46 Franchise Brands plc Annual Report and Accounts 2018 Key audit matters continued Impairment of goodwill and intangible assets How We Addressed the Key Audit Matter in the Audit Refer to the Accounting Policies on page 55 and Note 11 on page 65. The Group has goodwill and indefinite life intangible assets, which requires management to test these annually for impairment. There is a high degree of management judgement in assessing the value in use of the Cash Generating Units (“CGU”) to which the Goodwill and Intangible assets are allocated and therefore determining any potential impairments. There is therefore a significant risk that impairment of these assets is not appropriately recognised in accordance with applicable Financial Reporting Standards. We obtained the impairment analysis performed by management for each CGU. We challenged this impairment analysis and considered the reasonableness of management’s key judgements, Our work included; • Challenging the future trading projections by reference to current performance and the accuracy of prior year forecasting; • Challenging the discount rate applied; • Checking the impairment analysis for logical and arithmetic accuracy and to ensure that it has been undertaken in accordance with IAS 36; • Challenging the long term growth rate; • Assessing whether the forecasts adopted in the impairment review were Board approved and are consistent with those used in the going concern assessment; • Performing sensitivity analysis to understand the relative impact of changes in the key assumptions within the impairment models, as well as to confirm the appropriateness of Management’s disclosure of sensitivities in respect of the impairment review. Based on our procedures we noted no exceptions and found Management’s key assumptions to be within a reasonable range. We read the disclosures in the financial statements and found them to be consistent with the information we obtained during the course of our audit. Our application of materiality We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. For planning, we consider materiality to be the magnitude by which misstatements, individually or in aggregate and including omissions, could reasonably be expected to influence the economic decisions of reasonable users that are taken on the basis of the financial statements. The materiality for the Group financial statements as a whole was set at £140,000 (2017: £104,000). This was determined with reference to a benchmark of profit before tax, of which this represents 5%, which we consider to be one of the principal considerations for members of the Group in assessing the financial performance of the business. The materiality for the Parent Company financial statements was set at £90,000 (2017: £94,000). This was determined with reference to a benchmark of 3% of net assets limited to the component materiality set for the audit of the Group. In order to reduce to an appropriately low level the probability that any misstatements exceed materiality we use a lower materiality level, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole. Performance materiality for the group financial statements was set at £105,000 (2017: £78,000) and for the parent company £67,500 (2017: £71,000), representing 75% of materiality. The performance materiality threshold was selected based on the expected low level of misstatements and the relatively low number of accounts that are subject to management estimation. INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF FRANCHISE BRANDS PLC continued For the year ended 31 December 2018