Franchise Brands plc Annual Report and Accounts 2018 45 Financial Statements Governance Strategic Report Risk of misstatement in revenue recognition How We Addressed the Key Audit Matter in the Audit As detailed in note 1 to the Group financial statements the Group has adopted IFRS 15 Revenue from contracts with customers during the financial period. The adoption of IFRS 15 has resulted in changes to the revenue recognition policies applied by the Group. There are a number of judgements involved in the application of this new standard. In view of the judgements involved, as well as management being in a position to be able to override controls, we presumed a risk of fraud within this area. Management service revenue The application of IFRS 15 has resulted in a change to the timing of revenue recognition based on management’s assessment of when control has transferred and the Group has an enforceable right to payment. A key part of the franchisee arrangement is invoicing to the end customer and therefore management consider it appropriate to recognise revenue once this invoicing service has been performed. Agent vs principal Significant management judgement is also required in assessing principal vs agent considerations, as disclosed in note 2 of the financial statements and in the Financial Review section of the Strategic Report in respect of Key Account and Commercial customers. National advertising fund and central advertising funds As a result of the application of IFRS 15 there has been a change in the presentation of the income and expenditure relating to these advertising funds. As the funds are controlled by the group the income and expenditure are now presented gross. Under IAS 18 the income and expenditure were presented net. There is a risk that the adjustments to the opening reserves are misstated or incomplete and also that the disclosures made to the Group financial statements do not adequately explain the impact of the adoption of IFRS 15. We have addressed the matter as follows: • We reviewed the group’s revenue recognition policies for all revenue streams. We evaluated Management’s assessment of the performance obligations in relation to IFRS 15 criteria and challenged the key judgements made by Management. • We corroborated the key points to contracts and have held meetings with management to challenge the assumptions and judgements made. • In respect of Metro Rod Limited, we reviewed a sample of Franchisee agreements and customer contracts and considered the key terms against the principal vs agent considerations as noted within IFRS 15 to verify management’s judgement. We further ensured that the accounting policy for the arrangements has been appropriately applied. • We reviewed the accuracy and completeness of the transitional adjustments as set out in note 1. • We tested a sample of the contract assets recognised to ensure that appropriate audit evidence was in place to support the assets and that these met the definition of a contract asset in accordance with IFRS 15. • We reviewed the accounting policies established by the Group by reference to the requirements of IFRS 15 and have reviewed the adequacy of the disclosures within the financial statements. Based on the work performed we consider that revenue has been recognised appropriately and is in accordance with the Group’s revenue recognition accounting policy.