Key audit matter description | 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 | 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.
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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 |
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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.
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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 |
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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.
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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. |