and the disclosures in respect of Critical Accounting Judgements and Key Sources of Estimation Uncertainty in Note 1.4.

How the scope of our audit responded to the key audit matter

Our audit procedures included the following:

  • reviewing Management’s controls over their process for capitalisation, which include detailed pre-approval papers setting out consideration of compliance with the criteria of IAS 38 Intangible assets. We also reviewed controls over the process for assessing impairment, for example a half-yearly review of project status involving project managers and finance;
  • for the most significant projects meeting with project managers responsible to gain an understanding of the project, and to inform our assessment as to the feasibility and economic benefits of individual projects;
  • testing a sample of project additions in the year against the IAS 38 capitalisation criteria;
  • performing a number of audit procedures on internal staff costs capitalised including substantive testing to timesheets, discussions with project managers on the quantum of hours and nature of work attributable to the project, reviewing rates per hour by reference to payroll data and the standard rate per hour of IT development and engineering staff;
  • separately reviewing a sample of the most significant projects for indicators of impairment. This included reviewing the profile of all project additions to assess whether any projects had been abandoned or put on hold and held discussions with project managers to challenge whether the assets are still in use; and
  • performing a series of analytic tests on the costs capitalised to identify items that in our judgement appeared unusual, and obtaining explanations and supporting evidence from Management, for example challenging projects with limited or negative costs capitalised in the period.

Key observations

Based on the audit procedures performed, we are satisfied that amounts capitalised appropriately reflect the requirements of IAS 38.

Accounting for Ocado Solutions contracts

Key audit matter description

The introduction of Segmental Reporting during the year has placed greater emphasis on the £117.7m of revenue recognised in the Ocado Solutions business. This includes revenue being recognised for logistics and distribution services as well as the delivery of hardware and software solutions.

There are currently a limited number of Ocado Solutions contracts therefore results may be materially impacted by the revenue recognition profile of these contracts.

The accounting for Ocado Solutions contracts, which generally have a range of deliverables, is complex and requires judgement, particularly as to the timing of revenue recognition. Ocado Solution contracts can involve significant upfront payments and thus there is a potential risk of misstatement (due to fraud or error) if an inappropriate approach to revenue recognition is taken.

Refer to the Audit Committee report, Note 2.2 to the consolidated financial statements on segmental reporting and Note 1.4 to the consolidated financial statements on the related Critical Accounting Judgements and Key Sources of Estimation Uncertainty.

How the scope of our audit responded to the key audit matter

Our audit procedures focused on:

  • understanding the substance of the contractual requirements, particularly for those contracts that involve designing and developing customised software solutions; and
  • considering the appropriate accounting literature, notably IAS 18 Revenue and also, for those contracts that involve designing and developing bespoke software solutions, IAS 11 Construction Contracts.

Our work included:

  • reviewing and assessing contractual agreements in order to identify the key accounting considerations such as the identification of the deliverables within the contracts;
  • meeting with the relevant commercial managers to understand the substance of the agreements;
  • obtaining evidence to support transactions such as invoices for services, cash receipts, or proof of delivery for software solutions; and
  • assessing whether the accounting treatment applied by Management is in line with the appropriate accounting standards.

Key observations

We are satisfied that revenue from the Ocado Solutions contracts has been recognised appropriately and in line with the contractual agreements and the relevant accounting standards.

Refer to Note 2.1 in the consolidated financial statements.

Our application of materiality

We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Group materiality

We determined materiality for the group to be £6 million (2016: £5 million).

Basis for determining materiality

We determined materiality to be £6 million based on revenue. As a percentage materiality is 0.4% of revenue (2016: 0.4% of revenue).

Parent company materiality was determined as less than 0.5% of total assets.

Rationale for the benchmark applied

This has been based on professional judgement and the requirement of auditing standards. We believe revenue to be the financial measure most relevant to users of the financial statements given Ocado’s performance, in particular its levels of profitability and the significant investment in technology.

It also provides a consistent basis to the approach taken by the previous auditor.

We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £300,000 (2016: £235,000), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.

An overview of the scope of our audit

This was our first year as auditor of Ocado and as such our audit approach included an investment of time to understand the business. We reviewed the audit work papers of the previous auditor, visited each of the three operating Customer Fulfilment Centres (“CFCs”) and met with senior management across the group and members of the Audit Committee. We gained a detailed understanding of key processes and controls supporting the group’s transactions and assessed the risks of material misstatement for each account balance or disclosure item. Taken together, this informed our group audit scope.

As set out in Note 2.2 to the financial statements, during the year the group started to consider performance for two segments: the established online retail and distribution business; and the Ocado Solutions business set up to exploit the group’s significant investment in technology. The first new deals for this business were signed in the period and the results for the existing Morrisons contract were included in the segment. Our audit procedures cover both segments.

The scope of our group audit includes all significant trading companies in the UK, including the joint venture with Morrisons. The results taken together for these entities account for over 97% of the group’s revenue, profit after tax and net assets. For the entities not subject to detailed audit work, the group’s captive insurance company in Malta and the development operations in Poland and Spain, we tested the consolidation process and carried out analytical procedures to confirm our conclusion there were no material misstatements in the aggregated financial information.

All entities are managed from one central location in the UK and all audit work is completed by the group audit team, led by the Senior Statutory Auditor.

Other information

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.

In this context, matters that we are specifically required to report to you as uncorrected material misstatements of the other information include where we conclude that:

  • Fair, balanced and understandable – the statement given by the directors that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the group’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or
  • Audit committee reporting – the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee; or
  • Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the directors’ statement required under the Listing Rules relating to the company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R (2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code.
We have nothing to report in respect of these matters.
Responsibilities of directors

As explained more fully in the directors’ responsibilities statement, 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 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 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 company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS

Opinions on other matters prescribed by the Companies Act 2006

In our opinion the part of the directors’ remuneration report to be audited has been properly prepared in accordance with 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.
In the light of the knowledge and understanding of the group and the parent company and their environment obtained in the course of the audit, we have not identified any material misstatements in the strategic report or the directors’ report.
Matters on which we are required to report by exception

Adequacy of explanations received and accounting records

Under the Companies Act 2006 we are required to report to you if, in our opinion:

  • we have not received all the information and explanations we require for our audit; or
  • 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 are not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.

Directors' remuneration

Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been made or the part of the directors’ remuneration report to be audited is not in agreement with the accounting records and returns.

We have nothing to report in respect of these matters.
Other matters

Auditor tenure

Following the recommendation of the audit committee, we were appointed by the Board of Director’s on 3 May 2017 to audit the financial statements for the 53 weeks ending 3 December 2017 and subsequent financial periods. This is our first year as external auditor.

Consistency of the audit report with the additional report to the audit committee

Our audit opinion is consistent with the additional report to the audit committee we are required to provide in accordance with ISAs (UK).

Mark Lee-Amies FCA (Senior Statutory Auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, UK
6 February 2018