Report on the financial statements
In our opinion, the accompanying consolidated financial statements of XP Power Limited (the "Company") and its subsidiary corporations (the "Group") and the balance sheet of the Company are properly drawn up in accordance with the provisions of the Companies Act, Chapter 50 (the "Act") and International Financial Reporting Standards ("IFRS") as adopted by the European Union, so as to give a true and fair view of the consolidated financial position of the Group and the financial position of the Company as at 31 December 2018, and of the consolidated financial performance, consolidated changes in equity and consolidated cash flows of the Group for the financial year ended on that date.
What we have audited
The financial statements of the Company and the Group comprise:
- the consolidated statement of comprehensive income of the Group for the year ended 31 December 2018;
- the consolidated balance sheet of the Group as at 31 December 2018;
- the balance sheet of the Company as at 31 December 2018;
- the consolidated statement of changes in equity of the Group for the year then ended;
- the consolidated statement of cash flows of the Group for the year then ended; and
- the notes to the financial statements, including a summary of significant policies.
The basis for our opinion
We conducted our audit in accordance with International Standards on Auditing ("ISAs"). Our responsibilities under those standards are further described in the What are we responsible for section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
We are independent of the Group in accordance with the Accounting and Corporate Regulatory Authority's Code of Professional Conduct and Ethics for Public Accountants and Accounting Entities ("ACRA Code") together with the ethical requirements that are relevant to our audit of the consolidated financial statements in Singapore, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the ACRA Code.
Our audit approach – overview
The overall materiality which we have used to plan our work for the Group amounted to £1.77 million, which represented 4.7% of profit before taxation. The overall materiality applied to the audit of the Company balance sheet amounted to £1.15 million.
We performed an audit of the complete financial information and of significant financial statement line items for significant reporting units which included operations based in North America, Europe and Asia. This accounted for approximately 91% of Group revenues and 95% of Group assets.
Key audit matters
We identified the following key audit matters:
- Capitalised product development; and
- Business combination.
How we determined materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole.
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range of materiality allocated across components was £0.35 million – £1.6 million. Certain components were audited to a local statutory audit materiality that was also less than our overall Group materiality.
Based on our professional judgement, we determined that the benchmark of profit before taxation is appropriate as it reflects the Group's growth and investment plans. We believe this is a key measure used by shareholders in assessing the performance of the Group.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £177,000 as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
How we tailored the audit scope
The Group operates across North America, Europe and Asia. In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed at the local operations by us, as the Group engagement team, or component auditors from other PwC network firms operating under our instruction. Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those local operations to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the Group financial statements as a whole. In the current year, the Group engagement team visited the Group's operations in North America.
We designed our audit of the Group by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where management made subjective judgements, for example in respect of significant accounting estimates, that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the management that represented a risk of material misstatement due to fraud.
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the Group, the accounting processes and controls, and the industry in which the Group operates.
Having obtained sufficient appropriate audit evidence of the local operations, we performed audit procedures at the Group level over the consolidation process, goodwill, capitalised product development, taxation and business combination.
What are the key audit matters
Key audit matters are those matters that, in the auditor's professional judgement, were of most significance in the audit of the financial statements of the current period. Key audit matters include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and the directing of the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, 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. This is not a complete list of all risks identified by our audit.
|Key audit matters||How did our audit address these|
Refer to the Audit Committee Report (Report from the Chair of the Audit Committee), Note 3 (Critical accounting judgements and key sources of estimation uncertainty – Impairment of Goodwill) and Note 11 (Goodwill).
The Group has goodwill of £54.1 million at 31 December 2018 contained within three cash-generating units ("CGUs") defined by its geographical split – North America, Europe and Asia.
We focused on this area due to the relative size of the carrying amount of goodwill, which represented 23% of total assets, and because management's assessment of the "value-in-use" of the Group's CGUs involves significant judgements and assumptions about the future results of the business and the discount rates applied to future cash flow forecasts.
Key judgements and assumptions about the future results of the business include: revenue and profit growth rates, expected changes to overhead costs as well as risks specific to the three CGUs.
We assessed the appropriateness of management's identification of the Group's CGUs and the process to test for goodwill impairment. There were no significant issues noted.
We evaluated the suitability and appropriateness of the impairment model as prepared by management and noted no significant exceptions.
We assessed the reasonableness of the inputs used in the derivation of the discount rates. We also focused on understanding and challenging management's plans for future growth for each of the three CGUs. Forecasted growth in revenue and profits are driven by constant innovation in the development of new product families as well as the broadening of the customer base in the three CGUs. We benchmarked key market-related assumptions in management's forecasts such as revenue and profit growth rates and changes in the overhead costs with relevant economic and industry indicators and considered that such targets as set by management were achievable. Sensitivity analyses were also performed on the discount rates and growth rates. We agreed with management that no impairment was required.
Capitalised product development
Refer to the Audit Committee Report (Report from the Chair of the Audit Committee), Note 3 (Critical accounting judgements and key sources of estimation uncertainty – Recoverability of Capitalised R&D) and Note 12 (Intangible assets).
Part of the Group's strategy is to invest in research and development to create new products. As at 31 December 2018, the carrying value of product development costs capitalised as an intangible asset is £20.1 million, of which £6.2 million was capitalised in the current financial year.
We focused on the appropriateness of capitalisation of product development costs due to the relative size of the carrying amount of this intangible asset, which represented 9% of total assets, and because significant judgement is involved in determining whether the criteria to capitalise such product development costs, as set out in IAS 38, have been fulfilled and that the capitalised amounts are recoverable.
We also identified the useful lives of the capitalised product development costs as an area involving significant judgement. The carrying value of the capitalised product development costs is heavily dependent on the useful lives of the developed products. Management determined the useful lives of the developed products based on the expected life cycle of these products, taking into consideration expected customer demand and technological innovation.
We assessed the appropriateness of capitalisation of product development costs by ensuring compliance with the criteria to capitalise product development costs as set out in IAS 38, and challenged management through discussions and qualitative reviews of the products' feasibility. We also tested the accuracy and allocation of capitalised material costs and labour costs. Management was able to support the capitalisation of product development costs.
For selected samples of developed products, we reviewed the actual sales during the year along with projected sales to ensure that the capitalised development costs are supported by demand and are recoverable. For selected samples of products in development, we reviewed the project business case, forecasted demand, and other supporting analysis to support the recoverability of these products.
In the assessment of the useful lives of the capitalised product development costs, we performed a benchmarking exercise to compare the useful lives of the capitalised product development costs against other companies within the same industry. The useful lives as determined by management are in line with that of the industry and consistent with our understanding of the life cycle of the products.
Refer to the Audit Committee Report (Report from the Chair of the Audit Committee), Note 12 (Intangible assets), Note 31 (Business combination)
On 25 May 2018, the Group acquired the assets and business of Glassman High Voltage ("Glassman"), a US-based designer and manufacturer of High Voltage High Power conversion products. The final purchase consideration was US$47.5 million (£35.7 million). Management assessed that the acquisition of Glassman qualifies as a business combination by applying the definition in IFRS 3.
Management determined that the fair value of the net identifiable assets acquired was US$30.8 million (£23.2 million) with US$20.8 million (£15.7 million) relating to intangible assets that arose from the business combination. The valuation of the intangible assets was performed as part of the Purchase Price Allocation.
We focused on the intangible assets arising from the business combination as a significant area of judgement. The valuation methodology, as well as the inputs and assumptions in the model, will affect the fair value of the intangible assets.
The goodwill arising from the acquisition of Glassman of US$16.6 million (£12.5 million) is also highly dependent on the fair value of the identifiable assets acquired and the liabilities assumed at the acquisition date.
We reviewed management's assessment that the acquisition of Glassman should be accounted for as a business combination and determined that it was appropriately performed in accordance with the definition set out in IFRS 3.
We assessed the appropriateness of the identifiable assets acquired and the liabilities assumed at the acquisition date by reviewing the clauses laid out in the purchase agreement. We also reviewed management's procedure for determining the fair value of the net identifiable assets acquired and noted no significant exceptions.
We reviewed the appropriateness of recognition of the identified intangible assets in accordance with IAS 38. We agreed with management's assessment that the intangible assets are separately identifiable and the Group has control over the future economic benefits flowing from the intangible assets.
We reviewed the useful lives of the identified intangible assets as determined by management and consider these to be reasonable.
The valuation methodologies used for determining the fair values of the identified intangible assets were also assessed to be appropriate.
We involved valuation specialists to assist in the assessment of the models and key assumptions including discount rate, attrition rates, royalty rates and others. We focused on understanding and challenging management's inputs into the valuation model, which will have an impact on the fair value of the intangible assets. We assessed the projected future revenue growth and margins based not only on the historical performance of Glassman, but also relevant economic and industry indicators and considered such projections, as set by management, to be reasonable.
We tested the calculation of the goodwill arising from the acquisition of Glassman, being the difference between the total purchase consideration and the fair value of the net identifiable assets and noted that management's computation was in line with IFRS 3.
Also, the goodwill arising from the acquisition has been determined by management to be part of the North American CGU (please see key audit matter "Goodwill" in the Independent Auditor's Report). We have assessed management's determination of the CGU and noted no significant exceptions.
Information other than the financial statements and auditor's report thereon
Under the UK Listing Rules ("Listing Rules") we are required to review the Directors' statement, in relation to going concern. We have nothing to report having performed our review.
The Directors' assessment of the prospects of the Group
Under the Listing Rules we are required to review the Directors' statement that they have carried out a robust assessment of the principal risks facing the Group and the Directors' statement in relation to the longer-term viability of the Group, set out in the Managing Our Risks section. Our review was substantially less in scope than an audit and only consisted of making enquiries and considering the Directors' process supporting their statements; checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit. We have nothing to report having performed our review.
Corporate governance statement
Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to 11 further provisions of the UK Corporate Governance Code, set out in the "Accountability" section within the Corporate Governance Report. We have nothing to report having performed our review.
Management is responsible for the other information. The other information comprises the "Overview" section, "Strategic Report" , "Governance Report", and the "Financials" section. Other information, as defined in this section, does not include matters that we are required to review and report on under the Listing Rules, as described above.
Our opinion on the financial statements does not cover the other information and we do not and will 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, 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. We have nothing to report in this regard.
Responsibilities for the financial statements and the audit
What are Management and Directors responsible for
Management is responsible for the preparation of financial statements that give a true and fair view in accordance with the provisions of the Act and IFRSs as adopted by the European Union, and for devising and maintaining a system of internal accounting controls sufficient to provide a reasonable assurance that assets are safeguarded against loss from unauthorised use or disposition; and transactions are properly authorised and that they are recorded as necessary to permit the preparation of true and fair financial statements and to maintain accountability of assets.
In preparing the financial statements, management is responsible for assessing the Group'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 management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
The Directors are responsible for overseeing the Group's financial reporting process.
What are we responsible for
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 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.
As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:
- Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
- Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control.
- Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
- Conclude on the appropriateness of management's use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going concern.
- Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
- Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.
We communicate with the Audit Committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide the Audit Committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with the Audit Committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current year and are therefore the key audit matters. We describe these matters in our auditor's report, unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
Report on other legal and regulatory requirements
In our opinion, the accounting and other records required by the Act to be kept by the Company and by those subsidiaries incorporated in Singapore of which we are the auditor, have been properly kept in accordance with the provisions of the Act.
The engagement partner on the audit resulting in this independent auditor's report is Hans Koopmans.
Public Accountants and Chartered Accountants
5 March 2019