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critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the f-1 index communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. evaluation of the accounting for and disclosure of cryptocurrencies held as disclosed in note 3 to the consolidated financial statements, the company’s cryptocurrencies held as of december 31, 2020, which mainly consist of bitcoin, are accounted for as indefinite-lived intangible assets, and have been included in current assets on the consolidated balance sheet. the company’s cryptocurrencies as of december 31, 2020 were approximately $11,626,000. we identified the accounting for and disclosure of cryptocurrencies held as a critical audit matter for the following reasons. currently, no authoritative guidance exists for the accounting for and disclosure of cryptocurrencies held in accordance with accounting principles generally accepted in the united states (“gaap”). the company’s management has exercised significant judgment in their determination of how existing gaap should be applied to the accounting for cryptocurrencies held, the associated financial statement presentation and accompanying footnote disclosures. in addition, the accounting for cryptocurrencies involves the company’s information technology (“it”) environment as such assets are held in digital cold storage wallets. the primary procedures we performed to address this critical audit matter included the following: •tested the design and effectiveness of certain internal controls over the company’s digital cold storage wallets with the assistance of our it professionals; •performed an observation of the company’s digital cold storage wallets; •evaluated management’s rationale for the application of accounting standards codification (“asc”) 350 to account for its cryptocurrencies held, including management’s processes for evaluating its cryptocurrencies for impairment; •evaluated management’s rationale for the inclusion of cryptocurrencies as a current asset on the balance sheet with the assistance of our internal valuation specialists; •evaluated management’s disclosures of its cryptocurrency activity in the financial statement footnotes; and •examined supporting sale and cash receipt evidence for cryptocurrency sales, including management’s processes for calculating any gains on sales of cryptocurrencies. evaluation of the accounting for and disclosure of cryptocurrency mining revenue recognized as disclosed in note 3, the company recognizes revenue in accordance with asc 606, revenue from contracts with customers. the company provides computing power services to a digital asset mining pool (the “pool”) and has executed a contract with the pool operator to provide computing power to the pool. the contract, as amended, is terminable at any time by either party and the company’s enforceable right to compensation only begins when the company provides computing power to the pool. in exchange for providing computing power, the company is entitled to a fractional share of the fixed cryptocurrency award the pool operator receives for successfully adding a block to the blockchain, plus a fractional share of the transaction fees attached to that block. the company’s fractional share is based on the proportion of computing f-2 index power the company contributed to the pool as compared to the total computing power contributed by the pool participants in solving the current algorithm. the contract between the company and the pool also specifies that both parties waive any rights, claims or notices to revise or adjust any of the amounts of fractional share of the fixed cryptocurrency awarded to the company after 35 days of the date of any cryptocurrency award. during the year ended december 31, 2020, the company recognized net cryptocurrency mining revenue of approximately $11,984,000. we identified the accounting for and disclosure of cryptocurrency mining revenue recognized as a critical audit matter for the following reasons. currently, no authoritative guidance exists for the accounting for and disclosure of cryptocurrency mining revenue recognized in accordance with gaap. the company’s management has exercised significant judgment in their determination of how existing gaap should be applied to the accounting for and disclosure of cryptocurrency mining revenue recognized. in addition, the company’s cryptocurrency mining hardware that provides computing power to the pool is currently hosted at a third party facility. as such, the overall accounting for and disclosure of cryptocurrency mining revenue recognized involved the it environment of both the company and the third party hosting facility and material weaknesses were identified in the design and effectiveness of certain internal controls over the it environment of the company. the primary procedures we performed to address this critical audit matter included the following: •evaluated the design and effectiveness of it general controls over the company’s it environment and key financially relevant systems. we also performed similar procedures over the it environment of the third party hosting facility; •performed a site visitation of the third party hosting facility where the company’s mining hardware is located, which included an observation of the physical and environmental controls and mining equipment inventory observation procedures; •evaluated management’s rationale for the application of asc 606 to account for its cryptocurrency awards earned, which included evaluating the provisions of the contract between the company and the pool; •evaluated management’s disclosures of its cryptocurrency activity in the financial statement footnotes; •evaluated and tested management’s rationale and supporting documentation associated with the valuation of cryptocurrency awards earned with the assistance of our internal valuation specialists; •independently confirmed certain financial and performance data directly with the pool; and •compared the company’s digital cold storage wallet records to publicly available blockchain records. /s/ marcum llp marcum llp we have served as the company’s auditor since 2019. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.investment in unconsolidated affiliates - equity method investments - refer to notes 4 and 13 to the financial statements. critical audit matter description investments in affiliates that are not controlled by the company but over which the company has significant influence are accounted for using the equity method of accounting. equity method investments are assessed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. if the decline in value is considered to be other than temporary, the investment is written down to its estimated fair value, which establishes a new cost basis in the investment. at december 31, 2019, the carrying value of the equity method investment in atlantic coast pipeline, llc (acp) was $1.2 billion. acp has received several adverse court rulings, and as a result, the company evaluated this investment for impairment. the company has determined that fair value approximates carrying value and, therefore, concluded the investment is not impaired. the company used probability-weighted outcome scenarios of discounted future cash flows to estimate the fair value of the investment. the use of probability-weighted, discounted cash flows requires management to make significant estimates regarding the likelihood of various scenarios, the key assumptions including total construction cost and revenues, and the discount rate utilized to determine the fair value estimate. changes in these assumptions could have a significant impact on the fair value estimate, which is used to determine the amount of any impairment. we identified the impairment evaluation of acp as a critical audit matter because of the significant estimates and assumptions management makes related to the probability-weighted, discounted cash flows. the audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the likelihood of various scenarios, the key assumptions including total construction cost and revenues, and the discount rate required a high degree of auditor judgement and an increased extent of effort, including the need to involve our fair value specialists. how the critical audit matter was addressed in the audit our audit procedures related to the discounted, probability-weighted forecasts of future cash flows and determination of the fair value of the acp equity method investment, included the following, among others:•we tested the effectiveness of controls over the accounting for the acp equity method investment, including those over the development of the fair value estimate.•we evaluated the likelihood of the various outcomes used by management to develop the probability-weighted scenarios of future cash flows by:78reports ◦obtaining letters and making inquiries from the acp’s internal and external legal counsel regarding likely outcomes of future court rulings◦reading information included in the company’s and the project manager’s press releases, regulatory filings and orders, legal briefs and orders, and analyst and industry reports◦reading internal communications to management and the board of directors◦comparing the various scenarios to scenarios previously developed by management•we evaluated the reasonableness of the key assumptions used to develop the scenarios of future cash flows by comparing key assumptions to: ◦internal communications and schedules to management and the board of directors◦information included in the company’s and the project manager’s press releases, regulatory filings and related orders◦industry reports and external transaction data◦executed contracts and invoices•with the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate used to develop the fair value estimate by:◦determining the appropriateness of the valuation methodology by comparing management’s methodology to generally accepted valuation practice◦testing the mathematical accuracy of the fair value estimate◦testing the source information underlying the determination of the discount rate◦developing a range of independent estimates of the discount rate and comparing those to the discount rate selected by management regulatory matters - impact of rate regulation on the financial statements - refer to notes 1, 4, and 10 to the financial statements.critical audit matter description the company is subject to regulation by federal and state utility regulatory agencies (the “commissions”), which have jurisdiction with respect to the rates of the company’s electric and natural gas distribution companies. management has determined it meets the criteria for the application of regulated operations accounting in preparing its financial statements under accounting principles generally accepted in the united states of america. significant judgment can be required to determine if otherwise recognizable incurred costs qualify to be presented as a regulatory asset and deferred because such costs are probable of future recovery in customer rates. as of december 31, 2019, the company has $15 billion recorded as regulatory assets. we identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management, including assumptions regarding the outcome of future decisions by the commissions, to support its assertions on the likelihood of future recovery for deferred costs. as such, auditing these judgments required specialized knowledge of accounting for rate regulation due to its inherent complexities, a high degree of auditor judgment, and an increased extent of effort.how the critical audit matter was addressed in the audit our audit procedures related to the recovery of regulatory assets included the following, among others:•we tested the effectiveness of management’s controls over the evaluation of the likelihood of the recovery in future rates of regulatory assets and the monitoring and evaluation of regulatory developments that may affect the likelihood of recovering costs in future rates.•we evaluated the company’s disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments.•we read relevant regulatory orders issued by the commissions, regulatory statutes, interpretations, procedural memorandums, filings made by interveners, and other publicly available information to assess the likelihood of recovery in future rates based on precedence of the commission’s treatment of similar costs under similar circumstances. we evaluated the external information and compared to management’s recorded regulatory asset balances for completeness.•for regulatory matters in process, we inspected the company’s and intervenors’ filings with the commissions that may impact the company’s future rates, for any evidence that might contradict management’s assertions.•we performed audit procedures on the incurred costs requested for recovery to confirm their completeness and accuracy. •we obtained an analysis from management and letters from internal and external legal counsel, as appropriate, regarding probability of recovery for regulatory assets not yet addressed in a regulatory order to assess management’s assertion that amounts are probable of recovery./s/ deloitte & touche llp charlotte, north carolina february 20, 2020 we have served as the company's auditor since 1947. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.vendor allowances — refer to note 1 to the financial statements critical audit matter description the company receives vendor allowances from certain merchandise vendors through a variety of programs intended to offset the invoice cost of inventory and for promoting and selling merchandise inventory. allowances based on purchases are initially deferred and recorded as a reduction of merchandise inventory and are recognized as a reduction to cost of sales when the associated inventory is sold. allowances based on sales volumes are based on merchandise sold and are calculated using an agreed upon amount for each unit sold and recognized as a reduction to cost of sales when the associated inventory is sold. other promotional allowances not specifically related to volume of purchases or sales, such as advertising and placement, are recognized as a reduction to cost of sales ratably over the corresponding performance period. funds that are determined to be a reimbursement of specific, incremental, and identifiable costs incurred to sell a vendor’s products are recorded as an offset to the related expense when incurred. given the significance of vendor allowances to the financial statements and volume and diversity of the individual vendor agreements, auditing vendor allowances was complex and subjective due to the extent of effort required to evaluate whether the vendor allowances were recorded in accordance with the terms of the vendor agreements and that the allowances deferred as an offset to inventory were complete and accurate.37 how the critical audit matter was addressed in the audit our audit procedures related to evaluating whether the vendor allowances were recorded in accordance with the terms of the vendor agreements and the completeness and accuracy of deferred vendor allowances included the following, among others: we tested the effectiveness of controls over the recording of vendor allowances, including management's controls over the establishment of vendor arrangements, the calculation of vendor allowances earned, and the determination of the deferred vendor allowances recorded as a reduction to inventory.we selected a sample of vendor allowances recorded as a reduction of cost of sales and (1) recalculated the amount recognized using the terms of the vendor agreement; (2) for certain arrangements, confirmed the terms of the agreement directly with the vendor; and (3) evaluated, based on the terms of the agreement, if the amount should be deferred and recorded as a reduction of merchandise inventory.where confirmation responses from vendors were not received, we completed alternative procedures such as agreement to underlying contractual arrangements, tested the settlement of the arrangement and held discussions with a sample of company buyers to understand the terms of the agreement.we tested the amount of deferred vendor allowances recorded as a reduction to inventory by developing an expectation for the amount and comparing our expectation to the amount recorded by management. goodwill – best buy health reporting unit — refer to note 1 to the financial statements critical audit matter description the company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. the goodwill balance was $1,384 million as of january 29, 2022, of which $893 million was related to the best buy health reporting unit. the company uses the discounted cash flow model to estimate the fair value of the best buy health reporting unit, which requires management to make subjective estimates and assumptions related to forecasts of future revenues. changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. the fair value of the best buy health reporting unit exceeded its carrying value as of the measurement date and, therefore, no impairment was recognized. given the significant judgments made by management to estimate the fair value of the best buy health reporting unit, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the forecasts of future revenue of the best buy health reporting unit, specifically for new products and services, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. how the critical audit matter was addressed in the audit our audit procedures related to the forecasts of future revenue used by management to estimate the fair value of the best buy health reporting unit included the following, among others: we tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the best buy health reporting unit, such as controls related to management’s forecasts of future revenue.we evaluated management’s ability to accurately forecast future revenues by comparing actual results to management’s historical forecasts. we evaluated the reasonableness of management’s revenue forecasts for the new products and services by comparing the forecasts to: (1) the company’s historical revenue growth rates, including for similar existing products and services; (2) internal communications to management and the board of directors; (3) underlying source documents, when available, such as customer contracts; (4) underlying analyses detailing business strategies and growth plans; (5) forward-looking revenue expectations in external communications made by management to analysts and investors; and (6) industry reports containing analyses of the company and its peers utilizing the assistance of our fair value specialists.we inquired of operating and sales management teams to determine whether the judgments and assumptions used in the future revenue projections were consistent with the strategy and long-range plans for the best buy health reporting unit. /s/ deloitte & touche llp minneapolis, minnesota march 18, 2022 we have served as the company's auditor since 2005. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.warranty obligations – microinverters - refer to notes 2, 10 and 11 to the consolidated financial statements critical audit matter description the company’s warranty obligation provides for the replacement of microinverter units that fail during the product’s warranty term of 15 to 25 years. the estimated warranty liability is developed for each generation of product and requires management to estimate, among other factors, (1) the number of units expected to fail over time (i.e., failure rate); (2) the number of failed units expected to result in warranty claims over time (i.e., claim rate); and (3) the per unit cost of replacement units (i.e., replacement cost), all of which consider historical results, trends and the most current data available when the financial statements are available to be issued. the company’s warranty liability for all microinverter units sold after january 1, 2014 is measured at fair value by applying both of the following to the liability that results from the 3 factors discussed above: (1) compensation comprised of a profit element and risk premium required for a market participant to assume the obligation and (2) a discount rate based on the company’s credit adjusted risk free rate.enphase energy, inc. | 2021 form 10-k | 71table of contents given the subjectivity of estimating the projected failure rates and warranty claims, performing audit procedures to evaluate whether the expected failure rates were appropriately determined as of december 31, 2021, required a high degree of auditor judgment and an increased extent of effort.how the critical audit matter was addressed in the audit our audit procedures related to the estimated failure rates used in determining the warranty obligation included the following, among others: •we tested the effectiveness of controls utilized in the review of the warranty obligation calculation, including controls over the determination of estimated failure rates•we evaluated the methods and assumptions used by management to estimate the failure rates used as part of the calculation of the warranty obligation by:–testing the underlying data that served as the basis for the company’s failure rate analysis, which include historical claims and historical product sales, to evaluate the various assumptions and historical data consisting of failure of individual components contained in its microinverters.–reviewing third party data compiled on similar products in order to challenge management’s assumptions and identify supporting or contradictory evidence.–comparing management’s prior-year assumptions of expected failures to actual warranty claims received during the current year to identify potential bias in the determination of the failure rate estimates used in the warranty obligation recorded.–developing independent estimates of the future failure rates for product families by utilizing data analytics and compared them to management assumptions.valuation of intangibles related to business acquisitions – refer note 6 to the consolidated financial statements critical audit matter description the company completed in december 2021 two acquisitions (“december acquisitions”) with a net purchase consideration of $183.1 million. these transactions were accounted for as business combinations.auditing the accounting for the december acquisitions was complex due to the estimation uncertainty in the company’s determination of the fair value of the intangibles acquired, which primarily included trade names and developed technology. the estimation uncertainty was primarily due to the sensitivity of the respective fair values to the underlying significant assumptions. the fair value estimates of the trade names and developed technology intangible assets included significant assumptions in the prospective financial information, including estimated weighted average cost of capital, royalty rates and estimated revenue growth rates. these significant assumptions are forward looking and could be affected by expectations about future economic and market conditions.how the critical audit matter was addressed in the audit our audit procedures related to the valuation of intangible assets related to the december acquisitions included the following, among others: •we tested the effectiveness of controls over the estimation process supporting the fair value estimates of the trade names and developed technology intangible assets, including management’s review of the significant assumptions.•we evaluated the methods and assumptions used by management to estimate the valuation of intangible assets by:–evaluating the company's selection of the valuation methodologies, testing the significant assumptions and the completeness and accuracy of the underlying data.–comparing significant assumptions in the prospective financial information to current industry trends, as well as to the historical performance of the acquired business and a similar business segment of the company.–performing benchmarking approach for similar technology and performed inquiries with management to corroborate assumptions around useful life of intangibles. enphase energy, inc. | 2021 form 10-k | 72table of contents–performing sensitivity analyses to evaluate the changes in the fair value of the intangible assets that would result from the changes in significant assumptions.–engaging internal valuation specialists to assist with our evaluation of the methodologies used by the company and the evaluation of the discount rates by comparing them against discount rate ranges that were independently developed using publicly available market data for comparable entities./s/ deloitte & touche llp san francisco, california february 11, 2022 we have served as the company’s auditor since 2010. | 3 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. allowance for probable loan losses as described in note 4 of the consolidated financial statements, the company established an allowance for probable loan losses totaling $60,278,000 as of december 31, 2019, derived from the following elements: (1) allowances established on specific impaired loans, which are based on a review of the individual characteristics of each loan, 28including the customer’s ability to repay the loan, the underlying collateral values, and the industry in which the customer operates; (2) allowances based on actual historical loss experience for similar types of loans in the loan portfolio; and (3) allowances based on qualitative factors such as general economic conditions, changes in the mix of loans, company resources, border risk and credit quality indicators, among other things (collectively, “the qualitative factors”). the qualitative factors considered in the allowance for probable loan losses require a significant amount of judgment by management and involves a high degree of estimation. we identified the allowances derived from qualitative factors as a critical audit matter. auditing management’s estimate of the allowances derived from qualitative factors required a high degree of auditor judgement due to the nature of the qualitative factors and the subjectivity in judgments applied by management in forming them. our audit procedures related to auditing the company’s allowances derived from qualitative factors included the following, among others: ●we obtained an understanding of the relevant controls related to the allowance for probable loan losses, including allowances derived from qualitative factors, and tested such controls for design and operating effectiveness, including controls relating to management’s review of the qualitative factors and approval of the allowance calculation. ●we evaluated the reasonableness of management’s methods and assumptions used to determine allowances derived from qualitative factors by (1) evaluating management’s identification and measurement of qualitative factors; (2) testing the completeness and accuracy of data and information used in estimating the components of the qualitative factors; (3) evaluating the reasonableness of the change to the general reserve as a result of the qualitative factors; and (4) reviewing subsequent events and considering their impact on judgments as of the consolidated balance sheet date. /s/ rsm us llp we have served as the company's auditor since 2007. | 4 |
critical audit matters the critical audit matters communicated below are mattersarising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committeeand that: (1) related to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,subjective, or complex judgements. the communication of critical audit matters does not alter in any way our opinion on the financialstatements, taken as a whole, and we are not, by communicating the critical matters below, providing separate opinions on the criticalaudit matters or on the accounts or disclosures to which they relate. valuation of derivative liabilities critical audit matter description as described further in notes 2, 7, and8 to the financial statements, the company determined that the conversion features of its convertible notes and certain warrants issuedin conjunction with financing arrangements required to be accounted for as derivative liabilities. the derivative liabilities are recordedat fair value when issued and subsequently re-measured to fair value each reporting period. the company utilized a binomial option pricingmodel to determine the fair value of the derivative liabilities, which uses certain assumptions related to exercise price, term, expectedvolatility, and risk-free interest rate. 29 how the critical audit matter was addressed in the audit we determined the assessment of the fairvalues of the derivative liabilities as a critical audit matter due to the significant judgements used by the company in determining thefair value of the derivative liabilities. auditing the valuation of the derivative liabilities involved a high degree of auditor judgementand specialized skills and knowledge were needed. our audit procedures consistedof the following, among others: ·testing management’s process for developing the fair value measurement.·evaluating the appropriateness of the binomial option model used by the company to value the derivative liabilities.·testing the reasonableness of the assumptions used by the company in the binomial option model including exercise price, term, expected volatility, and risk-free interest rate.·testing the accuracy and completeness of data used by the company in developing the assumptions use in the binomial option model.·developing an independent expectation for comparison to the company’s estimate which included developing our own binomial option model and assumptions. professionals with specialized skill andknowledge were utilized by the firm to assist in the evaluation of the company estimate of fair value and development of our own independentexpectation. issuance and valuation of preferred stock critical audit matter description as described note 12 to the financial statements,the company issue preferred stock for services and to satisfy liabilities. how the critical audit matterwas addressed in the audit we determined the evaluation of the accountingfor the issuance preferred stock to be a critical audit matter due to the complexity of the instruments themselves and the complexityinvolved in the company’s determination of the appropriate accounting for the instrument. auditing the accounting for the issuanceof the preferred stock involved a high degree of auditor judgement and specialized skills and knowledge were needed. our audit procedures consistedof the following, among others: ·inspecting and reviewing the designation document for the establishment of the preferred stock and the documents related to the issuance of the instrument to the recipients.·evaluating the reasonableness of the conclusions made by the company related to the accounting treatment for embedded conversion feature and classification and presentation of the instrument as a whole in the consolidated balance sheet, including the company’s consideration of relevant accounting standards.·evaluating the reasonableness of the conclusions made by the company in regard to the timing and recognition of expense related to the issuance preferred stock for future services.·evaluating the reasonableness of conclusions made by the company in regard to the recognition of gain or loss to extinguish liabilities. professionals with specialized skill and knowledgewere utilized by the firm to assist in the evaluation of the company’s accounting for the issuance of the preferred stock. /s/ sadler, gibb & associates, llc we have served as the company’s auditor since 2017. | 4 |
critical audit matters critical audit matters are matters arising from the current periodaudit of the financial statements that were communicated orrequired to be communicated to the audit committee and that (1)relate to accounts or disclosures that are material to thefinancial statements and (2) involved our especially challenging,subjective, or complex judgments. we determined that there are nocritical audit matters. /s/moss adams llp portland,oregon march15, 2021 we haveserved as the company’s auditor since 2004. | 0 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.fair value—level iii investments—refer to notes 2, 4, and 5 to the financial statements critical audit matter description the company and the funds it sponsors and manages have investments reported at fair value. the fair values of certain investments are determined based on unobservable pricing inputs (“level iii investments”). these investments have limited observable market activity and the inputs used in the determination of fair value require significant management judgment or estimation.in addition, the company recognizes carried interest from investment funds based on cumulative fund performance to date. at the end of each reporting period, the company calculates the carried interest that would be due to the company for each investment fund, pursuant to the fund agreements. certain of the funds’ investments contain unobservable inputs that are classified as level iii in the fair value hierarchy. the change in the fair value of the underlying level iii investments held by the funds is a significant input into the determination of carried interest for each reporting period. as the fair value of underlying investments varies between reporting periods, it is necessary to make adjustments to amounts recorded as carried interest. accrued but unpaid carried interest as of the reporting date is reflected in investments in the consolidated statements of financial condition.we identified the level iii investments as a critical audit matter because of the unobservable pricing inputs management used to estimate fair value, and changes in the fair value of these investments directly impacts the amount of unrealized carried interest the company accrues for the period as well as unrealized investment income recorded during the period.performing audit procedures to evaluate the appropriateness of these inputs required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists who possess significant investment valuation expertise.how the critical audit matter was addressed in the audit our audit procedures related to the unobservable pricing inputs used by management to estimate the fair values of level iii investments included the following, among others:•we involved more senior, more experienced audit team members to perform audit procedures.•we tested the design, implementation, and operating effectiveness of controls over the determination of the fair value of level iii investments.•with the assistance of fair value specialists, we evaluated management’s process for level iii valuation, including their determination of the unobservable pricing inputs used to estimate fair value.•we assessed the consistency by which management applied its process.•we evaluated the company’s historical ability to accurately estimate fair value of level iii investments by comparing previous estimates of fair value to market transactions, subsequent to december 31, 2020, where appropriate./s/ deloitte & touche llp new york, new york february 19, 2021 we have served as the company's auditor since 2006. | 2 |
critical audit matters thecritical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicatedor required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financialstatements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit mattersdoes not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical auditmatters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. (continues) f-1 reportof independent registered public accounting firm to the stockholders and board of directors of novo integrated sciences, inc. (continued) businessacquisitions descriptionof the critical audit matter asdiscussed in note 15 to the financial statements, the company acquired certain businesses during the yearended august 31, 2021. auditingbusiness combinations were complex and highly judgmental due to the justification of business and significant estimation required todetermine the fair value of assets acquired / liabilities assumed, the purchase consideration conveyed and the resulting intangible assetsand goodwill recognized, and the significant judgment by management when estimating the fair value of the acquisition related contingentconsideration liability. howthe critical audit matter was addressed in the audit toaudit the accounting of the business combination transactions, we evaluated the justification of business acquisition from managementto ensure the compliance with u.s. gaap; and we reviewed the fair value calculation of assets acquired / liabilities assumed, the purchaseconsideration conveyed and the resulting intangible assets and goodwill recognized and valuation expert’s report that includedmethodology and assumptions used and assessed those inputs to be reasonable, testing management’s process for determining the fairvalue of the acquisition related contingent consideration liability, and testing the completeness and accuracy of the underlying dataused in the fair value calculation. impairmentof intangible assets and goodwill descriptionof the critical audit matter asdiscussed in note 2 to the financial statements, the company recorded impairment charges on goodwill during the year ended august 31,2021. auditingmanagement’s goodwill and intangible assets impairment test was complex and highly judgmental due to the significant estimationrequired to determine the fair value of the intangible assets and goodwill and underlying reporting unit. in particular, the fair valueestimate was sensitive to significant assumptions, such as the company’s financial forecast, discount rate, and operating costs,which are impacted by expectations about future market and economic conditions. howthe critical audit matter was addressed in the audit totest the estimated fair value of the company’s intangible assets and goodwill and underlying reporting unit, we performed auditprocedures that included, among other things, assessing methodologies and testing the significant assumptions discussed above and theunderlying data used by the company in its analysis. in addition, we assessed the current financial forecast in light of management’scurrent plans, and we assessed the historical basis of management’s estimates based on its current operating results that wouldresult from changes in the assumptions. /s/ srco professional corporation we have served as the company’s auditor since 2020 | 1 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. income taxes as described further in note 12 to the financial statements, the company records income taxes using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. we identified the tax effects of temporary and permanent differences related to stock-based compensation as a critical audit matter. the principal considerations for our determination that the tax effects of temporary and permanent differences are a critical audit matter are that auditing the application of executive compensation rules requires significant technical expertise, the company is generating excess tax deductions as a result of stock-based compensation and the stock-based compensation calculation is complex due to the required recordkeeping. our audit procedures related to the tax effects of temporary and permanent differences related to stock-based compensation included the following, among others. • involved an employee compensation specialist to assess the application of executive compensation rules. • obtained management’s permanent and temporary provision calculation and tied out inputs to supporting equity documentation. • tested the completeness and accuracy of the calculation of permanent and temporary differences. • determined that the ending gross temporary difference agreed to the supporting equity documentation. /s/ grant thornton llp we have served as the company’s auditor since 2005. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.blucora, inc. | 2021 form 10-k 67valuation of contingent consideration description of the matter on july 1, 2020, the company completed its acquisition of honkamp krueger financial services, “hkfs”, a.k.a. avantax planning partners, “app”, for total consideration of $131.5 million, including $27.6 million of initial fair value of contingent consideration related to two earn-out payments with a maximum potential payout of $60 million. as of december 31, 2021, there is one potential earn-out payment remaining with a maximum payout of $30 million. as disclosed in note 9 to the company’s consolidated financial statements, the fair value of the app contingent consideration was $28.3 million as of december 31, 2021.auditing management’s accounting for the contingent consideration was complex and highly judgmental due to the significant estimation required in determining the fair value of the contingent consideration. the significant estimation was primarily due to the complexity of the valuation model used by management to measure the fair value of the contingent consideration and the sensitivity of the fair value to the significant underlying assumptions. the company used a monte carlo simulation model to measure the fair value of the contingent consideration, which is required to be remeasured at fair value each reporting period until settled. the significant assumptions used in the simulation included forecasted advisory asset levels at july 1, 2022, the risk-adjusted discount rate reflecting the risk in the advisory asset projection and the asset volatility. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls related to the valuation of the contingent consideration, including management’s review of the valuation model and assumptions underlying the valuation of the contingent consideration.to test the fair value of the contingent consideration, we performed audit procedures that included, among others, assessing the terms of the arrangement, including the conditions that must be met for the contingent consideration to become payable. we performed procedures to test the completeness and accuracy of the underlying data and to assess the company’s projected asset forecasts given past performance and economic trends. we also involved our valuation specialists to assist in evaluating the company's use of a monte carlo simulation model and testing the significant assumptions used in the model, including asset volatility and the risk-adjusted discount rate. we have also evaluated the company’s disclosures in relation to this matter.blucora, inc. | 2021 form 10-k 68goodwill impairment description of the matter as reflected in the company’s consolidated financial statements at december 31, 2021, the wealth management reporting unit goodwill balance was $266.3 million. as disclosed in note 2 to the consolidated financial statements, goodwill is tested for impairment annually as of november 30, or more frequently if indicators of impairment require the performance of an interim impairment assessment.auditing management’s impairment test related to goodwill was complex and highly judgmental due to the significant estimation required in determining the fair value of the reporting unit. the fair value estimate for the reporting unit was sensitive to significant assumptions such as projected future revenue growth rates, future operating margins, the selected discount rate, and valuation multiples. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s goodwill impairment assessment process. this included testing of controls over the review of the company’s forecast as well as controls over the review of the significant assumptions used to estimate the fair value of the reporting unit.to test the fair value of the reporting unit, our audit procedures included, among others, assessing methodologies and testing the significant assumptions and underlying data used by the company, specifically the projected financial information including the future revenue growth rates, future operating margins, the selected discount rate, and valuation multiples. we also evaluated the completeness and accuracy of the underlying data supporting the assumptions. additionally, we compared the significant assumptions used by management to current industry, market and economic trends as well as the wealth management reporting unit’s past performance and future factors. we performed sensitivity analyses of significant assumptions to evaluate the change in the fair value of the reporting unit and assessed the historical accuracy of management’s estimates. in addition, we involved a valuation specialist to assist in evaluating the significant assumptions in the fair value estimate. we have also evaluated the company’s disclosures in relation to this matter./s/ ernst & young llp we have served as the company’s auditor since 2012. | 1 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.impairment of real estate assets - refer to notes 1 and 3 to the financial statements critical audit matter description the company performs an impairment analysis of properties which begins with an evaluation of events or changes in circumstances that may indicate that the carrying value may not be recoverable, such as a significant decline in occupancy, identification of materially adverse legal or environmental factors, a change in the designation of an asset from core to non-core, which may impact the anticipated holding period, or a decline in market value to an amount less than cost. the company makes judgments that determine whether specific real estate assets possess indicators of impairment. changes in those judgments could have a material impact on the real estate assets that are identified for further analysis.given the company’s evaluation of possible indications of impairment of real estate assets requires management to make judgments, performing audit procedures to evaluate whether management appropriately identified events or changes in circumstances indicating that the carrying amounts of real estate assets may not be recoverable required a high degree of auditor judgment.57table of contents how the critical audit matter was addressed in the audit our audit procedures related to the evaluation of real estate assets for possible indications of impairment included the following, among others: •we tested the effectiveness of controls over management’s identification of possible circumstances that may indicate that the carrying amounts of real estate assets are no longer recoverable, including controls over management’s designation of an asset as core or non-core, occupancy and management’s estimates of fair values. •we evaluated management’s identification of impairment indicators by developing an independent determination if properties exhibit an indicator of impairment by:◦inquiring of management and reading investment committee and board minutes to identify properties that should be evaluated as non-core and therefore may impact the anticipated holding period. ◦testing real estate assets for possible indications of impairment, including searching for adverse asset-specific circumstances and/or market conditions by circulating a questionnaire to regional property managers and using reputable market surveys.◦with the assistance of our fair value specialists, developing an independent expectation of impairment indicators and comparing such expectation to management’s analysis. /s/ deloitte & touche llp raleigh, north carolina february 9, 2021 we have served as the company’s auditor since 2006. | 3 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.goodwill — reporting unit within color solutions business - refer to notes 2 and 8 to the financial statements.critical audit matter description the company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. the company estimates the fair value of its reporting units using the average of both the income approach and the market approach. the market approach estimates a price reasonably expected to be paid by a market participant in the purchase of similar businesses. the income approach uses projected cash flows attributable to reporting units. projecting cash flows requires management to make significant estimates and assumptions. changes to these assumptions could have a significant impact on either the fair value of the reporting unit, the amount of any goodwill impairment, or both. the goodwill balance was $175.4 million as of december 31, 2020, of which $51.8 million was allocated to the color solutions reporting unit, which exhibits more sensitivity to changes in estimates and assumptions, most significantly related to forecasts of future revenues and the weighted-average cost of capital used to discount the cash flow projections. the estimated fair value of the color solutions reporting unit exceeded its carrying value by 67% as of the measurement date of october 31, 2020 and, therefore, no impairment is recorded.we identified goodwill for the color solutions reporting unit as a critical audit matter because of the significant judgments made by management to estimate the fair value of the reporting unit and the difference between its fair value and carrying value. obtaining sufficient audit evidence related to these assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to selection of the discount rate and forecasts of future revenue.39table of contents how the critical audit matter was addressed in the audit our audit procedures related to the discount rate and forecasts of future revenue used by management to estimate the fair value of this reporting unit included the following, among others: we tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the reporting unit, such as controls related to management’s selection of the discount rate and forecasts of future revenue.we evaluated management’s ability to accurately forecast future revenues by comparing actual results to management’s historical forecasts. we evaluated the reasonableness of management’s revenue forecasts by comparing the forecasts to:–historical revenues.–internal communications to management and the board of directors. –forecasted information included in industry reports that the reporting unit operates in. with the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate by:–testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation.–developing a range of independent estimates and comparing those to the discount rate selected by management.we considered the impact of changes in management’s projections from the october 31, 2020, annual assessment date to december 31, 2020 by comparing actual results for the period to management projections within the original valuation model. /s/ deloitte & touche llp cleveland, ohio march 1, 2021 we have served as the company's auditor since 2006. | 1 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. f-1 self-insurance reserves (u-haul)as described in note 3 and included in note 21a to the consolidated financial statements, u-haul retains the risk for certain public liability and property damage programs related to its rental equipment, which is referred to as self-insurance. the estimated u-haul self-insurance reserve as of march 31, 2022 was $418.9 million and was recorded in the consolidated balance sheets within policy benefits and losses, claims and loss expenses payable. the self-insurance reserve estimate requires significant management judgment and is based upon historical claims experience, current claim trends, and actuarial estimates.we identified the valuation of self-insurance reserves as a critical audit matter. significant and complex management judgments and assumptions, including the use of management specialists in actuarial methods, is required to evaluate historical claims experience, current claims trends and actuarial estimates, including (i) estimates of future incurred and paid losses, and (ii) initial expected claim costs. auditing these complex judgments and assumptions involved especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skills or knowledge needed.the primary procedures we performed to address this critical audit matter included the following: testing the design and operating effectiveness of internal controls surrounding the existence and accuracy of historical claims data used by the actuary.testing the completeness and accuracy of claims data utilized by the actuary by selecting a sample of claims and corroborating key attributes of claims detail to source and supporting documents.utilizing personnel with specialized knowledge and skill in actuarial methods to assist in evaluating the appropriateness of the methodology and key assumptions utilized by the external actuary including the future development of incurred and paid losses, initial expected claim cost per exposure and retrospective review of prior year estimates.valuation of future policy benefits (oxford)as discussed in notes 3, 16 and included in note 21a of the consolidated financial statements, the company’s life insurance subsidiary (“oxford”), sells life insurance, medicare supplement insurance, and deferred annuities. liabilities for future policy benefits are recorded in the consolidated balance sheets within policy benefits and losses, claims and loss expenses payable. management’s estimate of liabilities for future policy benefits as of december 31, 2021 was $399.0 million. the liability is determined by management utilizing the net premium valuation methodology and is accrued when premium revenue is recognized. the liability, which represents the present value of future benefits to be paid to policyholders and related expenses less the present value of future net premiums, is estimated using assumptions applicable at the time the insurance contracts are written, with provisions for the risk of adverse deviation, as appropriate. the company periodically performs a gross premium valuation and reviews original assumptions, including capitalized expenses which reduce the gross premium valuation, to evaluate whether assets and the liabilities are adequate and whether a loss should be recognized. we identified the valuation of future policy benefits for life and annuity policies as a critical audit matter. significant and complex management judgments and assumptions included expected mortality experience, policy lapses and surrenders, assets yields and expenses, and expected interest rate yields. management specialists in actuarial methods are utilized to evaluate the valuation of future policy benefits to determine whether loss recognition is required. auditing these complex judgments and assumptions involved especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skills or knowledge needed. f-2 the primary procedures we performed to address this critical audit matter included: testing the completeness and accuracy of a sample of policy data to source and supporting documents utilized to calculate management’s assumptions as the basis for the gross premium valuation. utilizing a specialist with knowledge and skill in actuarial methods to assist in reviewing the methodology and assumptions used in the gross premium valuation, including (i) assessing the reasonableness of assumptions used through independent calculations, (ii) evaluating the reasonableness of the amortization of capitalized expenses, (iii) evaluating the applicability of the assumptions and sources of management’s calculation at the time the insurance contracts were written and, (iv) reviewing the reasonableness of the gross premium valuation, including evaluating whether loss recognition is warranted. reserve for property & casualty losses and loss adjustment expenses (repwest)as described in notes 3, 16 and included in note 21a to the consolidated financial statements, the company’s property and casualty insurance subsidiaries recorded $160.4 million of reserves for property and casualty (“p&c”) losses and loss adjustment expenses at december 31, 2021. reserves for p&c losses and loss adjustment expenses are recorded in the consolidated balance sheets within policy benefits and losses, claims and loss expenses payable. insurance reserves for p&c take into account losses incurred based upon actuarial estimates and are management’s best approximation of future payments. these estimates are based upon past claims experience and current claim trends as well as actuarial estimates. changes in judgments and assumptions could materially impact the valuation of these liabilities, particularly for exposure with a long period of time between the insured period and settlement of all claims, such as, excess workers’ compensation claims. we identified the reserve for p&c losses and loss adjustment expense as a critical audit matter. significant and complex management judgments and assumptions, including the use of management specialists in actuarial methods, is required to evaluate past claims experience and current claim trends and actuarial estimates, including expected length of claims and cost trends associated with claimant treatments. auditing these complex judgments and assumptions involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed. the primary procedures we performed to address this critical audit matter included: testing the completeness and accuracy of claims data utilized by the actuary by selecting a sample of claims and corroborating key attributes of claims detail to source and supporting documents.utilizing personnel with specialized knowledge and skill in actuarial methods to assist in evaluating the appropriateness of the methodology and the assumptions used by management’s actuary including (i) performing a retrospective review of the prior year reserve estimate against actual performance, and (ii) assessing the reasonableness of actuarial methods and key underlying assumptions through testing of the actuarial models used to ensure accurate reflection of the nature of the underlying exposure, development characteristics associated with the claims, the reasonableness of the underlying assumptions, including the selection of loss development factors and expected loss ratios, weighting of methods, and the sensitivity of the estimate to alternate assumptions./s/ bdo usa, llp we have served as the company's auditor since 2003. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.revenue recognition - identification of performance obligations in revenue contracts as described in notes 2 and 19 to the consolidated financial statements, the company’s contracts with customers often include the promise to transfer multiple goods and services to a customer. distinct promises within a contract are referred to as performance obligations and are accounted for as separate units of account. management assesses whether each promised good or service is distinct for the purpose of identifying the performance obligations in the contract. this assessment involves subjective determinations and requires management to make judgments about the individual promised goods or services and whether such goods or services are separable from the other aspects of the contractual relationship. the company’s performance obligations include various distinct goods and services such as hardware, software licenses, warranties, and other service offerings and solutions. for the year ended january 31, 2020, a significant portion of the $34 billion infrastructure solutions group (“isg”) and $10.9 billion v mware reportable segment net revenues relate to contracts with multiple performance obligations. the principal considerations for our determination that performing procedures relating to the identification of performance obligations in revenue contracts is a critical audit matter are there was significant judgment by management in identifying performance obligations in revenue contracts, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate whether performance obligations in revenue contracts were appropriately identified by management. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls related to the proper identification of performance obligations in revenue contracts. these procedures also included, among others, testing the completeness and accuracy of management’s identification of performance obligations by examining revenue contracts on a test basis.86table of contents goodwill and indefinite-lived trade names impairment assessments as described in note 8 to the consolidated financial statements, the company’s consolidated goodwill and indefinite-lived trade names balances were $41.7 billion and $3.8 billion as of january 31, 2020, respectively. the goodwill associated with the infrastructure solutions group (“isg”) and rsa security (“rsa”) goodwill reporting units represent a portion of the total goodwill balance. goodwill and indefinite-lived intangible assets are tested for impairment annually during the third fiscal quarter and whenever events or circumstances may indicate that an impairment has occurred. management performs a quantitative goodwill impairment test to measure the fair value of each goodwill reporting unit relative to its carrying amount, and to determine the amount of goodwill impairment loss to be recognized, if any. the fair value of the goodwill reporting units are generally estimated using a combination of public company multiples and discounted cash flow methodologies which require significant judgment, including estimation of future cash flows, which is dependent on internal forecasts, current and anticipated economic conditions and trends, selection of market multiples through assessment of the reporting unit’s performance relative to peer competitors, the estimation of the long-term revenue growth rate and discount rate of the company’s business, and the determination of the company’s weighted average cost of capital. the fair value of the indefinite-lived trade names is generally estimated using discounted cash flow methodologies. the discounted cash flow methodology requires significant judgment, including estimation of future revenue, which is dependent on internal forecasts, the estimation of the long-term revenue growth rate of the company’s business and the determination of the company’s weighted average cost of capital and royalty rates.the principal considerations for our determination that performing procedures relating to goodwill and indefinite-lived trade names impairment assessments is a critical audit matter are that there was significant judgment by management when developing the fair value measurements of the isg and rsa reporting units and certain of the indefinite-lived trade names, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management’s selection of market multiples and cash flow projections, including significant assumptions related to long-term revenue growth rates and the discount rate. in addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained from these procedures.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s goodwill and indefinite-lived trade names impairment assessments, including controls over the fair value of the isg and rsa reporting units and indefinite-lived trade names. these procedures also included, among others, testing management’s process for developing the fair value estimates, evaluating the appropriateness of the public company multiples and discounted cash flow methodologies, testing completeness and accuracy of underlying data used in the methodologies, and evaluating the reasonableness of management’s selection of market multiples, and significant assumptions used by management in estimating the fair value of the isg and rsa reporting units and certain of the indefinite-lived trade names, including the long-term revenue growth rates and the discount rate. evaluating the assumptions related to the long-term revenue growth rates involved evaluating whether assumptions used by management were reasonable considering the past performance of each reporting unit and certain of the indefinite-lived trade names, consistency with third-party industry data, and whether the assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of the company’s discounted future cash flow methodologies and certain assumptions, including the discount rate.intra-entity transfer of intellectual property rights as described in note 11 to the consolidated financial statements, the company completed two intra-entity asset transfers of certain of its intellectual property (the “ip”) to irish subsidiaries, resulting in discrete tax benefits of $4.9 billion. the tax benefit for each intra-entity asset transfer was recorded as a deferred tax asset in the period of transaction and represents the book and tax basis difference on the transferred assets measured based on the ip’s current fair value and applicable irish statutory tax rate. the company applied significant judgment when determining the fair value of the ip, which serves as the tax basis of the deferred tax asset, and in evaluating the associated tax laws in the applicable jurisdictions. 87table of contents the principal considerations for our determination that performing procedures relating to the intra-entity transfers of the intellectual property rights is a critical audit matter are (i) there was significant judgment by management when determining the fair value of certain of the intellectual property subject to the intra-entity asset transfers which serves as the tax basis of the deferred tax asset and in evaluating the associated application of tax laws in the applicable jurisdictions, which in turn led to a high degree of auditor judgment, subjectivity and effort in applying procedures relating to the reasonableness of management’s determination of the fair value of certain of the intellectual property subject to the intra-entity asset transfers which serves as the tax basis of the deferred tax asset and in evaluating the associated application of tax laws in the applicable jurisdiction and (ii) the audit effort also involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained from these procedures.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the accounting for certain of the intra-entity transfers of the intellectual property, including controls over management’s review of the underlying agreements, determination of the tax basis, and management's assessment of the tax laws applicable to the transfer of a license for intellectual property. these procedures also included, among others, (i) examination of the underlying agreements, (ii) testing the information used in the calculation of the deferred tax asset, including management’s estimate of the fair value of certain of the intellectual property which serves as the tax basis for the deferred tax asset and evaluating the tax laws applicable to the transfer of the intellectual property, and (iii) testing the calculation of the deferred tax asset. professionals with specialized skill and knowledge were used to assist in the evaluation of management’s determination of the fair value of the intellectual property which serves as the tax basis for the deferred tax asset and applicability of the irish income tax laws and regulations./s/ pricewaterhouse coopers llp austin, texas march 27, 2020we have served as the company’s auditor since 1986. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.impairment assessments of goodwill and certain intangible assets as described in notes 2 and 7 to the consolidated financial statements, the company’s goodwill balance of $1,383.9 million as of december 31, 2020 is net of a $123.5 million impairment recognized in 2020. the company’s intangible assets balance of $2,686.3 million as of december 31, 2020 is net of $390.2 million of impairment recognized in 2020, and includes certain indefinite-lived investment management agreements and definite-lived client relationships. management performs its annual impairment assessment of goodwill and indefinite-lived intangible assets as of october 1 of each year, or more frequently if changes in circumstances indicate that the carrying value may be impaired. the company has determined that they have one reporting unit for goodwill impairment testing purposes. definite-lived intangible assets are tested for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. if the fair value of the sole reporting unit or intangible assets is less than the carrying amount, an impairment is recognized. management used a discounted cash flow model to determine the estimated fair value of the sole reporting unit, certain investment management agreements and certain client relationships. some of the inputs used in the discounted cash flow model required significant management judgment, including the discount rate, terminal growth rates, forecasted financial results, and market returns. the principal considerations for our determination that performing procedures relating to the impairment assessments of goodwill and certain intangible assets is a critical audit matter are (i) the significant judgment by management when developing the fair value measurement of the sole reporting unit and certain intangible assets; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to the discount rate, terminal growth rates, forecasted financial results, and market returns; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s impairment assessments of goodwill and certain intangible assets, including controls over the valuation of the sole reporting unit and certain intangible assets. these procedures also included, among others (i) testing 60table of contentsmanagement’s process for developing the fair value estimates; (ii) evaluating the appropriateness of the discounted cash flow model; (iii) testing the completeness and accuracy of underlying data used in the model; and (iv) evaluating the significant assumptions used by management related to the discount rate, terminal growth rates, forecasted financial results, and market returns. evaluating management’s assumptions related to the discount rate, terminal growth rates, forecasted financial results, and market returns involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the sole reporting unit, as well as investment companies subject to the investment management agreements and client relationships; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of the company’s discounted cash flow model and the discount rate. /s/ pricewaterhouse coopers llp denver, colorado february 24, 2021we have served as the company’s auditor since 2019. | 1 |
critical audit matters the critical audit matters communicated below are matters arisingfrom the current period audit of the consolidated financial statements that was communicated or required to be communicated to the auditcommittee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especiallychallenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on thefinancial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinionon the critical audit matter or on the accounts or disclosures to which it relates. valuation of inventory inventories consist of growing and processed plants and oils and arevalued at the lower of cost or net realizable value. in evaluating whether inventories are stated at lower of cost or net realizable value,management considers such factors as inventories in hand, estimated time to sell such inventories and current market conditions. write-offsfor inventory obsolescence are recorded when, in the opinion of management, the value of specific inventory items has been impaired. our audit procedures to address the company’s valuation of inventoryincluded the following, among others. we updated to our understanding of the company’s inventory process, observations of year endquantities, and the testing of the cultivation, manufacturing and processing costs allocated to the various stages of inventory duringthe year. we also tested the company’s net realizable values across each inventory and the assumptions used. impairment of long-lived assets the carrying value of long-lived assets are reviewed when facts andcircumstances suggest that the assets may be impaired or that the amortization period may need to be changed. the company considers internaland external factors relating to each asset, including cash flows, local market developments, industry trends and other publicly availableinformation. if these factors and the projected undiscounted cash flows of the company over the remaining amortization period indicatethat the asset will not be recoverable, the carrying value will be adjusted to the fair market value our audit procedures relating to the company’s assessment ofimpairment of long-lived assets included the following, among others. we evaluated the methodologies and tested the significant assumptionsand underlying data used by the company. such testing included assessing the reasonableness of the undiscounted cash flow projectionsused by the company in their assessment of impairment in comparison with historical data and the company’s assumptions used forthe projections. /s/ prager metis cpa’s llc we have served as the company’s auditor since 2018 | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.evaluation of the sufficiency of audit evidence over revenues from subscription services and related usage as discussed in note 1 to the consolidated financial statements, the company charges its clients subscription fees, usually billed on a monthly basis, for access to the company’s virtual contract center (“vcc”) cloud platform. the subscription fees are primarily based on the number of agent seats as well as the specific vcc functionalities and applications deployed by the client. agent seats are defined as the maximum number of named agents allowed to concurrently access the vcc cloud platform. substantially all of the company’s clients purchase both subscriptions and related telephony usage. the related telephony usage fees are generally based on the volume of minutes used for inbound and outbound client interactions. there are high volumes of subscription and related usage transactions processed across multiple information technology (“it”) systems.we identified the evaluation of the sufficiency of audit evidence over subscription services and related usage as a critical audit matter. revenues from subscription services and related usage involve a high volume of automated transactions dependent on the company’s it systems. therefore, our audit procedures required the involvement of it professionals and auditor judgement was required to determine the nature and extent of audit evidence obtained and evaluate the results of the procedures.the following are the primary procedures we performed to address this critical audit matter. we involved it professionals with specialized skills and knowledge, who assisted in evaluating the design and testing the operating effectiveness of certain internal controls over the company’s revenue process. this included controls over the capture and flow of subscription and related usage transactional information through the company’s it systems. we placed test calls and observed that call attributes such as duration and type of service were captured in the relevant it systems. for each billing sample tested, we also compared the agent seats, service types and rates for consistency with underlying documentation, including client contracts. we evaluated the sufficiency of audit evidence obtained by assessing the results of procedures performed, including the appropriateness of the nature and extent of such evidence over revenue for subscription services and related usage.66table of contents/s/ kpmg llp we have served as the company’s auditor since 2012. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 63 patient care revenue recognition description of matter the company had $9.5 million in patient care revenues for the year ended december 31, 2021. as disclosed in the note 1 to the consolidated financial statements, the company provides patient care services to customers and receives payments for those services from medicare, medicaid, commercial insurers, and individual patients. net revenues are recorded at the transaction price, which the company determines based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration, such as implicit price concessions. management estimates variable consideration using the expected value method, based on both historical and current information, which includes contractual agreements, discount policies, and historical reimbursement experience. the company may constrain the estimated variable consideration included in the transaction price. management makes significant judgment in the estimation of variable consideration. such assumptions include the application of historical collection rates, by payor, and consideration of other changes in the current business operations and external environment, to the current period revenues. as a result, a high degree of auditor judgment was required in performing audit procedures to evaluate the reasonableness of management’s estimates. changes in these estimates can have a material effect on the amount of revenue recognized. how we addressed the matter in our audit based on our knowledge of the company, we determined the nature and extent of procedures to be performed over patient care revenue. our audit procedures included the following: •obtained an understanding of the internal controls and processes in place over the company’s patient care revenue recognition process. •analyzed the significant assumptions and estimates made by management as discussed above. •assessed the recorded revenue by selecting a sample of transactions, analyzing the related contract, testing management’s identification of distinct performance obligations, and comparing the amounts recognized for consistency with underlying documentation. we have served as the company’s auditor since 2018. | 1 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. revenue recognition – expected labor costs to complete for certain fixed-price contracts as described in notes 1 and 2 to the consolidated financial statements, fixed-price contracts comprised $7.3 billion of the company’s total revenues for the year ended december 31, 2021, which includes performance obligations where control is transferred over time. for performance obligations where control is transferred over time, revenues are recognized based on the extent of progress towards completion of the performance obligation. the selection of the method to measure progress towards completion requires judgment and is based on the nature of the deliverables to be provided. management recognizes revenues related to fixed-price contracts for application development and systems integration services, consulting or other technology services as the service is performed using the cost to cost method, under which the total value of revenues is recognized on the basis of the percentage that each contract’s total labor cost to date bears to the total expected labor costs. the cost to cost method requires estimation of future costs, which is updated as the project progresses to reflect the latest available information. revenues related to fixed-price application maintenance, testing and business process services are recognized based on management’s right to invoice for services performed for contracts in which the invoicing is representative of the value being delivered. if management’s invoicing is not consistent with value delivered, revenues are recognized as the service is performed based on the cost to cost method described above. the principal considerations for our determination that performing procedures relating to revenue recognition – expected labor costs to complete for certain fixed-price contracts is a critical audit matter are the significant judgment by management when developing the estimated total expected labor costs to complete fixed-price contracts and the significant auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to management’s estimate of total expected labor costs.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the development of the estimated total expected labor costs to complete fixed-price contracts. these procedures also included, among others, evaluating and testing management’s process for developing the estimated total expected labor costs for a sample of contracts, which included evaluating the reasonableness of the total expected labor cost assumptions used by management. evaluating the reasonableness of the assumptions related to the total expected labor costs involved assessing management’s ability to reasonably develop total expected labor costs by (i) performing a comparison of actual labor costs incurred with expected labor costs for similar completed projects and (ii) evaluating the timely identification of circumstances that may warrant a modification to previous labor cost estimates, including actual labor costs in excess of estimates. /s/ pricewaterhouse coopers llp new york, new york february 16, 2022we have served as the company’s auditor since 1997. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.quantitative goodwill impairment assessment for reporting units a, b and c as described in notes 1 and 8 to the consolidated financial statements, the company’s consolidated goodwill balance was $4.9 billion as of december 31, 2019, and as disclosed by the company, the goodwill associated with reporting units a, b and c was $533.5 million, $209.1 million and $182.1 million, respectively. the fair value of reporting units for which management performed quantitative impairment tests were estimated using a combination of the income approach, which incorporates the use of the discounted cash flow method, and the market approach, which incorporates the use of earnings and revenue multiples based on market data. as disclosed by management, an equal weighting was applied to the income and market approaches for management’s analysis. for the income approach, management used projections, which require the use of significant estimates and assumptions specific to the reporting unit as well as those based on general economic conditions. factors specific to each reporting unit include revenue growth, profit margins, terminal value growth rates, capital expenditure projections, assumed tax rates, discount rates and other assumptions deemed reasonable by management. for the market approach, management used judgment in identifying the relevant comparable company market multiples. the principal considerations for our determination that performing procedures relating to the quantitative goodwill impairment assessment for reporting units a, b and c is a critical audit matter are there was significant judgment required by management when developing the fair value measurement of the reporting units, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s cash flow projections and significant assumptions used by management in the discounted cash flow and market models, including revenue growth, profit margins, terminal value growth rates, discount rates, and comparable company market multiples. in addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s quantitative annual goodwill impairment assessment, including controls over the valuation of the company’s reporting units. these procedures also included, among others, testing management’s process for developing the fair value estimates, evaluating the appropriateness of the discounted cash flow and market models, testing the completeness, accuracy and relevance of underlying data used in the models, and evaluating the significant assumptions used by management, including revenue growth, profit margins, terminal value growth rates, discount rates, and comparable company market multiples. evaluating management’s assumptions related to revenue growth, profit margins, and the terminal value growth rates involved evaluating whether the assumptions used by management were reasonable considering the current and past performance of the reporting units, the consistency with external market and industry data and whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of the company’s discounted cash flow and market multiple models and certain significant assumptions, including the discount rates and comparable company market multiples.unrecognized tax benefits as described in notes 1 and 9 to the consolidated financial statements, the company has recorded liabilities for unrecognized tax benefits of $345.3 million as of december 31, 2019. various years of the company’s income tax filings are currently under examination by tax authorities in the u.s., in various countries, and in various states, such as new york, in which the company has significant business operations. as disclosed by management, the assessment of recognition and measurement requires critical estimates and the use of complex judgments. management evaluates the tax positions using the “more likely than not” recognition threshold and then applies a measurement assessment to those positions that meet the recognition threshold. management establishes tax reserves considering the potential for additional assessments in each of the jurisdictions in which the company is subject to 43taxation. management assesses the likelihood of additional tax assessments in those jurisdictions and adjusts reserves as additional information or events require. the principal considerations for our determination that performing procedures relating to unrecognized tax benefits is a critical audit matter are there was significant judgment by management when determining unrecognized tax benefits as a result of applying complex tax laws to the company’s multi-national operations. this in turn led to significant auditor judgment, effort, and subjectivity in performing procedures to evaluate the timely identification and accurate measurement of unrecognized tax benefits. also, the evaluation of audit evidence available to support the tax liabilities for unrecognized tax benefits is complex and required auditor judgment as the nature of the evidence is often subjective. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the identification and recognition of the liability for unrecognized tax benefits, and controls addressing completeness of the unrecognized tax benefits, as well as controls over measurement of the liability. these procedures also included, among others, (i) testing the information used in the calculation of the liability for unrecognized tax benefits, including international, federal, and state filing positions, and the related final tax returns; (ii) testing the calculation of the liability for unrecognized tax benefits by jurisdiction, including management’s assessment of the technical merits of tax positions and estimates of the amount of tax benefit expected to be sustained; (iii) testing the completeness of management’s assessment of both the identification of unrecognized tax benefits and possible outcomes of each unrecognized tax benefit; and (iv) evaluating the status and results of income tax audits with the relevant tax authorities. /s/ pricewaterhouse coopers llp new york, new york february 21, 2020we have served as the company's auditor since 1952. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.deferred revenue as described in notes 2 and 4 to the consolidated financial statements, the partnership’s terminalling services agreements at the hardisty and stroud terminals generally grant make-up rights to customers that do not meet their monthly volume commitment. these rights allow customers to make up the volume deficiency by loading volumes in excess of their minimum monthly commitment in future periods, without additional charge, to the extent capacity is available for the excess volume. the make-up rights typically expire, if unused, in subsequent periods up to 12 months following the period for which the volumes were originally committed. as of december 31, 2021 96and 2020, the partnership had deferred revenue associated with make-up rights of $1.4 million and $0, respectively, which represents the amount of make-up rights (“breakage”) the partnership expects its customers will exercise. we identified management’s judgments used to estimate breakage as a critical audit matter. significant judgments are required by management to develop the estimate of breakage, including forecasting customer usage of the respective terminals based on customer nominations and nomination trends for the foreseeable future periods; management’s projections of the prices of crude oil and relevant pricing differentials, available pipeline takeaway capacity and associated pipeline apportionment levels; and the impact of government crude oil production curtailment restrictions, if any, which are outside of the partnership’s control. auditing these elements involved especially challenging auditor judgment due to the nature and extent of audit effort required in performing procedures and evaluating audit evidence obtained related to management’s assumptions. the primary procedures we performed to address this critical audit matter included: •testing the available pipeline takeaway capacity and associated pipeline apportionment levels used in management’s breakage analysis by comparing to market data; •evaluating the reasonableness of significant assumptions used by management, including obtaining third party information to support both applicable future oil prices and industry information on current government restrictions, as well as evaluating the customer’s expectation for future usage through nominations./s/ bdo usa, llp we have served as the partnership’s auditor since 2014. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.evaluation of the impairment analysis for brand trade name as discussed in notes 2 and 8 to the consolidated financial statements, the trade names intangible assets balance was $163 million as of january 2, 2021, of which $65 million related to the western window systems brand. the company performs an evaluation of the carrying amount of indefinite-lived trade names annually, or more frequently, if events or changes in circumstances indicate that they might be impaired. based upon the evaluation performed, the company recognized pre-tax impairment charge for the western window systems brand trade name of $8 million during the year ended january 2, 2021. - 48 - we identified the evaluation of the impairment analysis for the western window systems trade name as a critical audit matter. specifically, the evaluation of revenue growth rates, royalty rate, and discount rate assumptions used to calculate the fair value of the trade name required subjective auditor judgment as minor changes in those assumptions would have had a significant effect on the company’s assessment of the carrying value of the trade name. those assumptions are affected by expected future market or economic conditions, including the impact of covid-19 and the resulting duration of the economic downturn. the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls over the company’s trade name impairment analysis process, including controls over the development of the revenue growth rates, the royalty rate, and the discount rate assumptions. we performed sensitivity analyses over those assumptions to assess their impact on the company’s determination of the fair value of the trade name. we compared the company’s historical revenue forecasts to actual results to assess the company’s ability to accurately forecast. we evaluated the company’s forecasted revenue growth rates for the western window systems brand, by comparing the growth assumptions to forecasted growth rates in the company’s and its peer companies’ analyst reports, including the impact of covid-19. we involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the company’s: •selected royalty rate for the western window systems brand, by comparing it against publicly available market data for comparable entities’ trade name licensing agreements; and •discount rate, by comparing it against a discount rate range that was independently developed using publicly available market data for comparable entities. evaluation of the acquisition-date fair value of brand trade name as discussed in note 5 to the consolidated financial statements, on february 1, 2020, the company acquired new south window solutions, llc and new south window solutions of orlando llc (together, new south) in a business combination. as a result of the transaction, the company acquired a trade name intangible asset with an acquisition-date fair value of $22.2 million. we identified the evaluation of the acquisition-date fair value of the new south trade name intangible asset as a critical audit matter. specifically, the evaluation of revenue growth rates, royalty rate, and discount rate assumptions used to calculate the fair value of the trade name required subjective auditor judgment as minor changes in those assumptions would have had a significant effect on the company’s assessment of the fair value of the trade name. the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls over the company’s acquisition-date valuation process, including controls over the development of the revenue growth rates, royalty rate, and the discount rate assumptions. we performed sensitivity analyses over those assumptions to assess their impact on the company’s determination of the fair value of the trade name. we compared the company’s forecasted new south revenue growth rates to new south’s historical actual results and to forecasted growth rates in the company’s and its peer companies’ analyst reports. we involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the company’s: •selected royalty rate for the new south brand, by comparing it against publicly available market data for comparable entities’ trade name licensing agreements; and •discount rate, by comparing it against a discount rate range that was independently developed using publicly available market data for comparable entities. /s/ kpmg llp we have served as the company’s auditor since 2014. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.merger with tribune - valuation of fcc license and network affiliation agreement intangible assets as described in notes 2 and 3 to the consolidated financial statements, the company completed its merger with tribune media company (tribune) in 2019, which resulted in $1.2 billion of fcc license intangible assets and $1.3 billion in network affiliation agreement intangible assets being recorded. the estimated fair value of an fcc license is calculated using a discounted cash flow model referred to as the greenfield method. inputs to this model include, but are not limited to, (i) a four-year build-up period for a start-up station to reach a normalized state of operations, (ii) market long-term growth rate over a projection period, (iii) estimated market revenue share for a typical market participant without a network affiliation, (iv) estimated profit margins based on industry data, (v) capital expenditures based on the size of market and the type of station being constructed, (vi) estimated tax rates in the appropriate jurisdiction, and (vii) an estimated discount rate using a weighted average cost of capital analysis. the greenfield method also includes an estimated terminal value by discounting an estimated annual cash flow with an estimated long-term growth rate. the greenfield method is also utilized in the valuation of network affiliation agreements except that the estimated market revenue share, estimated profit margins, capital expenditures and other assumptions reflect a market participant premium. the excess of the estimated fair value in this model over the estimated value of an fcc license of an independent station under the greenfield method represents the estimated fair value of a network affiliation agreement. the principal considerations for our determination that performing procedures relating to the merger with tribune - valuation of fcc license and network affiliation agreement intangible assets is a critical audit matter are (i) there was a high degree of auditor judgment and subjectivity in applying procedures relating to the valuation of the acquired fcc license and network affiliation agreement intangible assets due to the significant amount of judgment by management when developing the estimates; (ii) significant audit effort was necessary in performing procedures and evaluating the audit evidence obtained relating to assessing the reasonableness of significant assumptions, including the market long-term growth rate over a projection period and an estimated discount rate using a weighted average cost of capital analysis; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.f-3 addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the merger with tribune, including the controls over management’s valuation of the fcc license and network affiliation agreement intangible assets and the controls over development of the assumptions related to the valuation of these intangible assets, including the market long-term growth rate and discount rate. these procedures also included, among others, reading the merger agreement and testing management’s process for valuing the fcc license and network affiliation agreement intangible assets. testing management’s processes included evaluating the appropriateness of the valuation methods, including the greenfield method, and the reasonableness of significant assumptions, including the market long-term growth rate over a projection period and an estimated discount rate using a weighted average cost of capital analysis. evaluating the reasonableness of the market long-term growth rate involved considering economic and industry forecasts. professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the valuation method and the estimated discount rate applied to the cash flow projections. the estimated discount rate was evaluated by considering the cost of capital of comparable businesses and other industry factors. merger with tribune - valuation of tv food network equity method investment as described in notes 2 and 7 to the consolidated financial statements, in connection with the tribune merger, the company recorded an equity method investment in tv food network amounting to $1.4 billion. the estimated fair value on the date of acquisition was based on a weighting of valuations using a combination of various methods. these methods included a discounted cash flow model, a dividend-capitalization approach, and comparable private transaction and public company multiples. discounts were also applied for the lack of control of the investee and marketability of a presumed sale. the principal considerations for our determination that performing procedures related to the merger with tribune - valuation of the tv food network equity method investment is a critical audit matter are (i) there was a high degree of auditor judgment and subjectivity in applying procedures relating to the valuation of the acquired tv food network equity method investment due to the significant amount of judgment by management when developing the estimate; (ii) significant audit effort was necessary to perform procedures relating to evaluating the reasonableness of the weighting applied to each valuation method and the discounts applied for the lack of control of the investee and the marketability of a presumed sale; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the merger of tribune, including the controls over management’s valuation of the tv food network equity method investment, and controls related to the weighting applied to the determined values from each valuation and the discounts applied for the lack of control of the investee and the marketability of a presumed sale. these procedures also included, among others, testing management’s process for valuing the tv food network equity method investment. testing management’s process included evaluating the appropriateness of the valuation methods, including the discounted cash flow model, dividend-capitalization approach, and comparable private transaction and public company multiples, and evaluating the reasonableness of the weighting and discounts applied to each determined value. professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the discounted cash flow model, dividend-capitalization approach, and comparable private transaction and public company multiples, and the reasonableness of the weighting and discounts applied. /s/ pricewaterhouse coopers llp dallas, texas march 2, 2020 we have served as the company’s auditor since 1997. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. revenue — refer to notes 1 and 3 to the financial statements critical audit matter description 62 for certain custom products that require engineering and development based on customer specifications, the company recognizes revenue over time using a cost-to-cost measure of progress which the company believes faithfully depicts the transfer of control of the goods or services to the customer. due to uncertainties inherent in the estimation process, estimates of hours and costs to complete a performance obligation may be revised. the company reviews and updates its contract-related estimates for projected hours and costs regularly, and records adjustments as needed. as judgements with respect to the forecasted hours and cost per hour could impact the timing or amount of revenue recognition, we identified the evaluation of the reasonableness of these assumptions and estimates as a critical audit matter. this required a high degree of auditor judgment and an increased extent of testing. how the critical audit matter was addressed in the audit our audit procedures related to testing the forecasted hours and cost per hour estimates and assumptions included the following, among others: for selected revenue arrangements we performed the following:•obtained and read the contract source documents and evaluated the consistency of the milestones and performance obligations with those reflected in managements calculations. •tested the hourly rates in management’s calculations. •tested the accuracy of the mathematical formulas included in management’s cost-to-cost measure of progress. •evaluated the company’s forecasted hours estimates by performing corroborating inquiries with the company’s project managers and leadership team and comparing the estimates to management’s work plans and contracts. •selected a sample of engineers and confirmed with them that the forecasted hours to complete as of december 31, 2021 for the project were complete, accurate, and reasonable as reflected in management’s calculations. •we performed inquires with the company's leadership team to understand, confirm, and corroborate the current status of the project and assess if the forecasted hours to complete the project were reasonable per their discussions with the customer. •we assessed management’s ability to estimate by reviewing actuals against original forecasts. /s/ deloitte & touche llp san jose, california february 28, 2022 we have served as the company's auditor since 2020. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.evaluation of the sufficiency of audit evidence over revenue as discussed in note 1 and note 11 to the consolidated financial statements, and disclosed in the consolidated statements of comprehensive income, the company recorded $1,104.1 million of total revenues for the year ended january 31, 2020, of which $896.3 million was subscription services related, and $207.8 million was professional services related. each of these categories of revenue has multiple service offerings, and the company’s process for revenue recognition differs between them. we identified the evaluation of the sufficiency of audit evidence over revenue as a critical audit matter. evaluating the nature and extent of audit evidence obtained over revenue for each service offering and related disclosures required subjective auditor judgment because of the multiple service offerings and the related disclosure requirements.the primary procedures we performed to address this critical audit matter included the following. we applied auditor judgment to determine the nature and extent of procedures to be performed over revenue, including the determination of the revenue for service offerings. for each service offering where procedures were performed, we tested certain internal controls over the company’s revenue recognition process and the related revenue disclosures. we assessed the recorded revenue by selecting transactions and comparing the amounts recognized for consistency with underlying documentation, including contracts with customers. we also evaluated the related revenue disclosures by selecting transactions comprising the reported balances and comparing the amounts reported for consistency with underlying documentation. in addition, we evaluated the overall sufficiency of audit evidence obtained over revenue.veeva systems inc. | form 10-k 57table of contents evaluation of the acquisition date fair value of intangible assets acquired in the crossix business combination as discussed in note 2 to the consolidated financial statements, on november 1, 2019, the company acquired crossix in a business combination. as a result of the transaction, the company acquired customer relationships and existing technology intangible assets with acquisition-date fair values of $70.1 million and $19.2 million, respectively. we identified the evaluation of the acquisition date fair value of the customer relationships and existing technology intangible assets acquired in the crossix business combination as a critical audit matter. testing the following key assumptions regarding future revenue growth rates and future operating margins, which were used in the measurement of the fair values, involved a high degree of subjectivity. the measurement of the fair value of these intangible assets was sensitive to changes in these key assumptions.the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s acquisition date fair value process, including controls over the development of the key assumptions as listed above. we performed sensitivity analyses over the key assumptions to assess the impact of changes in those assumptions on the company’s determination of the fair value of the intangible assets. we evaluated crossix’s future revenue growth rates and future operating margins by comparing them to historical results and benchmark data. in addition, we assessed the key assumptions by comparing them to those of a market participant, including consideration of recent similar market transactions./s/ kpmg llp we have served as the company’s auditor since 2010. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.liability for future policy benefits - refer to notes 1 and 3 to the consolidated financial statements critical audit matter description as of december 31, 2019, the liability for future policy benefits was $39.7 billion. future policy benefit liabilities are generally equal to the present value of future expected benefits to be paid, reduced by the present value of future expected net premiums. assumptions used to measure the liability are based on the company’s experience and include a margin for adverse deviation. management regularly reviews its assumptions supporting the estimates of actuarial liabilities and differences between actual experience and the assumptions used in pricing the policies and guarantees may require a change to the assumptions recorded at inception as well as an adjustment to the related liabilities. updating such assumptions can result in variability of profits or the recognition of losses. given the future policy benefit obligation for these contracts is sensitive to changes in the assumptions related to mortality, morbidity, benefit utilization and withdrawals, policy lapse, inflation, and investment returns, auditing management’s selection of these assumptions involves an especially high degree of estimation.how the critical audit matter was addressed in the audit our audit procedures related to the updating of assumptions by management included the following, among others: •we tested the effectiveness of management’s controls over the assumption review process, including those over the selection of the assumptions used. •with the assistance of actuarial specialists, we evaluated the appropriateness of the assumptions used, developed an independent estimate of the future policy benefit liability, and compared our estimates to management’s estimates. •we tested the completeness and accuracy of the underlying data that served as the basis for the actuarial analysis, including experience studies, to test that the inputs to the actuarial estimate were reasonable.•we evaluated the methods and assumptions used by management to identify potential bias. •we evaluated whether the assumptions used were consistent with evidence obtained in other areas of the audit.deferred acquisition cost (dac) - refer to notes 1 and 4 to the consolidated financial statements critical audit matter description the company incurs and defers certain costs in connection with acquiring new and renewal insurance business. these deferred costs, amounting to $4.9 billion as of december 31, 2019, are amortized over the expected life of the policy contract in proportion to actual and expected future gross profits, premiums or margins. for universal and variable life insurance policies and deferred annuity contracts, expected future gross profits utilized in the amortization calculation are derived using assumptions such as investment returns in excess of the amounts credited to policyholders, mortality, persistency, benefit elections and withdrawals, interest crediting rates, and expenses. the assumptions used in the calculation of expected future gross profits are reviewed at least annually. 123table of contents given the significance of the estimates and uncertainty associated with the long-term assumptions utilized in the determination of expected future gross profits, premiums, or margins, auditing management’s determination of the appropriateness of the assumptions used in the calculation of dac amortization involves an especially high degree of estimation.how the critical audit matter was addressed in the audit our audit procedures related to management’s determination of dac amortization included the following, among others: •we tested the effectiveness of management’s controls related to the determination of expected future gross profits, premiums, and margins, including those over management’s review that the assumptions utilized represented a reasonable estimate. •with assistance from our actuarial specialists, we evaluated the data included in the estimate provided by the company’s actuaries and the methodology utilized, and evaluated the process used by the company to determine whether the assumptions used were reasonable estimates based on the company’s own experience and industry studies.•we inquired of the company’s actuarial specialists whether there were any changes in the methodology utilized during the year in the determination of expected future gross profits. •we inspected supporting documentation underlying the company’s experience studies and, utilizing our actuarial specialists, independently recalculated the amortization for a sample of policies, and compared our estimates to management’s estimates.•we evaluated whether the assumptions used by the company were consistent with evidence obtained in other areas of the audit.•we evaluated the sufficiency of the company’s disclosures related to dac amortization.embedded derivative liabilities related to variable annuity guarantees - refer to notes 1, 7, and 8 to the consolidated financial statements. critical audit matter description the company sells index-linked annuities and variable annuity products with guaranteed minimum benefits, some of which are embedded derivatives that are required to be bifurcated from the host contract, separately accounted for, and measured at fair value. as of december 31, 2019, the fair value of the embedded derivative liability associated with certain of the company’s annuity contracts was $4.2 billion. management utilizes various assumptions in order to measure the embedded liability including expectations concerning policyholder behavior, mortality and risk margins, as well as changes in the company’s own nonperformance risk. these assumptions are reviewed at least annually by management, and if they change significantly, the estimated fair value is adjusted by a cumulative charge or credit to net income. given the embedded derivative liability is sensitive to changes in these assumptions, auditing management’s selection of these assumptions involves an especially high degree of estimation.how the critical audit matter was addressed in the audit our audit procedures related to the assumptions selected by management for the embedded derivative liability included the following, among others: •we tested the effectiveness of management’s controls over the embedded derivative liability, including those over the selection of the assumptions related to policyholder behavior, mortality, risk margins and the company’s nonperformance risk. •with the assistance of our actuarial specialists, we evaluated the appropriateness of the assumptions, tested the completeness and accuracy of the underlying data and the mathematical accuracy of the company’s valuation model.•we evaluated the reasonableness of the company’s assumptions by comparing those selected by management to those independently derived by our actuarial specialists, drawing upon standard actuarial and industry practice.124table of contents•we evaluated the methods and assumptions used by management to identify potential bias in the determination of the embedded liability. •we evaluated whether the assumptions used were consistent with evidence obtained in other areas of the audit./s/ deloitte & touche llp charlotte, north carolina february 26, 2020we have served as the company’s auditor since 2016. | 3 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. mortgage servicing rights - refer to notes 3, 6 and 9 to the financial statements critical audit matter description the company accounts for ms rs at fair value and categorizes its ms rs as “level 3” fair value assets. the company uses a discounted cash flow approach to estimate the fair value of ms rs. the key inputs used in the estimation of the fair value of ms rs include the applicable pricing spread (a component of the discount rate), the prepayment and default rates of the underlying loans (“prepayment speed”) and the annual per-loan cost of servicing, all of which are unobservable. significant changes to any of those inputs in isolation could result in a significant change in the ms rs’ fair value measurement. we identified the pricing spread and prepayment speed assumptions used in the valuation of ms rs as a critical audit matter because of the significant judgments made by management in determining these assumptions. auditing these assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, to evaluate the reasonableness of management’s estimates and assumptions related to selection of the pricing spread and prepayment speed. how the critical audit matter was addressed in the audit our audit procedures related to the pricing spread and prepayment speed assumptions used by the company to estimate the fair value of ms rs included the following, among others: ·we tested the design and operating effectiveness of internal controls over determining the fair value of ms rs, including those over the determination of the pricing spread and prepayment speed assumptions ·with the assistance of our fair value specialists, we evaluated the reasonableness of management’s prepayment speed assumptions by comparing them to independent market information ·we evaluated the reasonableness of management’s prepayment speed assumptions of the underlying mortgage loans, by comparing historical prepayment speed assumptions to actual results ·we tested management’s process for determining the pricing spread assumptions by comparing them to the implied spreads within market transactions and other third-party information used by management /s/ deloitte & touche llp los angeles, california february 28, 2020 we have served as the company’s auditor since 2008. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.valuation of pension benefit obligation as described in note 17 to the consolidated financial statements, the company’s consolidated pension benefit obligation, excluding other postretirement benefits, was $609 million as of december 31, 2019. management develops the actuarial assumptions used by various us and foreign plans based upon the circumstances of each particular country and pension plan. as disclosed by management, the determination of the pension benefit obligation requires the use of estimates and assumptions. management’s significant assumption in the determination of the pension benefit obligation is the discount rate. the principal considerations for our determination that performing procedures relating to the valuation of the pension benefit obligation is a critical audit matter are there was significant judgment by management to determine the pension benefit obligation. this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s significant assumption used in the valuation of the pension benefit obligation, specifically the discount rate. in addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the valuation of the pension benefit obligation, including controls over the company’s methods, significant assumption, and data. these procedures also included, among others, testing the completeness, accuracy, and relevance 36table of contentsof underlying data used in the valuation of the pension benefit obligation. with the involvement of professionals with specialized skill and knowledge to assist, these procedures also included testing management’s process for determining the pension benefit obligation, evaluating the appropriateness of the methods, and evaluating the reasonableness of the significant assumption, specifically the discount rate. /s/ pricewaterhouse coopers llp richmond, virginia february 18, 2020we have served as the company’s or its predecessor’s auditor since 1947. | 4 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.defined benefit plan assets—hedge fund and private equity fund valuation—refer to note 1 and note 13 to the financial statements critical audit matter description the fair values of defined benefit plan assets in hedge funds and private equity funds are estimated using the net asset value (nav) per share and total $84 million as of december 31, 2021. to derive the estimated nav per share, various methodologies are utilized, including, but not limited to, proprietary estimation models, quoted market prices, and third-party valuations for underlying securities within the investments; evaluation of contributions, distributions, interest, dividends, and management fees; as well as evaluation of the general market conditions and their correlation and impact on the investments.because the estimation of fair value of the hedge fund and private equity fund investments involves the use of complex proprietary models and unobservable inputs, auditing the valuation of these investments required a high degree of auditor judgment and an increased extent of effort.41how the critical audit matter was addressed in the audit our audit procedures related to the valuation of the defined benefit plan’s hedge fund and private equity fund investments included the following, among others:•we tested the design, implementation and operating effectiveness of the company’s controls over the valuation of the defined benefit plan’s hedge fund and private equity fund investments as of december 31, 2021.•we performed a retrospective review in which we compared the estimated fair value recorded by the company in the december 31, 2020 financial statements, to the actual fair value of the defined benefit plan’s hedge fund and private equity fund (using the per share nav disclosed in the fund’s subsequently issued audited financial statements) to evaluate the appropriateness of management’s estimation process.•we evaluated management’s ability to accurately estimate the fair value of hedge fund and private equity fund investments by performing a review of purchases and/or sales of hedge funds and private equity funds, initiated by the company, that occurred close to december 31, 2021 (when available), taking those traded values into account as well as changes in market conditions between the observable transaction date and december 31, 2021.•we rolled forward the valuation from each hedge fund or private equity fund’s most recently audited financial statements to december 31, 2021. this roll forward procedure included consideration of the company’s transactions in the fund during the period as well as an estimate of the fund’s returns based on an appropriate benchmark or index. we then compared our independent fund valuation estimate to the december 31, 2021 balance recorded by the company./s/ deloitte & touche llp dayton, ohio february 28, 2022 we have served as the company's auditor since 2006. | 4 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.accrued medicaid rebates as described in notes 2 and 10 to the consolidated financial statements, the company has accrued government rebates and chargebacks of $222.6 million as of december 31, 2021. a significant portion of these accruals relates to the company’s medicaid rebates. management calculates the medicaid rebate allowance using the expected value method. management accrues estimated rebates based on estimated percentages of medicine prescribed to qualified patients, estimated rebate percentages and estimated levels of inventory in the distribution channel that will be prescribed to qualified patients and records the rebates as a reduction of revenue. the principal considerations for our determination that performing procedures relating to accrued medicaid rebates is a critical audit matter are (i) the significant judgment by management when determining the allowance, and (ii) the high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management's estimate and significant assumptions related to estimated percentages of medicine prescribed to qualified patients, estimated rebate percentages and estimated levels of inventory in the distribution channel that will be prescribed toqualified patients. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to accrued medicaid rebates, including controls over the assumptions used to estimate the allowance. these procedures also included, among others, (i) developing an independent estimate of the accrued medicaid rebates by utilizing third-party prescription data, the terms of the specific rebate programs, and the historical trend of actual rebate claims paid, (ii) comparing the independent estimate to management’s estimate to evaluate the reasonableness of the estimate, (iii) testing rebate claims processed by the company, including evaluating those claims for consistency with the terms of the specific rebate programs, (iv) testing the completeness, accuracy and relevance of the underlying data used by management, and (v) evaluating the significant assumptions used by management related to estimated percentages of medicine prescribed to qualified patients, estimated rebate percentages and estimated levels of inventory in the distribution channel that will be prescribed to qualified patients. evaluating management’s assumptions involved evaluating whether the assumptions were reasonable considering (i) the consistency of the assumptions with historical trends, (ii) comparing assumptions and inputs to government prices, invoices, current payment trends, and other third-party data on a test basis where relevant, (iii) whether relevant company and industry specific considerations have been incorporated into the assumptions, and (iv) whether these assumptions were consistent with evidence obtained in other areas of the audit. f-2 valuation of developed technology asset - acquisition of viela bio, inc. as described in notes 1 and 4 to the consolidated financial statements, on march 15, 2021, the company completed its acquisition of viela bio, inc. (“viela”) and acquired all of the issued and outstanding shares of viela’s common stock for approximately $3.0 billion. identifiable assets and liabilities of viela, including identifiable intangible assets, were recorded based on their estimated fair values as of the date of the closing of the acquisition, which included a developed technology intangible asset of $1.5 billion. the fair value of developed technology was determined using an income approach. some of the most significant assumptions inherent in the development of the asset valuation include the estimated net cash flows for each year (including net sales, cost of goods sold, sales and marketing costs, and r&d costs) and the discount rate. the principal considerations for our determination that performing procedures relating to the valuation of the developed technology asset from the viela acquisition is a critical audit matter are (i) the significant judgment by management when determining the fair value of the developed technology asset acquired, (ii) the high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to net sales, cost of goods sold, sales and marketing costs, and discount rate, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the developed technology asset and controls over the development of significant assumptions related to net sales, cost of goods sold, sales and marketing costs, and discount rate. these procedures also included, among others (i) reading the purchase agreement, (ii) testing management’s process for determining the fair value of the developed technology asset, (iii) evaluating the appropriateness of the income valuation approach, (iv) testing the completeness, accuracy and relevance of the underlying data used by management in the approach, and (iv) evaluating the reasonableness of the significant assumptions used by management related to net sales, cost of goods sold, sales and marketing costs, and discount rate. evaluating management’s significant assumptions related to net sales, cost of goods sold, and sales and marketing costs involved evaluating whether the significant assumptions used by management were reasonable considering (i) the current and past performance of viela, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the income valuation approach and (ii) the reasonableness of the discount rate significant assumption. /s/ pricewaterhouse coopers llp chicago, illinois march 1, 2022 we have served as the company’s auditor since 2009. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.valuation of the asset-specific provision for loan losses as described in notes 2 and 3 to the consolidated financial statements, the company’s consolidated mortgage loan receivables held for investment, at amortized cost were $2.35 billion, net of allowance for credit losses of $41.5 million, as of december 31, 2020. the provision for loan losses includes a portfolio-based, current expected credit loss (“cecl”) component and an asset-specific component of $20.1 million and $21.4 million, respectively. the portfolio-based component of the provision for loan losses is calculated using a credit loss model, which is a forward-looking, econometric, commercial real estate loss forecasting tool. the model is comprised of a probability of default model and a loss given default model that, layered together with loan-level data, selected forward-looking macroeconomic variables, and pool-level mean loss rates, produces life of loan expected losses at the loan and portfolio level. where management has determined that the credit loss model does not fully capture certain external factors, including portfolio trends or loan-specific factors, a qualitative reserve is recorded. the asset-specific reserve component relates to reserves for losses on individually impaired loans. management considers a loan to be impaired when it is deemed probable the company will be unable to collect all amounts due according to the contractual terms of the loan agreement. if the loan is considered to be impaired, an allowance is recorded to reduce the carrying value of the loan to the present value of the expected future cash flows discounted at the loan’s effective rate, or the fair value of the collateral, less the estimated costs to sell, if recovery of the company’s investment is expected solely from the collateral. determining fair value of the collateral may take into account a number of assumptions including, but not limited to, cash flow projections, market capitalization rates, discount rates and recent comparable sales of similar properties. such assumptions are generally based on current market conditions and are subject to economic and market uncertainties.the principal considerations for our determination that performing procedures relating to the valuation of the asset-specific provision for loan losses is a critical audit matter are (i) the significant judgment by management in determining the fair value of the collateral of impaired loans for the asset-specific provision for loan losses, which in turn led to (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to management’s significant assumptions related to market capitalization rates used to estimate the fair value of the collateral of impaired loans for the asset-specific provision for loan losses. also, the audit effort involved the use of professionals with specialized skill and knowledge.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the valuation of the asset-specific provision for loan losses, including the significant assumptions related to market capitalization rates used to determine the fair value of the collateral for the asset-specific provision for loan losses. these procedures also included, among others (i) evaluating management’s process relating to the valuation of the asset- specific provision for loan losses, (ii) for a selection of individually impaired loans, evaluating the appropriateness of the methodologies used by management, (iii) testing the completeness and accuracy of the data, and (iv) for a selection of individually impaired loans, evaluating the reasonableness of the significant assumptions related to market capitalization rates by considering external market data. for a selection of individually impaired loans, professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of methodologies used by management and (ii) the reasonableness of the significant assumptions related to market capitalization rates.93table of contents valuation of assets acquired through foreclosure as described in notes 2 and 5 to the consolidated financial statements, the carrying value of the company’s consolidated real estate and related lease intangibles, net was $985.3 million, inclusive of $106.8 million of foreclosed properties, as of december 31, 2020. the company generally acquires real estate assets or land and development assets through cash purchases and may also acquire such assets through foreclosure or deed-in-lieu of foreclosure in full or partial satisfaction of defaulted loans. the company records real estate acquired through foreclosure at fair value. in estimating the fair value of the tangible and intangible assets acquired, management considers information obtained about each property as a result of its due diligence and marketing and leasing activities, and utilizes various valuation methods. these methods may include discounted cash flow models, for which assumptions including cash flow projections, discount and capitalization rates are used, or market comparable transactions, which require management judgment in determining the appropriateness of recent comparable sales of similar properties. management may also use the ground lease approach for land valuation, which requires judgment in determining comparable ground leases and related capitalization rates.the principal considerations for our determination that performing procedures relating to the valuation of assets acquired through foreclosure is a critical audit matter are (i) the significant judgment by management to estimate the fair value of the assets acquired through foreclosure, which in turn led to (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to management’s significant assumptions related to the appropriateness of recent comparable sales of similar properties. also, the audit effort involved the use of professionals with specialized skill and knowledge.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the valuation of assets acquired through foreclosure, including the significant assumptions related to the appropriateness of recent comparable sales of similar properties. these procedures also included, among others (i) evaluating management’s process relating to the valuation of assets acquired through foreclosure, (ii) evaluating the appropriateness of the valuation methods used by management, (iii) testing the completeness and accuracy of the data, and (iv) evaluating the reasonableness of the comparable sales of similar properties assumptions. professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of valuation methods used by management and (ii) the reasonableness of the significant assumptions related to the appropriateness of recent comparable sales of similar properties./s/ pricewaterhouse coopers llp new york, new york february 25, 2021 we have served as the company’s or its predecessor’s auditor since 2009. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.stand-alone selling price of cloud professional services the company recognized $160.2 million of cloud professional services revenue for the year ended december 31, 2021, and the related contract assets were $62.7 million as of december 31, 2021. as discussed in note 2 to the consolidated financial statements, the company’s cloud service arrangements include professional services revenue for the implementation of new customers or customer migrations, followed by access to the company’s hosted payroll processing solution. revenue recognized for the professional services and payroll processing performance obligations is based on an allocation of the total transaction price to each performance obligation using their respective stand-alone selling prices. this results in revenue being recognized in an amount that exceeds the amount the company is contractually allowed to bill their customer, resulting in the recognition of a contract asset. the determination of the stand-alone selling price for the performance obligations requires the company to make assumptions based on market conditions and observable inputs, as well as an estimate of the total professional service hours expected to be incurred in connection with the implementation.we identified the assessment of the company’s total estimated professional services hours expected to be incurred when determining the stand-alone selling price of the cloud professional services performance obligation for implementation as a critical audit matter. the testing of the professional services hours assumption required a higher degree of auditor subjectivity as the assumption is internally-developed and there is no observable market information.the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls related to the critical audit matter. this included a control related to the company’s process for estimating the total professional services hours expected to be incurred in determining the estimated selling price of the cloud professional services performance obligation, as well as internal controls related to the ongoing monitoring and accounting for changes to the total estimated professional services hours during the implementation phase. for a sample of contracts, we evaluated the company’s ability to accurately estimate the total hours expected to be incurred for the professional services performance obligation by comparing the estimated hours to the actual hours incurred. for a sample of contracts, we inquired of the project manager regarding the estimation of the total hours to be incurred and compared the project manager’s estimate to the company’s revenue model used to determine the estimated selling price of the cloud professional services performance obligation for implementation.acquisition-date fair value of customer relationships intangible asset as discussed in note 3 to the consolidated financial statements, on march 1, 2021, the company completed the purchase of 100% of the outstanding shares of ascender hcm pty limited for a purchase price of $359.6 million (the “transaction”). the company records all assets and liabilities, including intangible assets, acquired in a 50 2021 form 10-k table of contents business combination at fair value. the company acquired various intangible assets in the transaction, including a customer relationships intangible asset associated with the generation of future income from existing customers. the acquisition-date fair value for this asset was $76.5 million.we identified the evaluation of the acquisition-date fair value of the customer relationships intangible asset as a critical audit matter. there was a higher degree of subjective auditor judgment in evaluating forecasted ebitda margins used in the fair value measurement of the customer relationships intangible asset.the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls related to the company’s acquisition-date valuation process, including a control related to management’s assessment of the forecasted ebitda margins. to assess the forecasted ebitda margins used in the valuation, we compared the forecasted ebitda margins to ascender hcm pty limited’s historical results and ebitda margins of comparable companies. in addition, we performed sensitivity analyses over the acquisition-date fair value of the customer relationships intangible asset by considering reasonably possible changes to forecasted ebitda margins and comparing the results to the company’s fair value estimate. /s/ kpmg llp we have served as the company’s auditor since 1958. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. net revenue adjustments as described in note a to the consolidated financial statements, contracts with customers include some form of variable consideration, including sales discounts, trade promotions and certain other sales and consumer incentives, including rebates and coupon redemption. variable consideration is treated as a reduction in revenue when the related revenue is recognized, and is recorded using the most likely amount method, with updates to estimates and related accruals of variable consideration occurring each period based on historical experience and changes in circumstances. we identified the estimation of the reserves for these net revenue adjustments by management as a critical audit matter because the inputs and assumptions utilized by management in estimating these reserves, including consistency of historical data and contract pricing, require significant judgment and create a high degree of estimation uncertainty. consequently, auditing these assumptions requires subjective auditor judgment. our audit procedures related to the estimation of the reserves included the following, among others. ● we obtained an understanding of management’s processes and controls over calculating the reserves for net revenue adjustments, including understanding relevant inputs and assumptions. ● we tested the design and operating effectiveness of key controls relating to the calculation of the reserves for net revenue adjustments, including key management review controls over the period-end accrual of allowances, end-user pricing adjustments, trade spending, coupon redemption costs, returned product and other adjustments. ● we re-performed management’s process for calculating the reserves for net revenue adjustments. ● we evaluated key inputs and assumptions relevant to the net revenue adjustments, including contractual pricing and rebate arrangements with customers, historical allowance data and other contractual arrangements, which were compared to source documents. ● we considered transactions subsequent to year end occurring up to the date of our auditor’s opinion, which involved inspecting customer contracts and relevant source documents submitted by customers in conjunction with the allowance, including end-user pricing adjustment, trade spending, coupon redemption, return or other adjustments. /s/ grant thornton llp we have served as the company’s auditor since 1984. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. the impact of estimates of proved oil, natural gas liquids (“ngl”), and natural gas reserves on net oil and natural gas proved properties as described in notes 1 and 10 to the consolidated financial statements, the company has a net oil and natural gas proved properties balance of $6,246 million as of december 31, 2020 and depreciation, depletion, and amortization (“dd&a”) expense of $1,834 million for the year ended december 31, 2020. the company also recognized a ceiling test impairment of $5,580 million for the year ended december 31, 2020. the company uses the full cost method of accounting for its acquisition, exploration, and development activities. capitalized costs accumulated within each cost centre are depleted using the unit-of-production method based on proved oil, ngl and natural gas reserves. proved oil, ngl and natural gas reserve estimates are key inputs to the company’s depletion and ceiling test impairment calculations. a ceiling test impairment is recognized in net earnings when the carrying amount of a country cost centre exceeds the country cost centre ceiling. management estimates its proved oil, ngl and natural gas reserves according to the definition of proved reserves provided by the sec. management’s estimates of proved oil, ngl and natural gas reserves are made using available geological and reservoir data as well as production performance data. proved oil, ngl and natural gas reserves are those quantities of oil and natural gas, which by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible in future periods from known reservoirs under existing economic conditions, operating methods and government regulations. the assumptions used by management to determine estimates of the proved oil, ngl and natural gas reserves and the ceiling test impairment calculation include the average beginning-of-the-month prices during the 12-month period for the year, future production estimates, future production and development costs and estimates for abandonment and dismantlement costs associated with asset retirement obligations. the estimation of reserves is a subjective process. in determining the estimates of the proved oil, ngl and natural gas reserves, management utilizes the services of specialists, specifically petroleum engineers. the principal considerations for our determination that performing procedures relating to the impact of estimates of proved oil, ngl and natural gas reserves on net oil and natural gas proved properties is a critical audit matter are (i) significant judgment used by management, including the use of specialists, when developing the estimates of the proved oil, ngl and natural gas reserves and performing the ceiling test impairment calculation and (ii) a high degree of auditor judgment, effort and subjectivity in performing procedures to evaluate the significant assumptions 82 used in developing those estimates including the average beginning-of-the-month prices during the 12-month period for the year, future production estimates, future production and development costs, and estimates for abandonment and dismantlement costs associated with asset retirement obligations. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s estimates of proved oil, ngl and natural gas reserves, the calculation of the full cost ceiling test and the calculation of dd&a expense. these procedures also included, among others, evaluating management’s ceiling test impairment calculation and testing the unit-of-production depletion rate used to calculate depletion expense, testing the completeness, accuracy and relevance of underlying data and evaluating the appropriateness of the significant assumptions used by management in developing these estimates, including assumptions related to the average beginning-of-the-month prices during the 12-month period for the year, future production estimates, future production and development costs, and estimates for abandonment and dismantlement costs associated with asset retirement obligations. the work of management’s specialists was used in performing procedures to evaluate the reasonableness of the estimates of proved oil, ngl and natural gas reserves. as a basis for using this work, the specialists’ qualifications were understood and the company’s relationship with the specialists was assessed. the procedures performed also included evaluation of the methods and assumptions used by the specialists, tests of the data used by the specialists, and an evaluation of the specialists’ findings. evaluating the significant assumptions also involved evaluating whether the assumptions used were reasonable considering the past performance of the company and whether they were consistent with evidence obtained in other areas of the audit. /s/ pricewaterhouse coopers llp chartered professional accountants calgary, canada february 18, 2021 we have served as the company’s or its predecessors’ auditor since 1958. | 5 |
critical audit matters the critical accounting matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.accounting for acquisition of ellie mae description of the matter as discussed in note 3 to the consolidated financial statements, during 2020, the company completed its acquisition of ellie mae, inc. (ellie mae) for aggregate consideration of $11.4 billion. this transaction was accounted for as a business combination. 89auditing the company's accounting for its acquisition of ellie mae was complex due to the significant estimation in the company’s determination of fair value of identified intangible assets of $4.5 billion, which principally consisted of customer relationships, backlog, trademark/tradenames and developed technology (collectively referred to as the indentified intangibles). the significant estimation was primarily due to sensitivity of the fair value to underlying assumptions about future performance of the acquired business in the company’s discounted cash flow models used to measure the identified intangibles. these significant assumptions included the revenue and expense growth rates that form the basis of the forecasted results and the discount rate.how we addressed the matter in our audit 00000 we tested the company's controls that address the risk of material misstatement relating to the company's accounting for the acquisition. for example, we tested controls over the estimation process supporting the recognition and measurement of the identified intangibles, which included testing controls over management’s review of assumptions used in its respective valuation models.to test the estimated fair value of the identified intangibles, we performed audit procedures that included, among others, evaluating the valuation methodology and significant assumptions used by the company's valuation specialist, and evaluating the completeness and accuracy of the underlying data supporting the estimated fair value. we involved our valuation specialists to assist with our evaluation of the methodology used by the company and significant assumptions included in the fair value estimate, including testing the revenue and expense growth rates that form the basis of the forecasted results and the discount rate. for example, we compared these significant assumptions to current industry, market and economic trends, to assumptions used to value similar assets in other acquisitions, to the historical results of the acquired business, and to the company’s budgets and forecasts, in addition to performing sensitivity analysis over these assumptions. we also evaluated the adequacy of the company’s disclosures included in note 3 in relation to these acquisition matters.accounting for income taxes description of the matter 0as discussed in note 13 to the consolidated financial statements, the company operates in the united states and multiple international tax jurisdictions and is therefore subject to various tax treaty arrangements and where applicable, transfer pricing guidelines for intercompany transactions. consolidated income tax expense, including the liability for unrecognized tax benefits, is an estimate based on management’s understanding and interpretation of current enacted tax laws and tax rates of each tax jurisdiction. for the year-ended december 31, 2020, the company recognized consolidated income tax expense of $658 million, and as of december 31, 2020, the company accrued liabilities of $188 million for unrecognized tax benefits.auditing the company's accounting for consolidated income tax expense was complex because management’s calculation of consolidated income tax expense involves application and interpretation of complex tax laws. further, the identification and measurement of unrecognized tax benefits requires significant management judgment and estimation. each tax position may involve unique facts and circumstances to be evaluated, and there may be uncertainties around initial recognition and de-recognition of tax positions, including regulatory changes, litigation and examination activity.how we addressed the matter in our audit0000000we tested the company’s controls that address the risks of material misstatement relating to the company’s consolidated income tax expense. for example, we tested controls over management’s calculation of the federal, state and foreign components of income tax expense including management’s controls over the identification and ongoing review of its unrecognized tax benefits. to test consolidated income tax expense, we performed audit procedures that included, among others, recalculation of consolidated income tax expense and agreeing the data used 90in the calculations to the company’s underlying books and records. we involved our tax professionals to evaluate the application of tax law to management’s calculation methodologies and tax positions. this included assessing the company’s correspondence with the relevant tax authorities and evaluating third-party advice obtained by the company. we also evaluated assumptions the company used to develop its tax positions and related unrecognized tax benefit amounts by jurisdiction. for example, we compared the estimated liabilities for unrecognized tax benefits to similar positions in prior periods and assessed management’s consideration of current tax controversy and litigation and trends in similar positions challenged by tax authorities. we assessed the historical accuracy of management’s estimates of its unrecognized tax benefits by comparing the estimates with the resolution of those positions. we also evaluated the adequacy of the company’s disclosures included in note 13 in relation to these tax matters. /s/ ernst & young llp we have served as the company’s auditor since 2002. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.79issuance of convertible senior notes description of the matter as described in note 12 to the consolidated financial statements, in april 2020, the company issued $345.0 million of aggregate principal of 2.25% convertible senior notes due may 2026 in a private offering to qualified institutional buyers pursuant to rule 144a under the securities act of 1933, as amended. additionally, the company entered into separate capped call transactions to reduce potential dilution to the company’s common stock upon any conversion of the convertible notes. these transactions are collectively referred to as the convertible notes transactions. to account for the convertible notes, the company was required to separate the convertible notes into liability and equity components. the carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated conversion feature. the carrying amount of the equity component was determined by deducting the fair value of the liability component from the principal value of the convertible notes. the equity component was recorded in capital in excess of par value in the consolidated statement of stockholders’ equity and is not remeasured as long as it continues to meet the conditions for equity classification. auditing the company’s accounting for the convertible notes transactions was complex due to the judgment that was required in determining the balance sheet classification of the elements of the convertible notes. additionally, a detailed analysis of the terms of the convertible notes transactions was required to determine the existence of any derivatives that may require separate accounting under applicable accounting guidance. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the convertible notes transactions. for example, we tested the company's controls over the initial recognition and measurement of the convertible notes transactions, including the recording of the associated liability and equity components. we also tested the evaluation of the notes and the identification and evaluation of specific features and the related accounting. to test the initial accounting for the convertible notes transactions, our audit procedures included, among others, inspection of the agreements underlying the convertible notes transactions and testing management’s application of the relevant accounting guidance, including the determination of the balance sheet classification of each transaction and the identification of any derivatives included in the arrangements. we involved professionals with specialized skill and knowledge to assist in evaluating the appropriateness of the accounting for the convertible notes, including conclusions reached with respect to identification and bifurcation of embedded features.valuation of goodwill description of the matter at december 31, 2020, the company’s goodwill was $323.3 million and all goodwill was attributed to the midstream reporting unit in the shale segment. as discussed in note 9 to the consolidated financial statements, goodwill is tested for impairment at least annually, or more frequently if recent events or prevailing conditions indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value.auditing management’s annual and interim quantitative goodwill impairment tests was complex and highly judgmental due to the significant estimation required to determine the fair value of the midstream reporting unit. in particular, the fair value estimates were sensitive to significant assumptions, including changes in estimated future revenues, which are affected by expectations about future market, industry and economic conditions.how we addressed the matter in our audit we tested controls that address the risks of material misstatement related to the company’s goodwill impairment review process, including controls over management’s review of the significant assumptions described above. 80to test the estimated fair value of the company’s midstream reporting unit, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the company in its analysis. we compared the significant assumptions used by management to current industry and economic trends and evaluated whether changes in those trends would affect the significant assumptions. we assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting unit that would result from changes in the assumptions.depreciation, depletion & amortization description of the matter as described in note 1, under the successful efforts method of accounting, depreciation, depletion, and amortization (dd&a) related to proved gas properties is recorded using the units-of-production method. for the year ended december 31, 2020, the company recorded dd&a expense related to proved gas properties of $400.8 million. proved developed reserves, as estimated by petroleum engineers, are used to calculate depreciation of wells and related equipment and facilities and amortization of intangible drilling costs. total proved reserves, also estimated by petroleum engineers, are used to calculate depletion on property acquisitions. proved oil and natural gas reserve estimates are based on geological and engineering evaluations of in-place hydrocarbon volumes. significant judgment is required by the company’s internal engineering staff in evaluating geological and engineering data when estimating proved oil and natural gas reserves. estimating reserves also requires the selection of inputs, including price and operating, and development cost assumptions as well as tax rates by jurisdiction, among others. because of the complexity involved in estimating oil and natural gas reserves, management used independent petroleum engineers to audit the estimates prepared by the company’s internal engineering staff as of december 31, 2020. auditing the company’s dd&a calculation was especially complex because of the use of the work of the internal engineering staff and the independent petroleum engineers and the evaluation of management’s determination of the inputs described above used by the independent petroleum engineers in estimating proved oil and natural gas reserves.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of the company’s controls over its process to calculate dd&a, including management’s controls over the completeness and accuracy of the financial data provided to the independent petroleum engineers for use in estimating the proved oil and natural gas reserves.our audit procedures included, among others, evaluating the professional qualifications and objectivity of the individual primarily responsible for overseeing the preparation of the reserve estimates by the internal engineering staff and the independent petroleum engineers used to audit the estimates. in addition, in assessing whether we can use the work of the independent petroleum engineers, we evaluated the completeness and accuracy of the financial data and inputs described above used by the independent petroleum engineers in estimating proved oil and natural gas reserves by agreeing them to source documentation and we identified and evaluated corroborative and contrary evidence. for proved undeveloped reserves, we evaluated management’s development plan for compliance with the sec rule that undrilled locations are scheduled to be drilled within five years, unless specific circumstances justify a longer time, by assessing consistency of the development projections with the company’s drill plan and the availability of capital relative to the drill plan. we also tested the mathematical accuracy of the dd&a calculations, including comparing the proved oil and natural gas reserves amounts used to the company’s reserve report. /s/ ernst & young llp we have served as the company’s auditor since 2008. | 4 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. indefinite-lived intangible assets impairment test for certain trademarks as described in notes 1 and 5 to the consolidated financial statements, the company’s indefinite-lived intangible assets (trademarks) were $2,549 million as of august 1, 2021. of the carrying value of all indefinite-lived trademarks, $620 million related to the snyder's of hanover trademark, $350 million related to the lance trademark, $292 million related to the pace trademark, and $280 million related to the pacific foods trademark. management conducts a test at least annually for impairment, or when circumstances indicate that the carrying amount of the asset may not be recoverable. indefinite-lived intangible assets are tested for impairment by comparing the fair value of the asset to the carrying value. management determines fair value based on discounted cash flow analyses that include significant management assumptions such as revenue growth rates, weighted average costs of capital, and assumed royalty rates.the principal considerations for our determination that performing procedures relating to the indefinite-lived intangible assets impairment test for certain trademarks is a critical audit matter are the significant amount of judgment by management when developing the estimates related to the snyder's of hanover, lance, pace, and pacific foods trademarks, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management's significant assumptions related to (i) revenue growth rates, weighted average costs of capital, and assumed royalty rates for the snyder's of hanover, pace, and pacific foods trademarks and (ii) weighted average cost of capital and assumed royalty rate for the lance trademark. in addition, the audit effort involved the use of professionals with specialized skill and knowledge.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s trademark impairment tests. these procedures also included, among others, (i) testing management’s process for developing the fair value estimates; (ii) evaluating the appropriateness of the discounted cash flow analyses; (iii) testing the completeness, accuracy, and relevance of underlying data used in the analyses; and (iv) evaluating the significant assumptions used by management related to revenue growth rates, weighted average costs of capital, and assumed royalty rates for the snyder’s of hanover, pace, and pacific foods trademarks and weighted average cost of capital and assumed royalty rate for the lance trademark. evaluating management’s assumptions related to revenue growth rates, weighted average costs of capital and assumed royalty rates involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance associated with the trademarks, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of the company’s discounted cash flow model and evaluating the reasonableness of the weighted average costs of capital and royalty rates assumptions./s/ pricewaterhouse coopers llp pricewaterhouse coopers llp philadelphia, pennsylvania september 23, 2021we have served as the company’s auditor since 1954. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.insurance receivable related to aliso canyon gas leak - refer to note 16 of the notes to consolidated financial statements critical audit matter description sempra has an insurance receivable of $360 million as of december 31, 2021 related to certain costs arising from the aliso canyon natural gas storage facility gas leak. sempra has determined that the insurance receivable is probable of recovery based on the nature of the insurance claims, the costs incurred, and the coverage provided by applicable insurance policies.we identified the recoverability of the insurance receivable as a critical audit matter due to the management judgments required in assessing if, and to what degree, the coverage provided by applicable insurance policies would cover the types of costs included in the insurance claims submitted. auditing the probability of recovery of the insurance receivable required subjective auditor judgment and extensive audit effort.how the critical audit matter was addressed in the audit our audit procedures related to the probability of recovery of the insurance receivable for the costs related to the aliso canyon natural gas storage facility gas leak included the following, among others:f-2table of contents▪we tested the effectiveness of management’s internal controls over the costs included in the related insurance receivable and the evaluation of the recoverability of this insurance receivable.▪with the assistance of an insurance specialist, we evaluated management’s judgments related to the determination of the recoverability of the insurance receivable by:◦evaluating the coverage provided by applicable insurance policies and evaluating the potential coverage available under such policies based on the nature of the underlying costs.◦evaluating the probability of recovery of the insurance receivable by obtaining correspondence between sempra and the applicable insurers.◦evaluating the probability of recovery of the insurance receivable through inquiries with management and with external legal counsel of sempra and we evaluated whether the information provided was consistent with our other procedures.◦searching external sources for and considering any contradictory evidence to sempra’s accounting assessment of probability of recoverability of the insurance receivable.▪we evaluated whether sempra’s disclosures were appropriate and consistent with the information obtained in our procedures.regulatory accounting – impact of rate regulation on the financial statements – refer to note 1 of the notes to consolidated financial statements critical audit matter description sempra is subject to rate regulation by regulators and commissions in various jurisdictions (collectively, the “commissions”) that have jurisdiction with respect to the rates of electric and gas transmission and distribution companies in those jurisdictions. management has determined it meets the requirements under u.s. gaap to prepare its financial statements applying the specialized rules to account for the effects of cost-based rate regulation. accounting for the economics of rate regulation impacts multiple financial statement line items and disclosures, such as property, plant and equipment; regulatory assets and liabilities; operating revenues; operation and maintenance expense; depreciation expense; and taxes.we identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management to support its assertions about impacted account balances and disclosures and the high degree of subjectivity involved in assessing the impact of future regulatory orders on the financial statements. management’s judgments include assessing the likelihood of (1) the recovery in future rates of incurred costs and (2) potential refunds to customers. auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities.how the critical audit matter was addressed in the audit our audit procedures related to the application of specialized rules to account for the effects of cost-based rate regulation and the uncertainty of future decisions by the commissions included the following, among others:▪we tested the effectiveness of management’s controls over the evaluation of the likelihood of (1) the recovery in future rates of costs deferred as regulatory assets, and (2) a refund or a future reduction in rates that should be reported as regulatory liabilities. we tested the effectiveness of management’s controls over the initial recognition of amounts as regulatory assets or liabilities and the monitoring and evaluation of regulatory developments that may affect the likelihood of recovering costs in future rates or of a future reduction in rates.▪we read relevant regulatory orders issued by the commissions for sempra and other publicly available information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the commissions’ treatment of similar costs under similar circumstances. we evaluated the external information and compared to management’s recorded regulatory asset and liability balances for completeness.▪we evaluated sempra’s disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments./s/ deloitte & touche llp san diego, california february 25, 2022we have served as sempra’s auditor since 1935. | 5 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.allowance for sales returns as discussed in notes 1 and 4 to the consolidated financial statements, the company provides certain customers the option to return defective goods back to the company. a sales returns allowance is recorded in the period of the sale based upon an expected value method, which is based on the company’s prior experience and current return trends. as of december 31, 2020 and 2019, the company had accrued a sales returns allowance of approximately $11.2 million and $8.8 million, respectively. we identified the assessment of the allowance for certain sales returns as a critical audit matter. auditor judgment was required to evaluate certain assumptions which had a higher degree of measurement uncertainty. key assumptions included the determination of the period of sales for which the sales return rate should be applied. auditing this element involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters.32 the primary procedures we performed to address this critical audit matter included: •evaluating the expected return period for a sample of defective return goods, which is based on newly released products and the time of first receipt of the defective goods. •assessing the company’s historical ability to estimate the key assumptions by comparing historical estimated sales return allowance in aggregate to actual returns received by customers in aggregate. •evaluating the company’s key assumptions by comparing to actual returns subsequent to year-end in the aggregate, as compared to the current sales return allowance at year-end.allowance for cash-based incentive reserve as discussed in note 1 to the consolidated financial statements, the company provides certain customers cash-based incentives which include price concessions as a reduction to the customer sales invoice. all cash-based incentives are recorded in the period of the sale based upon the expected value method, which is based on the company’s prior experience and current trends. as of december 31, 2020 and 2019, the company had accrued an allowance for cash-based incentives of approximately $18.6 million and $16.0 million, respectively. we identified the assessment of the allowance for price concessions as a critical audit matter. auditor judgment was required to evaluate certain assumptions which had a higher degree of measurement uncertainty. the key assumption includes the volume of sales to which these price concessions will be applied. auditing this element involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters. the primary procedures we performed to address this critical audit matter included: •assessing the company’s historical ability to estimate key assumptions by comparing the prior year estimated price concessions in aggregate to actual subsequent credits issued. •evaluating the company’s key assumptions by comparing them to actual credits issued subsequent to year-end in aggregate, as compared to the current allowance for price concessions at year-end. /s/ bdo usa, llp we have served as the company’s auditor since 2014. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated and combined financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated and combined financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated and combined financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.evaluation of revenue recognition on agreements for sales of goods manufactured to unique customer specifications as discussed in note 1 to the consolidated and combined financial statements, the company enters into agreements for sales of goods manufactured to unique customer specifications. revenue from these types of contracts is recognized to the extent of progress towards completion measured by actual costs incurred relative to total expected costs.we identified revenue recognition for contracts from the sales of goods manufactured to unique customer specifications as a critical audit matter because of the complex auditor judgment required in evaluating the company's long-term estimates of the expected costs to be incurred in order to complete the contract.bhge llc 2019 form 10-k | 41the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s revenue recognition process for contracts from the sales of goods manufactured to unique customer specifications. such controls included controls pertaining to the company's estimation of costs expected to be incurred to complete the contract. we selected certain contracts from the sales of goods manufactured to unique customer specifications to evaluate the company’s ability to accurately estimate costs expected to be incurred to complete a contract. for the selected contracts, we evaluated the estimated costs expected to be incurred to complete the contract by:–questioning the company's finance and project managers regarding progress to date based on the latest project reports and the costs expected to still be incurred until completion;–observing project review meetings performed by the company and inspecting relevant minutes of those meetings to identify changes in the estimated costs expected to be incurred to complete the contract and related contract margins;–assessing the remaining estimated costs expected to be incurred by expenditure category on contracts in progress by comparing to the actual costs incurred during the current year for the selected project and similar projects; and–investigating changes to the contract margin when compared to the prior year's estimated contract margin. assessment of the carrying value of goodwill in the oilfield equipment and oilfield services reporting units as discussed in note 7 to the consolidated and combined financial statements, the company has four reporting units which are monitored for impairment on the basis of market condition. the company performs a goodwill impairment test on an annual basis on july 1 or whenever events and changes in circumstances indicate that the carrying value of a reporting unit might exceed its fair value. the goodwill balance as of december 31, 2019 was $20,396 million, of which $3,319 million and $12,749 million were related to the oilfield equipment and oilfield services reporting units, respectively. the oilfield equipment and oilfield services reporting units had fair values that were not significantly in excess of their carrying values. projected revenue, projected operating profit, and the discount rates are elements of the estimated future cash flows used by the company in determining the fair value of each reporting unit. we identified the evaluation of projected revenue, projected operating profit and the discount rates used in the assessment of the carrying value of goodwill for the oilfield equipment and oilfield services reporting units as a critical audit matter. specifically, the evaluation of projected revenue, projected operating profit, and the discount rates required the application of subjective auditor judgement because these projections involve assumptions about future events and changes to the discount rate assumptions may have a significant effect on the company's assessment of the carrying value of the goodwill of the reporting units.the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s goodwill impairment process, including controls over the development of projected financial information and the discount rates, and management’s review of the projections and comparison to historical results. we evaluated the projected revenue and projected operating profit assumptions by comparing the projected amounts to (a) the past performance of the reporting unit, including historical results and growth rates, and (b) relevant and reliable industry benchmark data related to future events. we also considered evidence obtained in other areas of the audit. we evaluated the company’s ability to accurately prepare projections by comparing the projected revenues and projected operating profit to historical results for the same period. in addition, we involved valuation professionals with specialized skills and knowledge, who assisted in: –evaluating the industry benchmark data used by the company in developing its projected financial information; –evaluating the discount rates used by comparing them against a discount rate range that was independently developed using publicly available market data for comparable entities; and –performing sensitivity analysis related to key inputs including revenue growth rates, discount rates and projected operating profit./s/ kpmg llp we have served as the company’s auditor since 2017. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.development derivative liability — refer to notes 5 and 9 to the financial statements critical audit matter description on february 28, 2019, the company entered into a development funding agreement with sfj pharmaceuticals group (“sfj”) under which sfj agreed to provide funding to the company to support the development of one of the company’s clinical trials (“sfj agreement”). the sfj agreement is presented as a derivative liability whose fair value is based on unobservable inputs. the liability is initially recorded at the value of the aggregate cash received pursuant to the contractual terms and is subsequently remeasured at each quarter with the change in fair value recorded in loss from remeasurement of development derivative liability on the income statement. we identified the valuation of the development derivative liability as a critical audit matter. the development derivative liability is valued using a scenario-based discounted cash flow method, whereby each scenario makes assumptions about the probability and timing of cash flows, and such cash flows are present valued using a risk-adjusted discount rate. this model includes unobservable inputs including the probability and timing of achieving u.s. food and drug administration (fda) and european medicines agency (ema) approval. this required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. 101how the critical audit matter was addressed in the audit our audit procedures related to the development derivative liability model and unobservable inputs used by management to estimate the fair value of the development derivative liability included the following, among others:•we tested the effectiveness of controls over management’s valuation of the development derivative liability, such as those related to management’s assumptions over the probability and timing of achieving fda and ema approval.•we evaluated the reasonableness of management’s assumptions over the probability and timing of achieving fda and ema approval by comparing the assumptions within the model to: –internal communications to management and the board of directors. –information included in the company’s press releases, as well as in analyst reports for the company. –inquiries with those responsible for clinical affairs regarding the progress of ongoing trials.•with the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology by testing the source information and the mathematical accuracy of the calculation. /s/ deloitte & touche llp boston, massachusetts february 27, 2020we have served as the company's auditor since 2019. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. long-lived asset recoverability tests – refinery asset groups as described in notes 2 and 7 to the consolidated financial statements and as disclosed by management, the company’s consolidated long-lived asset balance was $43 billion as of december 31, 2020, which includes the refinery asset groups within the refining & marketing segment. management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. if the sum of the undiscounted estimated pretax cash flows is less than the carrying value of an asset group, fair value is determined, and the carrying value is written down to the determined fair value. during the first and second quarters of 2020, management identified long-lived asset triggers relating to all of their refinery asset groups, except the gallup refinery in the second quarter as it had been impaired to its estimated salvage value in the first quarter, as a result of decreases to the refining & marketing segment expected future cash flows. the cash flows associated with these assets were significantly impacted by the effects of covid-19 and commodity price declines in the first quarter and continued unfavorable macroeconomic conditions in the second quarter. management performed recoverability tests for each refinery asset group by comparing the undiscounted estimated pretax cash flows to the carrying value of each asset group. the determination of undiscounted estimated pretax cash flows for the first and second quarter refinery asset group recoverability tests utilized significant assumptions including management’s best estimates of the expected future cash flows, allocation of refining & marketing segment cash flows to the individual refinery asset groups, the estimated useful life of certain refinery asset groups, and the estimated salvage value of certain refinery asset groups. the principal considerations for our determination that performing procedures relating to the long-lived asset recoverability tests of the refinery asset groups performed by management in the first and second quarters of 2020 is a critical audit matter are (i) the significant judgment by management when developing the undiscounted estimated pretax cash flows of the refinery asset groups; and (ii) the high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s recoverability tests and the significant assumption related to allocation of refining & marketing segment cash flows to individual refinery asset groups.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s long-lived asset recoverability tests, including controls over the allocation of the undiscounted estimates of pretax cash flows to individual refinery asset groups. 92table of contents these procedures also included, among others (i) testing management’s process for developing the undiscounted estimated pretax cash flows utilized for the recoverability tests; (ii) evaluating the appropriateness of the undiscounted estimated pretax cash flow model used; (iii) testing the completeness and accuracy of underlying data used by management in the model; and (iv) evaluating the reasonableness of the significant assumption related to the allocation of refining & marketing segment cash flows to individual refineries. evaluating the reasonableness of this significant assumption involved (i) evaluating the appropriateness of management’s allocation of refining & marketing segment cash flows to individual refinery asset groups; (ii) evaluating the appropriateness, completeness, and accuracy of underlying data used to allocate refining & marketing segment cash flows to individual refinery asset groups; and (iii) considering whether the data used in the allocation was consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were utilized to assist in evaluating the appropriateness of the company’s undiscounted estimated pretax cash flow model.goodwill impairment tests – certain midstream reporting units as described in notes 7 and 19 to the consolidated financial statements and as disclosed by management, the company’s consolidated goodwill balance was $8,256 million as of december 31, 2020, which includes, within the midstream segment, the goodwill associated with mplx’s crude gathering reporting unit of $1.1 billion. as described by management, within the midstream segment, the company recorded an impairment charge of $1.81 billion in the first quarter of 2020 related to mplx’s eastern gathering & processing reporting unit, which fully impaired the reporting unit’s historical goodwill balance. management annually evaluates goodwill for impairment as of november 30, as well as whenever events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit with goodwill is less than its carrying amount. the overall deterioration in the economy and the environment in which mplx and its customers operate, as well as a sustained decrease in the mplx unit price, were considered triggering events requiring an impairment test during the first quarter of 2020. the fair values of the reporting units were determined based on applying both a discounted cash flow method, or income approach, as well as a market approach. significant assumptions that were used to estimate the mplx eastern gathering and processing and mplx crude gathering reporting units’ fair values under the discounted cash flow method included management’s best estimates of the discount rate, as well as estimates of future cash flows, which are impacted primarily by producer customers’ development plans, which impact future volumes and capital requirements.the principal considerations for our determination that performing procedures relating to the goodwill impairment tests of the company’s crude gathering and eastern gathering and processing reporting units of the midstream segment is a critical audit matter are (i) the significant judgment by management when estimating the fair value of the reporting units; and (ii) the high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumption related to future volumes.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s goodwill impairment tests, including controls over the estimation of the fair value of the crude gathering and eastern gathering and processing reporting units. these procedures also included, among others (i) testing management’s process for developing the fair value estimates; (ii) evaluating the appropriateness of the income and market approaches used; (iii) testing the completeness and accuracy of underlying data used by management in the approaches; and (iv) evaluating the reasonableness of the significant assumption related to future volumes. professionals with specialized skill and knowledge were utilized to assist in evaluating the appropriateness of the company’s income and market approaches. evaluating the assumption related to future volumes involved (i) considering whether the assumption used was reasonable considering past performance of each reporting unit, producer customers’ historical and future production volumes, and industry outlook reports; and (ii) considering whether the assumption was consistent with evidence obtained in other areas of the audit. equity method investment impairment test - mark west utica emg, l.l.c.as described in notes 7 and 17 to the consolidated financial statements, the company’s consolidated equity method investment balance was $5,422 million as of december 31, 2020, which included a balance of $698 million related to mark west utica emg, l.l.c. during the first quarter of 2020, the company recorded an impairment charge of $1.25 billion related to mark west utica emg, l.l.c. as disclosed by management, equity method investments are assessed for impairment whenever factors indicate an other than temporary 93table of contentsloss in value. as a result of the overall deterioration in the economy and the environment in which mplx and its customers operate, there was a reduction in forecasted volumes processed by the systems operated by mark west utica emg, l.l.c. these were considered events requiring an impairment test during the first quarter of 2020. the fair value of the investment was determined based on applying a discounted cash flow method, an income approach. significant assumptions that were used to develop the estimate of the fair value under the discounted cash flow method include management’s best estimates of the expected future cash flows, including prices and volumes, the weighted average cost of capital and the long-term growth rate.the principal considerations for our determination that performing procedures relating to the impairment test of the company’s equity method investment in mark west utica emg, l.l.c. is a critical audit matter are (i) the significant judgment by management when estimating the fair value of the investment; and (ii) the high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumption related to future volumes.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s equity method investment impairment test, including controls over the estimation of the fair value of the investment in mark west utica emg, l.l.c. these procedures also included, among others (i) testing management’s process for developing the fair value estimate; (ii) evaluating the appropriateness of the discounted cash flow method used; (iii) testing the completeness and accuracy of underlying data used by management in the method; and (iv) evaluating the reasonableness of the significant assumption related to future volumes. evaluating the assumption related to future volumes involved (i) considering whether the assumption used was reasonable considering past performance of mark west utica emg, l.l.c., producer customers’ historical and future production volumes, and industry outlook reports; and (ii) considering whether the assumption was consistent with evidence obtained in other areas of the audit./s/ pricewaterhouse coopers llp toledo, ohio february 26, 2021we have served as the company’s auditor since 2010. | 1 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.vendor consideration and receivables - refer to note 2 to the financial statements critical audit matter description the company receives rebates and incentives from certain suppliers, primarily through purchase-based programs. consideration earned under these incentives is estimated during the year based on purchasing activity, as obligations under the program are fulfilled primarily as products are purchased. consideration is typically received in the form of invoice reductions to be applied against the amounts owed to the company’s vendors, or less often in the form of cash payments. the purchase-based incentives are recorded as a reduction to inventory as they are earned based on inventory purchases. as the related inventory is sold, the amounts are recorded as a reduction to cost of goods sold.total vendor receivables were $145 million at january 1, 2022. although many of these incentives are under long-term agreements others are negotiated on an annual basis or shorter.we identified vendor consideration as a critical audit matter due to the extent of audit effort required to evaluate whether vendor consideration is recorded in accordance with the terms of the vendor agreements.38how the critical audit matter was addressed in the audit our audit procedures related to the evaluation of the vendor agreements included the following, among others: •we tested the effectiveness of controls over vendor consideration including management’s controls over the calculation of the amount recorded and the accuracy of the agreement information input in the system utilized to calculate the amount of vendor consideration recorded.•we selected a sample of vendor consideration recorded and (1) confirmed the amount recorded directly with the vendors or (2) recalculated vendor consideration amounts recorded by the company using the terms of the executed vendor agreement•we selected a sample of inventory on hand and evaluated whether the related vendor consideration was properly recognized at and during the period ended january 1, 2022. /s/ deloitte & touche llp chicago, illinois february 17, 2022we have served as the company's auditor since 2006. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.evaluation of the significant assumptions underlying the breakage rates for certain customer programs as discussed in notes 2 and 8 to the consolidated financial statements, the company recorded accounts receivable allowances totaling $274.6 million as of march 31, 2022 for various cooperative marketing arrangements and customer incentive and pricing programs (collectively, customer programs). the company estimates the percentage of customer programs that will not be claimed or will not be earned by customers, which is commonly referred to as “breakage”. breakage reduces the company’s accruals for certain customer programs and it is applied at the time of sale. the company uses judgment in assessing the period in which claims are expected to be submitted and the relevance of historical claim experience.we identified the evaluation of the significant assumptions underlying the breakage rates for certain customer programs as a critical audit matter. the significant assumptions in the breakage rates estimate included: 1) the determination of the period in which the claims are expected to be submitted by the customers, 2) the assessment of the relevance of historical customer claim experience, and 3) the assessment of the relevance of the historical trend of claims submitted after the expected period. a high degree of auditor judgment was required to evaluate the significant assumptions, due to the inherent uncertainties related to such assumptions as well as recent changes in certain customers’ claim processing behavior in the current economic environment.the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of internal control related to the process to determine the breakage rates estimate. this included a control related to the company’s evaluation of the significant assumptions in the breakage rates estimate. we evaluated the underlying information related to the expected period that a customer claim will be submitted and assessed the relevance of historical claim experience by analyzing the trend in the customers’ historical claims and accruals information for certain customer programs. we assessed the relevance of the historical trend of claims submitted after the expected period by analyzing the trend of historical claims received after the expected period compared to the total earned amount of each respective period. in addition, we evaluated the company’s ability to estimate the breakage rates by comparing the estimated breakage from fiscal year 2021 to actual subsequent breakage in fiscal year 2022.assessment of the accruals for certain customer programs as discussed in notes 2 and 8 to the consolidated financial statements, the company recorded accrued customer program liabilities of $232.4 million as of march 31, 2022. the company records these accruals as a reduction of revenue at the time of sale. the company estimated these accruals based on historical data or future commitments that are planned and controlled by the company. the company uses judgment in analyzing historical trends, inventories owned by and located at the customers, products sold by the direct customers to end customers or resellers, known product quality issues, negotiated terms, and other relevant customer and product information, such as stage of product life-cycle, which are expected to experience unusually high discounting.we identified the assessment of the accruals for certain customer programs as a critical audit matter. historical experience being predictive of customer programs’ earned amounts is the significant assumption used to estimate logitech international s.a. | fiscal 2022 form 10-k | 67table of contentsthe accruals for customer programs. due to the inherent uncertainties related to the relevance of the predictive historical experience to the determination of the estimate, the testing required a high degree of auditor judgment.the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls related to the critical audit matter. this included controls related to the company’s assessment of whether historical experience is predictive of customer programs’ earned amounts and the company’s validation of the underlying channel inventory data used to estimate the accruals for customer programs. we assessed the historical experience used in estimating the accruals for certain customer programs using a combination of the company’s internal historical information of sales, customer programs’ earned amounts, third-party contracts, and relevant and reliable third-party channel inventory and sell-through data. we inspected selected customer contracts to assess the terms and conditions related to certain customer programs. we analyzed channel inventory data trends by product and by region comparing fiscal year 2022 quarterly channel inventory weeks on-hand ratios to prior fiscal years. in addition, we evaluated the company’s ability to estimate the accruals for certain customer programs by comparing recorded accruals from fiscal year 2021 to actual subsequent customer programs’ earned amounts in fiscal year 2022. /s/ kpmg llp we have served as the company’s auditor since 2014. | 2 |
critical audit matters the critical audit matter communicated below isa matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involvedour especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way ouropinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separateopinion on the critical audit matter or on the accounts or disclosures to which it relates. fair value of investments as discussed in note 5 to the financial statements,the company measures substantially all of its investments at fair value using unobservable inputs and assumptions as there is no readilyavailable market value. as of december 31, 2021, total investments at fair value were $34,307,092. we identified the evaluation of the fair valueof investments as a critical audit matter. assessment of the company’s judgments regarding the use of specific valuation techniques,inputs and assumptions involved a high degree of subjective auditor judgment. changes in these techniques, inputs and assumptions couldhave a significant impact on the fair value of investments. in particular, the company uses the market, income, and cost approaches tovalue certain equity and debt investments. additionally, the company makes judgments relating to credit risk and market yields used inyield analyses, guideline company market multiples and financial performance measures used in determining enterprise values, discountrates used in discounted cash flow analyses for certain equity, debt and other interest-bearing investments, and replacement or reproductioncost indications, in the application of the cost approach. addressing the matter involved performing proceduresand evaluating audit evidence in connection with forming our overall opinion on the financial statements. these procedures included, amongothers, either (i) testing management’s process for determining the fair value estimate, which included evaluating the appropriatenessof the market approach, income approach, or cost approach; testing the completeness, accuracy, and relevance of the underlying data usedin the technique; and evaluating the significant unobservable inputs and assumptions used by management, including the selected valuationmultiples, discount rates, market yields or replacement or reproduction cost indications, by considering the consistency and reasonablenessof the unobservable inputs relative to the performance and condition of the subject company or assets, and the external market and industrydata and evidence obtained in other areas of the audit; or (ii) the involvement of professionals with specialized skill and knowledgeto assist in developing an independent fair value estimate range for certain level 3 debt and equity investments, and comparison of management’sfair value indications to the independently developed range of fair value estimates. developing the independent range involved selectionof significant unobservable inputs for the market multiples, discount rates or market yields, or replacement or reproduction cost indications,in order to evaluate the reasonableness of management’s fair value estimate of these certain level 3 investments, using a rangeof available market information. we have served as the company's auditor since2015. | 1 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.42table of contents assessment of impairment indicators of mineral property as described in note 4 to the consolidated financial statements, the carrying amount of the company’s mineral property was $55,375,124 as at december 31, 2021. management applies judgment to assess the mineral property for impairment indicators that could give rise to the requirement to conduct a formal impairment test. internal and external factors such as (i) significant decrease in the market price of the asset, (ii) current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset, (iii) significant changes in expected capital and operating costs, and reclamation costs, (iv) significant adverse changes in the business climate or legal factors including changes in gold prices, and (v) current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life, are evaluated by management in determining whether there are any indicators of impairment.the principal considerations for our determination that the assessment of impairment indicators of the mineral property is a critical audit matter are that there was judgment by management when assessing whether there were indicators of impairment for the mineral property. this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate audit evidence relating to the judgments made by management in their assessment of indicators of impairment that could give rise to the requirement to conduct a formal impairment test.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures include, among others, evaluating management’s assessment of indicators of impairment; and assessing whether there has been a significant decrease in the market price of the asset, significant changes in the expected capital costs, operating costs, reclamation costs, and current period cash flow or operating losses combined with a history of losses or forecasted continued losses associated with the use of the asset, by considering the current and past performance of the mineral property including other third-party information and evidence obtained in other areas of the audit, as applicable. the procedures performed also included (i) evaluating whether there were significant adverse changes in the business climate or legal factors including changes in gold prices by considering external market data and industry data; and (ii) assessing the completeness of external and internal factors that could be considered as indicators of impairment of the company’s mineral property, including consideration of evidence obtained in other areas of the audit.we have served as the company’s auditor since 2017. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.valuation of interest-rate related derivatives and hedged items as described in notes 15 and 16 to the financial statements, the fhl bank uses derivatives to reduce funding costs and to manage its exposure to interest-rate risks, among other objectives. the total notional amount of derivatives as of december 31, 2020 was $35 billion, of which 80% were designated as hedging instruments, and the fair value of derivative assets and liabilities as of december 31, 2020 was $391 million and $11 million, respectively. the fair values of interest-rate related derivatives and hedged items are calculated using a discounted cash flow analysis, which utilizes market-observable inputs. the significant assumptions used in the model include discount rates, market indices, and market volatility. the principal considerations for our determination that performing procedures relating to the valuation of interest-rate related derivatives and hedged items is a critical audit matter are the significant audit effort in evaluating the discount rates, market indices, and market volatility assumptions used to fair value these derivatives and hedged items, and the audit effort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. these procedures included testing the effectiveness of controls relating to the valuation of interest-rate related derivatives and hedged items, including controls over the model, data and assumptions. these procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent range of prices for a sample of interest-rate related derivatives and hedged items and comparison of management’s estimate to the independently developed ranges. developing the independent range of prices involved testing the completeness and accuracy of data provided by management and independently developing the discount rates, market indices, and market volatility assumptions.72table of contents other reporting required by government auditing standards in accordance with government auditing standards, we have also issued our report dated march 4, 2021 on our tests of the entity’s compliance with certain provisions of laws, regulations, contracts and grant agreements, and other matters for the year ended december 31, 2020. the purpose of that report is to describe the scope of our compliance testing and the results of that testing, and not to provide an opinion on compliance. that report is an integral part of an audit performed in accordance with government auditing standards in considering the entity’s compliance.atlanta, georgia march 4, 2021we have served as the fhl bank’s auditor since 1990. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.evaluation of vendor rebates and concessions as discussed in note 2 to the consolidated financial statements, other accounts receivable consists primarily of amounts earned from the company’s vendors under contractual agreements (collectively referred to as vendor rebates and concessions). these agreements are often specific to a particular product or promotion for a specified period of time, which results in a high volume of agreements, each with potentially non-standardized terms and conditions governing how the rebate is earned and calculated. therefore, the inputs used to calculate the vendor rebates and concessions, which can include financial and non-financial data from multiple sources, will vary depending on the specific terms of the agreements. other accounts receivable was $20.8 million as of september 30, 2020.we identified the evaluation of vendor rebates and concessions as a critical audit matter because of the challenging auditor judgment required to assess the non-standardized terms of the agreements and the nature and source of the inputs used in the recognition and measurement of the receivable.the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls over the company’s process to calculate vendor rebates and concessions. this included controls over the derivation of key inputs and the evaluation of the contractual terms of the agreements. for a sample of the vendor rebates and concessions, we evaluated the nature and source of the inputs used, and the terms of the contractual agreements. we recalculated the amount of the receivable based on the inputs and the terms of the agreements. we also compared the amount of cash received to the amount previously recognized by the company for a sample of the vendor rebates and concessions that were collected subsequent to year end.assessment of goodwill for impairment as discussed in notes 2 and 9 to the consolidated financial statements, the company tests goodwill for impairment at least annually and whenever events or changes in circumstances indicate that it is more likely f-2than not that the fair value of a reporting unit is less than its carrying amount. the total goodwill balance as of september 30, 2020 was $540.0 million, of which $81.2 million and $458.8 million were allocated to the sally beauty supply reporting unit and the beauty systems group reporting unit, respectively. as a result of the novel coronavirus (“covid-19”) global pandemic the company experienced a significant reduction in sales due to the rolling shut down of customer facing operations at all stores beginning in march 2020. the company also experienced a decline in market capitalization leading up to march 31, 2020, the end of the company’s fiscal second quarter. as a result, the company determined that a triggering event had occurred, which required the performance of an interim goodwill impairment test as of march 31, 2020. the company used the discounted cash flow method to determine the fair value of its reporting units.we identified the assessment of goodwill for impairment as a critical audit matter. significant auditor judgment, and the need to involve valuation professionals with specialized skills and knowledge, was required to evaluate forecasted revenues, and the discount rates used by the company to determine the fair values of the company’s reporting units. as a result of the impact of covid-19 on the company’s business at the time of the impairment test, there was significant uncertainty associated with these inputs. the involvement of valuation professionals was also necessary due to the specialized skills and knowledge required to assess the company’s estimate of fair value as determined by the discounted cash flow models compared to the company’s market capitalization at the reporting date.the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls over the company’s goodwill impairment assessment process. this included controls over forecasted revenues used in the company’s analysis and controls related to the development of the discount rate. we performed sensitivity analyses over the revenue forecasts and discount rate to assess their impact on the company’s determination of the fair value of the reporting units. we evaluated the company’s revenue projections by comparing the company’s historical forecasts to actual results, and by comparing the forecast for the period subsequent to march 31, 2020 to actual results through the end of the fiscal year as stores began to reopen. we involved valuation professionals with specialized skills and knowledge, who assisted in: —evaluating the company’s discount rate, by comparing it against a discount rate that was independently developed using publicly available third-party market data for comparable entities, —performing sensitivity analyses for the fair values using various discount rates, —calculating the reporting units’ implied fair value earnings multiples as derived from the company’s discounted cash flow value, and comparing them to the observed earnings multiples from a set of comparable public companies, and, —assessing the company’s estimated fair values of its reporting units on a combined basis compared to the company’s market capitalization./s/ kpmg llp we have served as the company’s auditor since 2006. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. asset-based fee revenue - advisory programs fees as described in notes 1 and 4 to the consolidated financial statements, $5.537 billion of the firm's total asset-based fee revenue of $7.515 billion for the year ended december 31, 2020 was generated from program fees for investment advisory services provided within the partnership’s advisory programs. revenue from advisory programs fees are derived from fees determined by the underlying value of client assets. advisory program contracts outline the investment advisory services to be performed for a client under the contract and do not have a definite end date. program fees are based on the average daily market value of client assets in the program as well as contractual rates and are charged to clients monthly and collected the following month. the principal considerations for our determination that performing procedures relating to revenue from advisory program fees is a critical audit matter are the significant audit effort in performing procedures relating to the fees, which are calculated based on the valuation of client assets and the corresponding contractual rate charged to the client. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the recognition of revenue from advisory program fees. these procedures also included, for a sample of accounts, obtaining advisory program contracts and evaluating whether rates used in the calculations were consistent with the advisory program contracts, independently pricing the securities positions within the account, independently calculating the average assets under management, and independently calculating the advisory program fees./s/ pricewaterhouse coopers, llp st. louis, missouri march 12, 2021we have served as the partnership’s auditor since 2002. | 4 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter, in any way, our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.82table of contents allowance for loan losses (all)description of the matter the company’s loan portfolio totaled $1.3 billion as of december 31, 2020, and the associated all was $13.8 million. as discussed in notes 1 and 6 to the consolidated financial statements, determining the amount of the all requires significant judgment about the collectability of loans, which includes an assessment of quantitative factors such as historical loss experience within each risk category of loans and testing of certain commercial loans for impairment. management applies additional qualitative adjustments to reflect the inherent losses that exist in the loan portfolio at the balance sheet date that are not reflected in the historical loss experience. qualitative adjustments are made based upon changes in lending policies and practices, depth of lending staff, economic conditions, changes in the loan portfolio mix, trends in loan delinquencies and nonaccrual loans, collateral values, and concentrations of credit risk for the commercial loan portfolios.we identified these qualitative adjustments within the all as critical audit matters because they involve a high degree of subjectivity. in turn, auditing management’s judgments regarding the qualitative factors applied in the all calculation involved a high degree of subjectivity.how we addressed the matter in our audit we gained an understanding of the company’s process for establishing the all, including the qualitative adjustments made to the all. we evaluated the design and tested the operating effectiveness of controls over the company’s all process, which included, among others, management’s review and approval controls designed to assess the need and level of qualitative adjustments to the all, as well as the reliability of the data utilized to support management’s assessment.to test the qualitative adjustments, we evaluated the appropriateness of management’s methodology and assessed whether all relevant risks were reflected in the all and the need to consider qualitative adjustments, including the potential effect of covid-19 on the adjustments.regarding the measurement of the qualitative adjustments, we evaluated the completeness, accuracy, and relevance of the data and inputs utilized in management’s estimate. for example, we compared the inputs and data to the company’s system reports and other internal sources and considered the existence of new or contrary information. furthermore, we analyzed the changes in the components of the qualitative reserves relative to changes in external market factors, the company’s loan portfolio, and asset quality trends, which included the evaluation of management’s ability to capture and assess relevant data from both external sources and internal reports on loan customers affected by the covid-19 pandemic and the supporting documentation for substantiating revisions to qualitative factors.we also utilized internal credit review specialists with knowledge to evaluate the appropriateness of management’s risk-rating processes, to ensure that the risk ratings applied to the commercial loan portfolio were reasonable.we have served as the company’s auditor since 1999. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the currentperiod audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee andthat (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especiallychallenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on theconsolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separateopinion on the critical audit matter or on the accounts or disclosures to which it relates.real estate property acquisitions as described in notes 2 and 3 to the consolidated financial statements, during 2021,the company completed 24 property acquisitions for a total purchase price of $376.7 million, of which $43.5 million of land, $304.7 millionof buildings and site improvements, and $28.7 million of net deferred lease intangibles were recorded. the accounting for real estateproperty acquisitions requires estimates and judgment as to expectations for future cash flows of the acquired property, the allocationof those cash flows to identifiable intangible assets and liabilities, and in determining the estimated fair value for assets acquiredand liabilities assumed. the amounts allocated to lease intangibles (leases in place, leasing commissions, tenant relationships, and aboveand below market leases) are based on management’s estimates and assumptions, as well as other information compiled by management,including independent third-party analysis and market data. the process for determining the allocation to these components requires managementto make estimates and assumptions, including rental rates, land value, discount rates, and exit capitalization rates.f-3 the principal considerations for our determination that performing procedures relatingto real estate property acquisitions is a critical audit matter are (i) the significant judgment by management in determining the fairvalues of the tangible and intangible assets acquired and liabilities assumed, (ii) a high degree of auditor judgment, subjectivity andeffort in performing procedures and evaluating audit evidence related to management’s assumptions for rental rates, land value,discount rates, and exit capitalization rates, and (iii) the audit effort involved the use of professionals with specialized skill andknowledge.addressing the matter involved performing procedures and evaluating audit evidencein connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectivenessof controls relating to purchase price accounting, including controls over the allocation of the purchase price to the assets acquiredand liabilities assumed. these procedures also included, among others, testing of management’s process for determining the fairvalues of the tangible and intangible assets acquired and liabilities assumed, including (i) reading the purchase agreements, (ii) evaluatingthe appropriateness of the models used by management, (iii) for selected acquisitions, testing the completeness and accuracy of the dataused in the models, and (iv) for selected acquisitions, evaluating the reasonableness of assumptions used by management for rental rates,land value, discount rates, and exit capitalization rates. evaluating these assumptions involved evaluating whether the assumptions usedby management were reasonable considering (i) consistency with external market and industry data and (ii) whether the assumptions wereconsistent with evidence obtained in other areas of the audit. for selected acquisitions, professionals with specialized skill and knowledgewere used to assist in evaluating (i) the appropriateness of management’s models and (ii) the reasonableness of management’sassumptions used in the models for the rental rates, land value, discount rates, and exit capitalization rates. /s/pricewaterhouse coopers llp boston, massachusetts february 23, 2022 we have served as the company’s auditor since 2020. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.real estate investment properties – determination of impairment indicators — refer to notes 2 and 12 to the consolidated financial statements critical audit matter description the company’s evaluation of real estate investment properties for impairment involves an initial assessment of each investment property to determine whether events or changes in circumstances exist that may indicate that the carrying amounts of investment properties are no longer recoverable. possible indications of impairment may include current events or anticipated future changes in circumstances affecting occupancy, leasing, hold periods, and changes in market conditions. when events or changes in circumstances are identified, a property is tested for recoverability by comparing its carrying value to its estimated future undiscounted cash flows. if the carrying amount of a property exceeds the estimated future undiscounted cash flows, an analysis is performed to determine the fair value of the property.56the company makes significant assumptions in its consideration of events or changes in circumstances to identify whether there are indications of impairment. changes in these assumptions could have a significant impact on the investment properties identified for further analysis. the total investment properties balance as of december 31, 2020 was $3.3 billion, following impairment losses recorded during 2020 of $2.6 million.we identified the company’s consideration of impairment indicators for its investment properties as a critical audit matter because of the significant assumptions management makes in its consideration of whether events or changes in circumstances have occurred indicate the carrying amounts of investment properties may not be recoverable. this required a high degree of auditor judgment when performing audit procedures to evaluate whether management appropriately identified impairment indicators.how the critical audit matter was addressed in the audit our audit procedures related to the assessment of investment properties for possible indications of impairment included the following, among others:•we tested the effectiveness of the controls over management’s identification of possible circumstances that may indicate the carrying amounts of investment properties are no longer recoverable, including controls over management’s estimates.•we evaluated management’s impairment analysis by:◦testing real estate assets for possible indications of impairment, including searching for adverse asset-specific and/or market conditions.◦developing an independent expectation of impairment indicators and comparing such expectation to management’s analysis.accounts receivable, net – collectibility of tenant receivables — refer to notes 2 and 6 to the consolidated financial statements critical audit matter description the recent global pandemic relating to covid-19 has impacted the company’s ability to collect rental income on a timely basis, as certain tenants have been materially impacted by tenant store closures, quarantines and stay-at-home orders. as a result of covid-19 and the measures implemented to mitigate its impact, a certain number of the company’s tenants requested, and the company executed, lease concession agreements and may grant further rent concessions, on a case-by-case basis. the company is required to evaluate each lease arrangement as to whether it is probable of collecting substantially all of the remaining lease payments. individual leases are assessed for collectibility and upon the determination that the collection of rents over the remaining lease life is not probable, lease income is recognized on the cash basis of accounting. for leases where collectibility of substantially all the remaining lease payments is probable, the company records a general reserve against the portion of its accounts receivable balance management believes to be uncollectible. the company accounts for certain tenants on the cash basis of accounting and estimates its general reserve based on a quantitative and qualitative analysis of balances outstanding, historical collection levels, status of lease concessions, financial health and current economic trends, among other factors.the company makes significant assumptions in establishing a general reserve and determining whether tenant revenue should be recognized on the cash basis. changes in these assumptions could have a significant impact on the accounts receivable, net.we identified the company’s evaluation of the collectibility of a tenant’s lease payments as a critical audit matter because of the significant assumptions management makes in its evaluation of the collectibility of receivables related to revenue generating activities. this required a high degree of auditor judgment when performing audit procedures to evaluate whether management appropriately determined if tenant revenue should be recognized on the cash basis of accounting and management’s estimate of the general reserve.57how the critical audit matter was addressed in the audit our audit procedures related to evaluating the company’s determination of whether tenant revenue should be recognized on the cash basis of accounting and the general reserve include the following, among others:•we tested the effectiveness of the controls over management’s assessment of the probability of collecting substantially all of the remaining lease payments from each tenant and management’s estimate of its general reserve for uncollectible receivables.•we evaluated management’s assessment of whether tenant revenue should be recognized on the cash basis and management’s estimate of its general reserve by:◦evaluating and inspecting the terms of recent lease amendments containing lease concessions.◦testing the completeness and accuracy of the cash-basis tenant listing for which the company made the determination collection of rents over the remaining lease life is not probable, which included consideration of tenant specific and market information.◦obtaining and evaluating the reasonableness of management’s analysis of its general reserve.•we performed corroborating inquiries with company personnel, including those from the leasing department, legal department, operations, and financial reporting, and inspected tenant records, including executed lease amendments, to determine whether management’s assumptions regarding the probability of collecting substantially all of the remaining lease payments and collection losses were appropriate based on the status of lease concession agreements and recent rent collection experience./s/ deloitte & touche llp chicago, illinois february 17, 2021we have served as the company’s auditor since 2009. | 4 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. going concern analysis as discussed in note 3, the company had a going concern due to net losses from operations for the year ended december 31, 2020 and had a working capital deficit and a stockholders’ deficit as of december 31, 2020.auditing management’s evaluation of a going concern can be a significant judgment given the fact that the company uses management estimates on future revenues and expenses, which are difficult to substantiate. to evaluate the appropriateness of the going concern, we examined and evaluated the financial information along with management’s plans to mitigate the going concern and management’s disclosure on going concern. /s/ m&k cpas, pllc m&k cpas, pllc we have served as the company’s auditor since 2010 | 1 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.f-1table of contents description of the critical audit matter:as discussed in note 2 to the consolidated financial statements, the company has entered into debt and equity agreements which included convertible notes and warrants. these agreements required management to assess whether the conversion features of the convertible notes required bifurcation and separate valuation as a derivative liability and whether the warrants required accounting as derivative liabilities, which are required to be recorded at estimated fair value. the company’s determination of the estimated fair value involves the identification of related financial instruments and a clear understanding of the terms of the agreements. auditing management’s estimates of fair value requires a high degree of auditor judgment and an increased extent of effort, including the need to carefully examine to understand the true nature of the related agreements.how we addressed the critical audit matter in our audit:our audit procedures related to determination of the estimated fair values of these debt and equity transactions included the following, among others:·we evaluated whether the company’s accounting treatment which required the recognition of a derivative liability was appropriate. ·we gained an understanding of management’s process and methodology to develop the estimates. ·we examined signed contracts and amendments. ·we evaluated the reasonableness of the inputs and assumptions used by management in developing the estimates. ·we evaluated the adequacy of the disclosures related to these fair value measurements. /s/ haynie & company haynie & company salt lake city, utah april 15, 2021 we have served as the company’s auditor since 2018. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. assessment of impairment indicators of long-lived assets as described in notes 2, 7, and 8 to the consolidated financial statements, the carrying value of long-lived assets (consisting of mineral properties and capital assets) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of the asset or asset group may not be recoverable (impairment indicators). the carrying amounts of the company’s mineral properties and capital assets were $35.1 million and $21.3 million respectively as of december 31, 2021. management applies significant judgment to assess whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable giving rise to the requirement to conduct an impairment test. events or changes in circumstances that could trigger an impairment test include: (i) significant adverse changes in the business climate including significant decreases in uranium prices, or significant adverse changes in legal factors, (ii) significant changes in expected capital, operating, or reclamation costs, and (iii) significant decreases in the market price of the assets. no impairment indicators were identified by management as of december 31, 2021. the principal considerations for our determination that performing procedures relating to the assessment of impairment indicators of long-lived assets is a critical audit matter are that there was significant judgment by management when assessing whether there were indicators of impairment related to the company’s long-lived assets, specifically related to assessing whether there were: (i) significant adverse changes in the business climate including significant decreases in uranium prices, or significant adverse changes in legal factors, (ii) significant changes in expected capital, operating, or reclamation costs, and (iii) significant decreases in the market price of the assets. this in turn led to a high degree of auditor judgment and subjectivity in performing procedures to evaluate audit evidence relating to the judgments made by management in their assessment of any event or changes in circumstances that could give rise to the requirement to conduct an impairment test. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included, among others: (i) evaluating whether there were significant adverse changes in the business climate related to significant decreases in uranium prices by considering external market and industry data, (ii) evaluating whether there were significant adverse changes in legal factors by obtaining on a sample basis evidence to support the rights to the mineral properties, (iii) assessing whether there were significant decreases in the market price of the assets by considering any prolonged declines in the company’s share price, and (iv) evaluating whether there were significant changes in expected capital costs, operating costs, or reclamation costs, or other factors that may indicate that the carrying amounts of the long-lived asset may not be recoverable, through consideration of evidence obtained in other areas of the audit. /s/pricewaterhouse coopers llp chartered professional accountants vancouver, canada march 9, 2022 we have served as the company’s auditor since 2004. | 1 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.goodwill impairment assessments as described in notes 2 and 9 to the consolidated financial statements, the company’s consolidated goodwill balance was $33.1 billion as of december 26, 2020. management tests reporting units for impairment annually as of the first day of the second quarter, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. reporting units are tested for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. if the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is recorded based on the difference between the fair value and carrying amount, not to exceed the associated carrying amount of goodwill. management recognized non-cash impairment losses of $2.3 billion for the year ended december 26, 2020. management generally utilizes the discounted cash flow method under the income approach to estimate the fair value of reporting units. as disclosed by management, management’s cash flow projections included significant judgments and assumptions related to net sales, cost of products sold, selling, general and administrative costs (sg&a), depreciation and amortization, working capital, capital expenditures, income tax rates, discount rates, long-term growth rates, and other market factors. the principal considerations for our determination that performing procedures relating to the goodwill impairment assessments is a critical audit matter are (i) the significant judgment by management when developing the fair value measurements of the reporting units; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to net sales, cost of products sold, sg&a, discount rates and long-term growth rates; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments, including controls over the valuation of the company’s reporting units. these procedures also included, among others (i) testing management’s process for developing the fair value estimates; (ii) evaluating the appropriateness of the discounted cash flow method; (iii) testing the completeness and accuracy of underlying data used in the fair value estimates and (iv) evaluating the significant assumptions related to net sales, cost of products sold, sg&a, discount rates and long-term growth rates. evaluating management’s assumptions related to net sales, cost of products sold, sg&a, discount rates and long-term growth rates involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of (i) the company’s discounted cash flow method and (ii) the discount rate and long-term growth rate assumptions. indefinite-lived intangible assets impairment assessment as described in notes 2 and 9 to the consolidated financial statements, the company’s consolidated indefinite-lived intangible assets balance, which consists primarily of individual brands, was $42.3 billion as of december 26, 2020. management tests brands for impairment annually as of the first day of the second quarter, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a brand is less than its carrying amount. brands are tested for impairment by comparing the estimated fair value of each brand with its carrying amount. if the carrying amount of a brand exceeds its estimated fair value, an impairment loss is recorded based on the difference between the fair value and carrying amount. management recognized non-cash impairment losses of $1.1 billion for the year ended december 26, 2020. as disclosed by management, management utilizes either an excess earnings method or relief from royalty method to estimate the fair value of its brands. using the excess earnings method, management’s cash flow projections included significant judgments and assumptions relating to net sales, cost of products sold, sg&a, contributory asset charges, income tax considerations, long-46term growth rates, discount rates, and other market factors. using the relief from royalty method, management’s cash flow projections included significant judgments and assumptions related to net sales, royalty rates, income tax considerations, long-term growth rates, discount rates, and other market factors. the principal considerations for our determination that performing procedures relating to the indefinite-lived intangible assets impairment assessment is a critical audit matter are (i) the significant judgment by management when developing the fair value measurements of the brands; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to net sales, cost of products sold, sg&a, long-term growth rates and discount rates for the excess earnings method and net sales, royalty rates, long-term growth rates and discount rates for the relief from royalty method; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s indefinite-lived intangible assets impairment assessment, including controls over the valuation of the company’s indefinite-lived intangible assets. these procedures also included, among others (i) testing management’s process for developing the fair value estimates; (ii) evaluating the appropriateness of the excess earnings and relief from royalty methods; (iii) testing the completeness and accuracy of underlying data used in the fair value estimates; and (iv) evaluating the significant assumptions used by management related to net sales, cost of products sold, sg&a, long-term growth rates and discount rates for the excess earnings method and net sales, royalty rates, long-term growth rates and discount rates for the relief from royalty method. evaluating management’s assumptions related to net sales, cost of products sold, sg&a, long-term growth rates and discount rates for the excess earnings method and net sales, royalty rates, long-term growth rates and discount rates for the relief from royalty method involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the individual brands; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of (i) the company’s excess earnings and relief from royalty methods and (ii) the royalty rate, long-term growth rate and discount rate assumptions./s/ pricewaterhouse coopers llp chicago, illinois february 17, 2021 we have served as the company’s or its predecessors' auditor since 1979. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.rate matters and regulation - impact of rate regulation on the financial statements - refer to notes 1 and 5 to the financial statements critical audit matter description the company is subject to rate regulation by the kansas corporation commission and by the missouri public service commission (collectively the "commissions"), which have jurisdiction with respect to the rates of electric distribution companies in kansas and missouri, respectively. management has determined it meets the requirements under accounting principles generally accepted in the united states of america to prepare its financial statements applying the specialized rules to account for the effects of cost-based rate regulation. accounting for the 57table of contents economics of rate regulation impacts multiple financial statement line items and disclosures, such as property, plant, and equipment, including asset retirements and abandonments; regulatory assets and liabilities; operating revenues; operating and maintenance expense; and depreciation expense.the company's rates are subject to regulatory rate-setting processes and annual earnings oversight. rates are determined and approved in regulatory proceedings based on an analysis of the company's costs to provide utility service and a return on, and recovery of, the company's investment in the utility business. regulatory decisions can have an impact on the recovery of costs, the rate of return earned on investment, and the timing and amount of assets to be recovered by rates. the commissions' regulation of rates is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital. decisions to be made by the commissions in the future will impact the accounting for regulated operations, including decisions about the amount of allowable costs and return on invested capital included in rates and any refunds that may be required. while the company has indicated it expects to recover costs from customers through regulated rates, there is a risk that the commissions will not approve (1) full recovery of the costs of providing utility service or (2) full recovery of all amounts invested in the utility business and a reasonable return on that investment.when the company retires a regulated plant, the company must assess the probability of recovery of the regulated plant, which is dependent upon amounts that may be recovered through regulated rates, including any return. pending receipt of regulatory approval for the retirement and/or recovery of the affected plants, accounting for early retirements of regulated plants involves judgment related to the nature of the early retirement and the likelihood that the company will recover its remaining investment in these retired generating plants with return. auditing the judgments related to the nature and likelihood of the retirement and the probability of recovering the generating plant investment with a return involves especially subjective and complex judgment.we identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management to support its assertions about impacted account balances and disclosures and the high degree of subjectivity involved in assessing the impact of future regulatory orders on the financial statements. management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs, (2) probability of potential charges related to the abandonment of regulated plants, and (3) a refund to customers. given that management's accounting judgments are based on assumptions about the outcome of future decisions by the commissions, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities.how the critical audit matter was addressed in the audit our audit procedures related to the uncertainty of future decisions by the commissions included the following, among others:•we tested the effectiveness of management's controls over the evaluation of the likelihood of (1) the recovery in future rates of costs incurred as property, plant, and equipment and deferred as regulatory assets and (2) a refund or a future reduction in rates that should be reported as regulatory liabilities.•we tested the effectiveness of management's controls over the initial recognition of amounts as property, plant, and equipment; regulatory assets or liabilities; and the monitoring and evaluation of regulatory developments that may affect the likelihood of recovering costs in future rates or of a future reduction in rates, including company management's determination of the likelihood of recovery of the full investment of certain regulated plants and probability of refunding amounts previously collected from customers related to certain regulated plants.•we evaluated the company's disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments.•we evaluated external information and compared it to management's recorded regulatory asset and liability balances for completeness. such external information included relevant regulatory orders issued by the commissions for the company and other public utilities in kansas and missouri, regulatory statutes, interpretations, procedural memorandums, filings made by intervenors, and other publicly available 58table of contents information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedence of the commissions' treatment of similar costs under similar circumstances.•for regulatory matters in process, including those that could impact the early retirement of regulated plants, we inspected the company's filings with the commissions and the filings with the commissions by intervenors that may impact the company's future rates, for any evidence that might contradict management's assertions.•we evaluated the reasonableness of management's judgments for potential indicators of abandonment by performing the following:◦we inquired of management about property, plant, and equipment that may be abandoned.◦we inspected the capital projects budget and construction-in-process listings and inquired of management to identify projects that are designed to replace assets that may be retired prior to the end of the useful life.◦we inspected minutes of the board of directors and regulatory orders and other filings with the commissions to identify any evidence that may contradict management's assertion regarding probability of an abandonment.•we compared actual spend for projects that have been capitalized to property, plant, and equipment to budget. we evaluated regulatory filings for any evidence that intervenors are challenging full recovery of the cost of any capital projects. for significant projects that were over budget or if full recovery of project costs is being challenged by intervenors, we evaluated management's assessment of the probability of a disallowance. we tested selected costs included in the capitalized project costs for completeness and accuracy.•we evaluated management's analysis, and letters from internal and external legal counsel, as appropriate, regarding probability of recovery for regulatory assets or refund or future reduction in rates for regulatory liabilities not yet addressed in a regulatory order to assess management's assertion that amounts are probable of recovery or a future reduction in rates.•we evaluated management's conclusions for the probable recovery of the retired regulated plant investment with a return with the assistance of professionals in our firm having expertise in the application of accounting guidance for early retirements of regulated plants. we evaluated management's conclusions regarding the accounting for the abandonment of certain regulated plants and the impact of recent rate orders on the accounting./s/ deloitte & touche llp kansas city, missouri march 2, 2020 we have served as the company's auditor since 2002. | 4 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.f-2revenue recognition - identifying and evaluating terms and conditions in contracts description of the matter as discussed in note 2 to the consolidated financial statements, the company derives its revenues primarily from subscription services fees, professional services fees and term-based licenses. the company determines revenue recognition following five-step framework in line with asc 606, revenue from contracts with customers (topic 606) “asc 606”. management applies significant effort and judgment in identifying and evaluating any non-standard terms and conditions in contracts which may impact revenue recognition.auditing revenue recognition was complex due to the significant amount of effort and judgment required in the identification and evaluation of terms and conditions in contracts that impact revenue recognition.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of the company's controls over the internal review and assessment of terms and conditions within contracts that would impact revenue recognition in accordance with asc 606. our substantive procedures included, among others, testing the completeness and accuracy of management’s identification and evaluation of terms and conditions within contracts, reading executed contracts for a sample of revenue transactions and evaluating whether the company appropriately applied its revenue recognition policy to the arrangements based on the terms and conditions therein. we additionally assessed the appropriateness of the related disclosures in the consolidated financial statements.acquisition of laurel parent holdings, inc. and its subsidiaries (“l lamasoft”) – fair value of technology-related intangible assets description of the matter as discussed in note 4 to the consolidated financial statements, the company completed the acquisition during fiscal 2021 of laurel parent holdings, inc. and its subsidiaries (“l lamasoft”) for consideration of $1.4 billion, accounted for as a business combination. auditing the company's accounting for its acquisition of l lamasoft was complex due to the significant estimation required in determining the fair value of developed technology intangible assets, which were valued and recorded at $316.1 million. the company used a discounted cash flow model to measure developed technology intangible assets. the significant estimation was primarily due to the judgmental nature of the inputs to the valuation model and the sensitivity of the fair value to certain underlying significant assumptions, in particular, the projections of future revenue, including the impact of the technology migration curve. this significant assumption is forward-looking and could be affected by future economic and market conditions.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of the company's controls over its accounting for acquisitions, such as controls over the recognition and measurement of developed technology intangible assets, including the valuation model and underlying assumptions used to develop such estimates.to test the estimated fair value of the developed technology intangible assets, our audit procedures included, among others, involvement of our valuation specialists to assist us in the evaluation of the valuation methodology used by the company and procedures to test the assumptions used in the valuation, including the completeness and accuracy of the underlying data. we performed a sensitivity analysis of the discount rate and revenue projections to evaluate the change in the fair value resulting from changes in the assumptions. we also compared the revenue forecast assumptions, including the impact of technology migration curves, to current industry, market and economic trends, to the assumptions used to value similar assets in other acquisitions, to historical results of the acquired business and to other guideline companies within the same industry.f-3fair value determination of convertible senior notes description of the matter as discussed in note 9 to the consolidated financial statements, in june 2020, the company issued $1,380.0 million in convertible senior notes (convertible notes). concurrent with the issuance of the convertible notes, the company entered into capped call transactions that are exercisable upon conversion of the convertible notes (collectively with the convertible notes referred to as the convertible notes transactions). the accounting for the convertible notes transactions was complex as it required assessment as to whether features in the convertible notes required bifurcation and an evaluation of the appropriate classification of those features in the financial statements. additionally, the convertible notes transactions were complex as valuation of the conversion feature in the convertible notes involved estimation of the fair value of the liability component of the convertible notes on a stand-alone basis.auditing management’s evaluation of the convertible notes transactions involved addressing the complexity in assessing the components for separability and assessing valuation of the liability component on a stand-alone basis. the company estimated the fair value of the liability component of the convertible notes using a discounted cash flow model with a discount rate determined primarily using observable yields for stand-alone debt instruments with a comparable credit rating and term as well as using lattice models. the fair value of the liability component is sensitive to changes in the discount rate. the company also performed a detailed analysis of the terms of the convertible notes transactions to identify whether there were any embedded derivatives that required separate identification and valuation under applicable accounting guidance.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s accounting for the convertible notes transactions, including its controls over estimating the fair value of the stand-alone liability component and evaluating the existence and valuation of embedded derivatives.to test the initial accounting for the convertible notes transactions, our procedures included, among others, inspection of the agreements for the convertible notes transactions and assessing management’s application of the relevant accounting guidance. we also involved our valuation specialists to assist in our evaluation of the company’s determination of the fair value of the liability component on a stand-alone basis, including testing the appropriateness of the methodology and the discount rate./s/ ernst & young llp we have served as the company’s auditor since 2015. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. research and development costs as described in notes 2 and 5 to the consolidated financial statements, management uses significant judgment in estimating the amount of research and development costs recognized in each reporting period. management analyzes and estimates the progress of its preclinical studies and clinical trials, completion of milestone events per underlying agreements, invoices received and contracted costs when estimating the research and development costs to accrue in each reporting period. total research and development costs incurred during the year ended december 31, 2019 were $72.3 million and research and development costs accrued were $13.8 million as of december 31, 2019. the principal considerations for our determination that performing procedures relating to research and development costs is a critical audit matter are there was significant judgment by management when estimating the costs incurred for services performed by vendors that have not yet been invoiced in estimating the research and development costs to accrue in the reporting period. this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate the audit evidence obtained relating to estimates of costs accrued. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls over management’s process relating to accruing research and development costs, including controls over estimating the costs incurred for services performed by vendors that have not yet been invoiced. these procedures also included, among others, testing management’s process for estimating the research and development costs to accrue in the reporting period, evaluating the completeness and accuracy of underlying data used in management’s estimate by testing for consistency with a sample of contracts and invoices, testing the number of patients screened for and enrolled in the trial, testing the mathematical accuracy of the calculation of the accrual for research and development costs incurred, and evaluating the reasonableness of assumptions used in the estimate. evaluating the reasonableness of assumptions used in the estimate involved assessing management’s ability to reasonably estimate costs incurred that have not been invoiced by (i) performing a f-3 table of contents comparison of the estimated accrual to average procedure rates per contracts applied to the number of patients screened for and enrolled in the trial, and by (ii) performing a comparison of the estimated accrual to actual costs incurred on similar completed preclinical studies and clinical trials. /s/ pricewaterhouse coopers llp philadelphia, pennsylvania february 26, 2020 we have served as the company’s auditor since 2016. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.impairment of long-lived assets – refer to notes 1 and 3 to the financial statements.critical audit matter description39 the evaluation of drilling equipment, specifically drilling rigs, for impairment occurs whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable, such as cold stacking a drilling rig, the expectation of cold stacking a drilling rig in the near term, contracted backlog of less than one year, a decision to retire or scrap a drilling rig, or excess spending over budget on a newbuild, construction project or major drilling rig upgrade. when the company determines that the carrying value of a drilling rig may not be recoverable, they prepare an undiscounted probability-weighted cash flow analysis to determine if there is a potential impairment. this analysis utilizes certain assumptions for each drilling rig under evaluation and considers multiple probability-weighted utilization and dayrate scenarios. the company’s development of the dayrate assumption involves judgments relative to the current and expected market for the drilling rigs and expectations of future oil and gas prices. the drilling and other property and equipment balance was $5.2 billion as of december 31, 2019, and no impairment expense was recorded for the year ended december 31, 2019. we identified impairment of drilling rigs as a critical audit matter because of the significant judgments made by management to identify indicators of impairment and to prepare probability-weighted cash flow analyses to determine if potential impairments exist. this required a high degree of auditor judgment, including the involvement of fair value specialists, and increased extent of effort related to evaluating indicators of impairment and dayrate used in the undiscounted probability-weighted cash flow analysis. how the critical audit matter was addressed in the audit our audit procedures related to (i) the identification of indicators of impairment and (ii) the evaluation of the company’s undiscounted probability-weighted cash flow analysis for those drilling rigs with factors that indicated potential impairment included the following, among others: •we tested the effectiveness of relevant controls related to the company’s identification of impairment indicators, and the company’s review of the undiscounted probability-weighted cash flow analyses. •we evaluated the company’s identification of impairment indicators by: o corroborating information used in the identification of impairment indicators through independent inquiries of marketing and operations personnel and by performing an independent assessment of potential indicators of impairment utilizing the individual drilling rig history, asset class history for dayrates, backlog and potential drilling rig opportunities. o considering industry and analysts reports and the impact of macroeconomic factors, such as future oil and gas prices, on the company’s process for identifying indicators of impairment. o comparing the timing of impairments recorded by the company with the timing of impairments recorded by the company’s peers. •with the assistance of our fair value specialists, we evaluated the company’s undiscounted probability-weighted cash flow analysis for those drilling rigs with factors that had indicators of potential impairment by: o evaluating the reasonableness of the dayrate assumptions utilized in the company’s probability-weighted undiscounted cash flow analyses by evaluating potential drilling rig opportunities and considering industry reports and data. o comparing the assumptions used in the company’s previous undiscounted probability-weighted cash flow analyses to the assumptions used in the current undiscounted probability-weighted cash flow analyses to assess for management bias. 40 income taxes – refer to notes 1 and 14 to the financial statements.critical audit matter description the company accounts for income taxes in accordance with accounting standards that require the recognition of the amount of taxes payable or refundable for the current year and an asset and liability approach in recognizing the amount of deferred tax liabilities and assets for the future tax consequences of events that have been currently recognized in the financial statements or tax returns. in each of the tax jurisdictions, the company recognized a current tax liability or asset for the estimated taxes payable or refundable on tax returns for the current year and a deferred tax asset or liability for the estimated future tax effects attributable to temporary differences and carryforwards. the deferred tax liability balance was $47.5 million as of december 31, 2019 and income tax benefit recorded in 2019 was $44.8 million.in several of the jurisdictions in which the company operates, certain wholly-owned subsidiaries entered into agreements with other wholly-owned subsidiaries to provide specialized service and equipment. the company applied transfer pricing methodologies to determine the amount to be charged for providing the services and equipment and utilized outside consultants to assist in the development of such transfer pricing methodologies. each jurisdiction enacts laws, which, in many cases, allows for alternative transfer pricing methodologies, which may differ from the company’s selected methodologies. alternative transfer pricing methodologies, if applied, could result in different chargeable amounts.given the multiple jurisdictions in which the company files tax returns and the complexity of the tax laws and regulations, and transfer pricing methodologies applied to wholly-owned subsidiary transactions, auditing management’s estimates of income taxes in foreign jurisdictions required a high degree of auditor judgment and an increased extent of effort, including the use of our tax specialists and audit teams in the local jurisdiction knowledgeable of the tax laws of the applicable country.how the critical audit matter was addressed in the audit our audit procedures related to the company’s application of transfer pricing methodologies, included the following, among others: •we evaluated the appropriateness and consistency of management’s methods and assumptions used in the application of its transfer pricing methodology, which included testing the effectiveness of the related internal controls. •we involved transfer pricing specialists to evaluate the reasonableness of transfer pricing methodologies utilized by the company. •we tested the accuracy of transfer prices by recalculating the prices in accordance with the chosen methodology. •with the assistance of our income tax specialists and audit teams in the local jurisdiction knowledgeable of the tax laws of the applicable country, we evaluated management’s assertions with respect to the company’s entitlement to the economic benefits associated with the tax positions resulting from the application of transfer pricing methodology. /s/ deloitte & touche llp houston,texas february 11, 2020 we have served as the company’s auditor since 1989. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.liability for future policy benefits– refer to notes 1 and 3 to the consolidated financial statements critical audit matter description as of december 31, 2020, the liability for future policy benefits totaled $44.3 billion, and included benefits related to variable annuity contracts with guaranteed benefit riders and universal life insurance contracts with secondary guarantees. management regularly reviews its assumptions supporting the estimates of these actuarial liabilities and differences between actual experience and the assumptions used in pricing the policies and guarantees may require a change to the assumptions recorded at inception as well as an adjustment to the related liabilities. updating such assumptions can result in variability of profits or the recognition of losses. 65table of contents given the future policy benefit obligation for these contracts is sensitive to changes in the assumptions related to general account and separate account investment returns, and policyholder behavior including mortality, lapses, premium persistency, benefit election and utilization, and withdrawals, auditing management’s selection of these assumptions involves an especially high degree of estimation.how the critical audit matter was addressed in the audit our audit procedures related to the updating of assumptions by management included the following, among others:•we tested the effectiveness of management’s controls over the assumption review process, including those over the selection of the significant assumptions used related to general account and separate account investment returns, and policyholder behavior including mortality, lapses, premium persistency, benefit election and utilization, and withdrawals. •with the assistance of our actuarial specialists, we evaluated the appropriateness of the significant assumptions used, developed an independent estimate of the future policy benefit liability, and compared our estimates to management’s estimates. •we tested the completeness and accuracy of the underlying data that served as the basis for the actuarial analysis, including experience studies, to test that the inputs to the actuarial estimate were reasonable.•we evaluated the methods and significant assumptions used by management to identify potential bias.•we evaluated whether the significant assumptions used were consistent with evidence obtained in other areas of the audit.deferred acquisition cost (dac) – refer to notes 1 and 4 to the consolidated financial statements critical audit matter description the company incurs and defers certain costs in connection with acquiring new and renewal insurance business. these deferred costs, amounting to $4.4 billion as of december 31, 2020, are amortized over the expected life of the policy contract in proportion to actual and expected future gross profits, premiums or margins. for deferred annuities and universal life contracts, expected future gross profits utilized in the amortization calculation are derived using assumptions such as separate account and general account investment returns, mortality, in-force or persistency, benefit elections and utilization, and withdrawals. the assumptions used in the calculation of expected future gross profits are reviewed at least annually.given the significance of the estimates and uncertainty associated with the long-term assumptions utilized in the determination of expected future gross profits, auditing management’s determination of the appropriateness of the assumptions used in the calculation of dac amortization involves an especially high degree of estimation.how the critical audit matter was addressed in the audit our audit procedures related to management’s determination of dac amortization included the following, among others: •we tested the effectiveness of management’s controls related to the determination of expected future gross profits, including those over management’s review that the significant assumptions utilized related to separate account and general account investment returns, mortality, in-force or persistency, benefit elections and utilization, and withdrawals represented a reasonable estimate. •with assistance from our actuarial specialists, we evaluated the data included in the estimate provided by the company’s actuaries and the methodology utilized, and evaluated the process used by the company to determine whether the significant assumptions used were reasonable estimates based on the company’s own experience and industry studies.•we inquired of the company’s actuarial specialists whether there were any changes in the methodology utilized during the year in the determination of expected future gross profits. •we inspected supporting documentation underlying the company’s experience studies and, utilizing our actuarial specialists, independently recalculated the amortization for a sample of policies, and compared our estimates to management’s estimates.66table of contents•we evaluated whether the significant assumptions used by the company were consistent with evidence obtained in other areas of the audit and to identify potential bias.•we evaluated the sufficiency of the company’s disclosures related to dac amortization.embedded derivative liabilities related to variable annuity guarantees – refer to notes 1, 7, and 8 to the consolidated financial statements. critical audit matter description the company sells index-linked annuities and variable annuity products with guaranteed minimum benefits, some of which are embedded derivatives that are required to be bifurcated from the host contract, separately accounted for, and measured at fair value. as of december 31, 2020, the fair value of the embedded derivative liability associated with certain of the company’s annuity contracts was $7.6 billion. management utilizes various assumptions in order to measure the embedded liability including expectations concerning policyholder behavior, mortality and risk margins, as well as changes in the company’s own nonperformance risk. these assumptions are reviewed at least annually by management, and if they change significantly, the estimated fair value is adjusted by a cumulative charge or credit to net income.given the embedded derivative liability is sensitive to changes in these assumptions, auditing management’s selection of these assumptions involves an especially high degree of estimation.how the critical audit matter was addressed in the audit our audit procedures related to the assumptions selected by management for the embedded derivative liability included the following, among others:•we tested the effectiveness of management’s controls over the embedded derivative liability, including those over the selection of the significant assumptions related to policyholder behavior, mortality, risk margins and the company’s nonperformance risk. •with the assistance of our actuarial specialists, we evaluated the appropriateness of the significant assumptions, tested the completeness and accuracy of the underlying data and the mathematical accuracy of the company’s valuation model.•we evaluated the reasonableness of the company’s assumptions by comparing those selected by management to those independently derived by our actuarial specialists, drawing upon standard actuarial and industry practice.•we evaluated the methods and assumptions used by management to identify potential bias in the determination of the embedded liability.•we evaluated whether the assumptions used were consistent with evidence obtained in other areas of the audit./s/ deloitte & touche llp charlotte, north carolina march 3, 2021we have served as the company’s auditor since 2005. | 3 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.revenues - proprietary loan program revenue recognition - refer to note 2 in the fy 2021 form 10k critical audit matter description the portion of tuition revenue related to the company’s proprietary loan program is considered a form of variable consideration, in accordance with asc 606, revenue from contracts with customers. the company estimates the amount it expects to collect on these loans by calculating the amount due compared to historical loan collections over the past 10 years, and recognizes that amount of estimated revenue over the student’s program, resulting in a notes receivable balance of $36.1 million as of september 30, 2021. the company evaluates the collectability rate of its outstanding loans each quarter, which requires significant management judgment. the company currently uses the actual collection experience over the past 10 years to determine the expected collection rate.f-4the key judgment made by management is the length of historical collection experience used to calculate the expected collection rate and requires a high degree of auditor judgement in determining the reasonableness of the period of time used by management to estimate the expected collection rate. how the critical audit matter was addressed in the audit our audit procedures related to the expected collection rate for the proprietary loan program included the following, among others: •tested the design and effectiveness of the company’s internal controls related to the company’s evaluation of the proprietary loan program expected collection rate.•considered how the expected collection rate might change if the company had used a different time period in the calculation of the expected collection rate, and what impact it would have on the financial statements.•performed a trend analysis by comparing recent repayment trends and collection rates by quarter over the past 3 years compared to the expected collection rate calculated to evaluate whether the expected collection rate estimate is reasonable.•recalculated the expected collection rate based on the actual collection rates of the loan portfolio for the most recent 10 years.•evaluated the underlying historical loan data by making selections of loans included in the data population and traced to source documentation, and recalculated the amount of the loan due as of the reporting date.•agreed monthly loan collection amounts for selected months to bank statements.•tested completeness of the loan data population by tracing a selection of students from historical accounting records to the underlying population used to calculate the expected collection rate./s/ deloitte & touche llp phoenix, arizona december 2, 2021we have served as the company's auditor since 2015. | 3 |
critical audit matters thecritical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements thatwas communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are materialto the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communicationof the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and weare not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accountsor disclosures to which it relates. going concern assessment asdiscussed in note 3 to the consolidated financial statements, historically, the company has incurred net losses. since its inception,the company has met its liquidity requirements principally through the sale of its common stock in public and private placements. the company believes that its current financial resources as of the date of issuance of the consolidated financial statements are sufficientto fund its current operating budget and contractual obligations as of december 31, 2021 as they fall due in the next twelve-month period,and as such have concluded that there are no material uncertainties related to events or conditions that may cast significant doubt uponthe company’s ability to continue as a going concern. in making such a determination, management prepared a short-term cash flowprojection. management used significant assumptions in preparing the short-term cash flow projection, which included operating costsand financing obligations. theprincipal considerations for our determination that performing procedures relating to the going concern assessment is a critical auditmatter are the significant judgments in management’s plans to fund its operating budget and contractual obligations. this requireda high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate management’s conclusionthat it is probable the company’s plans will be effectively implemented within twelve months after the date the consolidated financialstatements are issued and will provide the necessary cash flows to fund the company’s operating budget and contractual obligations. addressingthe matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidatedfinancial statements. these procedures included the following: ●evaluation of the reasonableness of key assumptions and estimates used by the management in the short-term cash flow projection in the light of its existing operating requirements and plans. ●evaluation of the reasonableness of management’s plans on the cash flow requirements of the operations. ●testing the completeness, accuracy, and relevance of underlying data in the short-term cash flow projection. ●evaluation of the adequacy of the company’s disclosure of these circumstances in the consolidated financial statements. /s/morison cogen llp wehave served as the company’s auditor since 2010. | 2 |
critical audit matters the critical audit matters communicatedbelow are matters arising from the current period audit of the financial statements that were communicated or required to be communicatedto the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involvedour especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in anyway our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below,providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. indefinite-lived trade name impairment assessment as described in notes 1 and 4 to the consolidatedfinancial statements, the company’s indefinite-lived trade name balance was $8,400,000 as of january 2, 2021. indefinite-livedintangible assets are tested for impairment annually during the fourth fiscal quarter and whenever events or circumstances mayindicate that an impairment has occurred. the fair value of the indefinite-lived trade name is generally estimated using discountedcash flow methodologies. the discounted cash flow methodology requires significant judgment, including estimation of future revenue,which is dependent on internal forecasts, the estimation of the long-term revenue growth rate of the company’s business,the determination of the company’s weighted average cost of capital, and royalty rates. we identified the company’s indefinite-livedtrade name impairment assessment as a critical audit matter because of the significant assumptions and judgments made by managementwhen estimating the fair value of the indefinite-lived trade name. auditing management’s assumptions and judgments regardingfuture revenues, the weighted average cost of capital, and the royalty rate involved a high degree of auditor judgment and an increasedeffort, including the use of our valuation specialists. our audit procedures related to future revenues,royalty rate, and the weighted average cost of capital utilized in the valuation of the company’s indefinite-lived tradename included the following, among others: -with the assistance of our valuation specialists, we evaluated the reasonableness of the weighted average cost of capital andtested the relevance and reliability of source information underlying the determination of the rates, tested the mathematical accuracyof the calculation, and evaluated the reasonableness of the royalty rate selected by management.-we evaluated the reasonableness of future revenues by:o comparing management’s forecasts to historical results for the company.o comparing management’s forecasts to third-party industry data.-we evaluated the impact of changes to revenue forecasts and revenue growth rates on the fair value of the indefinite-livedtrade name. deferred tax asset valuation allowance and uncertain tax position as described in note 6 to the consolidatedfinancial statements, the company’s gross deferred tax asset and valuation allowance was $5,700,000 and $4,700,000, respectively,as of january 2, 2021. the company recognizes deferred income taxes for differences between the financial reporting and tax basisof assets and liabilities. deferred tax assets include loss and credit carryforwards and are reduced by a valuation allowance if,based on available evidence, it is more likely than not that some portion of the deferred tax assets will not be realized. the company regularly reviews the deferred tax assets for recoverability considering historical profitability, projected taxable income,the expected timing of the reversals of existing temporary differences and tax planning strategies. the principal considerations for our determinationthat performing procedures relating to management’s determination of the value of deferred tax assets is a critical auditmatter are that there is significant judgment by management in the determination that it is more likely than not that sufficienttaxable income will be generated to realize deferred tax assets and in the recognition of potential uncertain tax positions, andauditing the valuation of deferred tax assets involved especially subjective judgment. our audit procedures related to the determinationthat it is more likely than not that sufficient taxable income will be generated to realize deferred tax assets as well as management’sidentification of an uncertain tax position included the following, among others: -we evaluated the reasonableness of management’s estimates of future taxable income by considering the weight appliedto negative evidence and positive evidence that is objectively verifiable.-we evaluated the company’s “more likely than not” conclusion with regard to deferred tax assets that areconsidered realizable and recomputed the valuation allowance and uncertain tax position for those that were not considered realizable.-we evaluated management’s identification of an uncertain tax position and its application of tax law.-we evaluated the company’s “more likely than not” conclusion with regard to the tax deduction to be takenrelated to the dissolution of the company’s born free brand. /s/ rsm us llp we have served as the company's auditor since 2010. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. goodwill impairment assessment - hoover reporting unit as described in notes 2 and 9 to the consolidated financial statements, the company’s consolidated goodwill balance was $1,388 million as of december 31, 2019. as disclosed by management, the goodwill associated with the hoover reporting unit was $91.3 million as of december 31, 2019. management reviews goodwill for possible impairment at least annually, as of november 30, or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. an impairment charge is recognized for the amount by which the carrying value of goodwill exceeds the estimated fair value of the reporting unit. management reviews the carrying value of goodwill utilizing a discounted cash flow model. to determine the estimated fair value of the reporting unit, management makes assumptions related to the expected cash flows, discount rate, and long-term growth rate. the principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the hoover reporting unit is a critical audit matter are there was significant judgment by management when developing the estimated fair value of the reporting unit. this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating evidence related to management’s estimates of expected cash flows and significant assumptions, including forecasted revenue, forecasted operating income margins and the discount rate. in addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the company’s reporting unit. these procedures also included, among others, testing management’s process for developing the fair value estimates and evaluating the appropriateness of the discounted cash flow model, testing the completeness, accuracy and relevance of underlying data used in the model, and evaluating the significant assumptions used by management, including forecasted revenue, forecasted operating income margins and the discount rate. evaluating significant assumptions related to forecasted revenue and forecasted operating income margins involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of certain significant assumptions, including the discount rate./s/ pricewaterhouse coopers llp mclean, virginia february 26, 2020 we have served as the company’s auditor since 1946. | 1 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.valuation of incurred but not yet reported benefits payable as described in notes 2 and 11 to the consolidated financial statements, the company’s incurred but not yet reported benefits payable (ibnr) was $5.7 billion as of december 31, 2021. management develops its estimate for ibnr using actuarial methodologies and assumptions, primarily based upon historical claim experience. actuarial standards of practice generally require a level of confidence such that the liabilities established for ibnr have a greater probability of being adequate versus being insufficient, or such that the liabilities established for ibnr are sufficient to cover obligations under an assumption of moderately adverse conditions. as described by management, for the periods prior to the most recent two months, a completion factor method uses historical paid claims patterns to estimate the percentage of claims incurred during a given period that have historically been adjudicated as of the reporting period. changes in claim inventory levels and known changes in claim payment processes are taken into account in these estimates. for the most recent two months, the incurred claims are estimated primarily from a trend analysis based upon per member per month claims trends developed from historical experience in the preceding months, adjusted for known changes in estimates of hospital admissions, recent hospital and drug utilization data, provider contracting changes, changes in benefit levels, changes in member cost sharing, changes in medical management processes, product mix and workday seasonality. the principal considerations for our determination that performing procedures relating to the valuation of ibnr is a critical audit matter are the significant judgment by management when developing the estimate of ibnr, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating the actuarial methodologies and significant assumptions related to completion factors, per member per month claims 123trends, and the potential for moderately adverse conditions. also, the audit effort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the valuation of ibnr, including controls over the actuarial methodologies and development of significant assumptions related to completion factors, per member per month claims trends, and the potential for moderately adverse conditions. these procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent estimate of ibnr. this independent estimate includes a range of reasonable outcomes, including outcomes under moderately adverse conditions, which are compared to management’s estimate of ibnr. developing the independent estimate involved developing independent completion factors and per member per month claims trends assumptions using management’s data, testing the completeness and accuracy of data provided by management, and evaluating the reasonableness of management’s assumptions.goodwill impairment assessments – provider and home solutions reporting units as described in notes 2 and 9 to the consolidated financial statements, the company’s consolidated goodwill balance was $11.1 billion as of december 31, 2021, and the goodwill associated with the provider and home solutions reporting units was $0.9 billion and $6.6 billion, respectively. management conducts an impairment test in the fourth quarter of each year and more frequently if adverse events or changes in circumstances indicate that the asset may be impaired. management relies on an evaluation of future discounted cash flows analysis to determine fair value and uses discount rates that correspond to a market-based weighted-average cost of capital, and terminal growth rates that correspond to long-term growth prospects, consistent with the long-term inflation rate. key assumptions in management’s cash flow projections, including revenue growth rates, medical and operating cost trends, and projected operating income, are supported with management’s long-range business plan and annual planning process. the principal considerations for our determination that performing procedures relating to the goodwill impairment assessments of the provider and home solutions reporting units is a critical audit matter are the significant judgment by management when determining the fair value of the reporting units, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the revenue and terminal growth rates, projected operating income, and the discount rates. also, the audit effort involved the use of professionals with specialized skill and knowledge.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments, including controls over the significant assumptions used in the valuation of the provider and home solutions reporting units. these procedures also included, among others, testing management's process for determining the fair value estimate of the reporting units; evaluating the appropriateness of the discounted cash flows analysis; testing the completeness and accuracy of underlying data used in the analysis; and evaluating the reasonableness of the significant assumptions used by management related to the revenue and terminal growth rates, projected operating income, and the discount rates. evaluating management’s assumptions related to revenue and terminal growth rates and projected operating income involved considering the past performance of the reporting units and whether the assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the company’s discounted cash flows analysis and the reasonableness of the significant assumptions related to the terminal growth rates and the discount rates.acquisition of kindred at home – valuation of certificate of need intangible assets as described in notes 3, 6 and 9 to the consolidated financial statements, in august 2021, the company acquired the remaining 60% interest in kindred at home for an enterprise value of $8.2 billion, which resulted in $1.8 billion 124of certificate of need intangible assets being recorded. management developed its estimate of the fair value of the certificate of need intangible assets acquired based on the income approach, which involved the use of inputs and significant assumptions including historical revenues and earnings, long-term growth rate, discount rate, contributory asset charges and future tax rates, among others.the principal considerations for our determination that performing procedures relating to the valuation of the kindred at home certificate of need intangible assets acquired is a critical audit matter are the significant judgment by management when developing the fair value, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to long-term growth rate and discount rate. also, the audit effort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over the valuation methodologies and the development of significant assumptions related to the valuation of the certificate of need intangible assets, including long-term growth rate and discount rate. these procedures also included, among others, reading the purchase agreement and testing management’s process for estimating the fair value of certificate of need intangible assets. testing management’s process included evaluating the appropriateness of the income method and the reasonableness of the significant assumptions related to long-term growth rate and discount rate. evaluating the reasonableness of the long-term growth rate involved considering the past performance of the acquired business, the company’s historical results, and whether the assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the income method and the reasonableness of significant assumptions related to the long-term growth rate and discount rate./s/ pricewaterhouse coopers llp louisville, kentucky february 17, 2022we have served as the company’s auditor since 1968. | 1 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.indefinite-lived intangible assets valuation - certain brand assets - refer to notes 2 and 4 to the financial statements critical audit matter description as discussed in notes 2 and 4, the company has indefinite-lived brand intangible assets (“brand assets”). the company’s evaluation of the brand assets for impairment is performed annually as of october 1, and involves the comparison of the fair value of each brand asset to its carrying value. management estimates the fair value of the brand assets using a multi-period excess earnings method, which is a specific discounted cash flow method. the fair value determination of these assets requires management to make significant estimates and assumptions related to revenue growth projections, discount rates, and operating margins. each of these assumptions is sensitive to future market or industry conditions, as well as company-specific conditions. changes in these assumptions could have a significant impact on the fair value of certain indefinite-lived brand intangible assets (“certain brand assets”) that have a lower headroom percentage, the amount of any impairment, or both. given the significant judgments made by management to estimate the fair value of certain brand assets, a high degree of auditor judgment and an increased extent of effort were required to perform audit procedures that evaluated the reasonableness of management’s estimates and assumptions.50table of contents how the critical audit matter was addressed in the audit our audit procedures related to the underlying business and valuation assumptions for certain brand assets included the following, among others:•we tested the effectiveness of controls over the company’s indefinite-lived brand intangible asset impairment review process. this included controls over management’s review of the revenue growth rates, operating margins, and discount rates used in the valuation models.•we performed risk assessment procedures and for certain brand assets with a higher risk of impairment, we evaluated the reasonableness of management’s ability to forecast revenue growth and operating margins by comparing the forecasts to:–historical revenue and operating margins.–underlying analysis of business strategies and growth plans.–internal communication to senior management.–forecasted information in industry reports.–historical and forecasted peer data. •we considered the impact of changes in management's forecast from the october 1, 2021 annual assessment date to december 31, 2021.•with the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology and discount rates, including testing the mathematical accuracy of the calculation, and developed a range of independent estimates and compared those to the discount rates selected by management./s/ deloitte & touche llp boston, massachusetts february 24, 2022 we have served as the company’s auditor since 2016. | 1 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.critical audit matter how the matter was addressed in the audit royalties refer to note 5 of the financial statements.the company and cell med x corp. (“cmxc”) entered into a buyback agreement to sell the exclusive distribution rights to the e balance microcurrent device back to cmxc. the sale price included a retained royalty on future sales of the e balance device capped at $507,000.the company constrained the income recognized to reduce the probability of a significant income reversal in future periods. the estimate was based on historical experience, anticipated future performance, market conditions, and management’s best estimate at the time.a significant change in the estimate of future sales could have affected the estimated gain on sale.the company regularly reviewed and updated its estimates.given the judgment necessary to estimate projected future sales, auditing such estimates required increased audit effort due to the complexity of the therapeutic market and a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures.our audit procedures relating to the variable consideration measurement included the following:• we obtained a confirmation from cmxc on amount of royalty payable to the company as at december 31, 2021.• we reviewed the latest publicly available information from cmxc on whether the license has been obtained.• we evaluated the reasonableness of management’s estimates of future sales and evaluated the basis for expected future changes.• we performed lookback testing on sales history of the e balance device./s/ dale matheson carr-hilton labonte llpdale matheson carr-hilton labonte llpchartered professional accountants we have served as the company’s auditor since 2017 | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.liability for unpaid losses and loss adjustment expense (lae)- refer to notes 2 and 10 to the financial statements critical audit matter description as a provider of both residential and commercial property and casualty insurance, the company establishes reserves for both reported and unreported unpaid losses that have occurred at or before the balance sheet date for amounts estimated which they will be required to pay in the future, including provisions for claims that have been reported but are unpaid at the balance sheet date and for obligations on claims that have been incurred but not reported at the balance sheet date (herein “loss reserves”). due to the nature and unpredictability in both the severity and frequency of these events and their related claims, the company uses a significant amount of judgment in estimating the loss reserves, including analyzing historical and industry loss data, claims frequency and severity, claims processing procedures, legislative enactments, judicial decisions and legal developments in imposition of damages, and general economic conditions, including inflation. additionally, the company engages independent actuarial specialists in order to assist management in establishing appropriate loss reserves. given the subjectivity of estimating the projected losses to be incurred by the company as it relates to both reported and unreported claims, performing audit procedures to evaluate whether the company’s loss reserves were appropriately recorded 60as of december 31, 2021, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial specialists. how the critical audit matter was addressed in the audit our audit procedures related to the loss reserves included the following, among others: •we tested the effectiveness of controls related to loss reserves, including management’s controls over the projection of settlement value of reported and unreported claims.•we evaluated the methods and assumptions used by management to estimate the loss reserves by:–testing the underlying data that served as the basis for the actuarial analysis, including historical claims, to test that the inputs to the actuarial estimate were reasonable.–holding discussions with management to discuss the company’s ultimate recorded reserve actions and understand any trends that have been observed in the company’s claims data.–comparing management’s prior-year assumptions of expected development and ultimate loss to actuals incurred during the current year to identify potential bias in the determination of the loss reserves.•with the assistance of our actuarial specialists, we developed independent estimates of the loss reserves, including loss data, significant drivers, and claim development factors, and compared our estimates to management’s estimates./s/ deloitte & touche llp tampa, florida march 15, 2022we have served as the company's auditor since 2018. | 2 |
critical audit matters the critical audit matter communicated below isa matter arising from the current period audit of the financial statements that is communicated or required to be communicated to theaudit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especiallychallenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on thefinancial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinionon the critical audit matter or on the accounts or disclosures to which it relates. valuation of investments in privately-heldcompanies description of the matter as of december 31, 2021, the company had $9.5million of investments in companies without readily determinable fair values. the company typically measures these investments at costless any impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment. we identifiedthe valuation of these investments as a critical audit matter because of the significant judgement management uses to estimate the investmentvalue. this is a challenging audit area due to the subjectivity in assessing whether observable price changes have occurred for investmentsthat are identical or similar to the investment the company holds, and in assessing whether an investment is impaired. how we addressed the matter in our audit addressing the matter involved obtaining an understandingof management’s process for accounting for their investments that do not have readily determinable fair values. we considered theappropriateness of the company’s application of accounting policy by obtaining and reviewing the company’s analysis and confirmingits compliance with accounting principles generally accepted in the united states. we tested the mathematical accuracy of the company’scarrying value calculations and considered whether or not any of the investments should be impaired. we evaluated the accounting conclusionsreached by the company as to whether any observable transactions had occurred that were identical or similar in nature through readingof the company’s available financial and other information regarding the investee and through public searches for corroboratingor contradictory information. further, we evaluated the company’s impairment conclusions considering this internal and externalinformation. we also evaluated the adequacy of the company’s disclosures in note 7 in relation to this matter. /s/withum smith+brown, pc we have served as the company's auditor since2021. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.revenue recognition - rebates and incentives as described in notes 1 and 3 to the consolidated financial statements, the company provides certain customers with rebates or incentives which totaled $8.1 billion for the year ended december 31, 2019. the company has business agreements with certain customers that provide for rebates or other support when customers meet certain volume hurdles as well as other support incentives, which are tied to performance. rebates and incentives are recorded as a reduction to gross revenue primarily when volume- and transaction-based revenues are recognized over the contractual term. rebates and incentives are calculated based upon estimated customer performance and the terms of the related business agreements. management considers various factors in estimating customer performance, including forecasted transactions, card issuance and card conversion volumes, expected payments and historical experience with that customer.the principal considerations for our determination that performing procedures relating to rebates and incentives is a critical audit matter was the significant judgment of management when developing estimates related to rebates and incentives based on customer performance. this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s estimates related to customer performance and the reasonableness of assumptions related to the forecasted transactions, card issuance and card conversion volumes, expected payments and historical experience with that customer.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to customer rebates and incentives, including controls over evaluating customer performance based upon historical experience with that customer, forecasted transactions, card issuance and card conversion volumes and expected payments. these procedures also included, among others, evaluating the reasonableness of estimated customer performance for a sample of customer agreements, including (i) evaluating rebate and incentive contracts to identify whether all incentives are identified and recorded accurately; (ii) testing management’s process for developing the estimated customer performance, including evaluating the reasonableness of the assumptions related to the forecasted transactions, card issuance and card conversion volumes, expected payments and historical customer experience; and (iii) evaluating the estimated customer performance as compared to actual results in the period the customer reports actual performance. /s/ pricewaterhouse coopers llp new york, new york february 14, 2020 we have served as the company’s auditor since 1989. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 143 table of contents deferred acquisition costs and value of business acquired intangible assets description of the matter as disclosed in note 2 and note 6 to the consolidated financial statements, the company’s deferred policy acquisition costs and value of business acquired (dac/voba) totaled $2.8 billion at december 31, 2019, net of unrealized gains and losses, of which $1.5 billion represented deferred acquisition costs and value of business acquired related to universal life-type products and fixed and variable deferred annuity contracts. the carrying amount of the dac related to universal life-type products and fixed and variable deferred annuity contracts is the total of costs deferred less amortization net of interest. the carrying amount of the voba related to universal life-type products and fixed and variable deferred annuity contracts is the outstanding value of in-force business acquired, based on the present value of estimated net cash flows embedded in the insurance contracts at the time of the acquisition, less amortization net of interest. dac and voba related to universal life-type products and fixed and variable deferred annuity contracts are amortized over the estimated lives of the contracts in relation to the emergence of estimated gross profits. as described in note 1 to the consolidated financial statements, there is a significant amount of uncertainty inherent in calculating estimated gross profits as the calculation includes significant management judgment in developing certain assumptions such as expected future mortality, persistency, interest crediting rates, fee income, returns associated with separate account performance, expenses to administer the business, and certain economic variables. management’s assumptions are adjusted, known as unlocking, over time for emerging experience and expected changes in trends. the unlocking results in dac/voba amortization being recalculated, using the new assumptions for estimated gross profits, that results either in additional or less cumulative amortization expense.auditing management’s estimate of dac/voba related to universal life-type products and fixed and variable deferred annuity contracts was complex due to the highly judgmental nature of assumptions included in the projection of estimated gross profits used in the valuation of dac/voba.how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of the controls over the dac/voba estimation process, including, among others, controls related to management’s evaluation of the need to update assumptions based on the comparison of actual company experience to previous assumptions and updating investment margins for current and expected future market conditions.we utilized actuarial specialists to assist with our audit procedures, which included, among others, reviewing the methodology applied by management by comparing to the methodology used in prior periods as well as industry practice. to assess the assumptions used in measuring estimated gross profits, we compared the significant assumptions noted above with historical experience, observable market data and management’s estimates of prospective changes in these assumptions. we also independently recalculated estimated gross profits for a sample of product cohorts for comparison with the actuarial result developed by management. future policy benefits for secondary guarantees on universal life products description of the matter the company has $3.0 billion of liabilities for secondary guarantees on universal life-type products at december 31, 2019, as disclosed in note 8 to the consolidated financial statements. the carrying amount of those product guarantees is based on estimates of how much the company will pay for future benefits and claims and the amount of fees to be collected from policyholders to fund those guarantees. as described in note 1 to the consolidated financial statements, there is significant uncertainty inherent in estimating the product guarantee liability because there is significant management judgment involved in developing certain assumptions, including expected mortality experience, interest rates, and policy lapse experience, that effect the underlying value of the guarantee.auditing the estimate of liabilities for secondary guarantees on universal life-type products was complex due to the highly judgmental nature of the actuarial assumptions used by management in their valuation of the liabilities. 144 table of contents how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of the controls over the process to estimate the liability balance, including, among others, controls related to management’s evaluation of the development of assumptions used in the valuation of the liability, based on the comparison of actual company experience to previous assumptions and interest rates due to current and expected future market conditions. we utilized actuarial specialists to assist with our audit procedures, which included, among others, evaluating the methodology used by management by comparing to the methodology used in prior periods as well as industry practice. to assess the assumptions used in the measurement of the liability, we compared the significant assumptions noted above with historical experience, observable market data and management’s estimates of prospective changes in these assumptions. in order to test the model used to calculate secondary guarantees on universal life-type products, we performed independent recalculations of a sample of policies which we compared to the company’s recorded results. realizability of deferred tax assets description of the matter as described in note 17 to the consolidated financial statements, at december 31, 2019, the company had total deferred tax assets from continuing operations of $2.3 billion, net of a $0.4 billion valuation allowance. as described in note 1 to the consolidated financial statements, these deferred tax assets represent the tax benefit of future deductible temporary differences, net operating loss carryforwards, and tax credit carryforwards. deferred tax assets are reduced by a valuation allowance if, based on the weight of all available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. in evaluating the need for a valuation allowance, the company considers many factors, including the future reversal of existing temporary differences and the identification and use of available tax planning strategies. if those sources are insufficient to support the recoverability of the deferred tax assets, the company then considers its projections of future taxable income, which involves significant management judgment.auditing management’s assessment of the realizability of its deferred tax assets is complex because management’s projection of future taxable income includes forward-looking assumptions which are inherently judgmental because they may be affected by future market or other economic conditions.how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of controls that relate to the development of the projection of future taxable income supporting the realizability of deferred tax assets. this included, among others, controls related to the review and approval process of future projected taxable income and the assumptions used in the company’s model.among other audit procedures performed, we evaluated the assumptions used by the company to develop projections of future taxable income. we assessed the historical accuracy of management’s projections by comparing the projections of future taxable income with the actual results of prior periods. we also evaluated management’s consideration of current industry and economic trends and compared the projections of future taxable income with other available financial information prepared by the company. additionally, we utilized tax professionals to assist us in our audit procedures, which included, among others, evaluating the methodology utilized within the company’s future taxable income projections model by comparing to the methodology used in prior periods and testing the calculations within the model. accounting for discontinued operations and related loss on sale description of the matter as discussed in notes 1 and 2 to the consolidated financial statements, on december 18, 2019, the company announced that it had entered into a master transaction agreement (mta) with resolution life us (resolution life) to divest its individual life and other legacy non-retirement fixed and variable annuities businesses. the transaction will be executed through the sale of the company’s wholly-owned subsidiaries, security life of denver insurance company (sld) and security life of denver international limited to resolution life. in addition, in accordance with the transaction, several of the company’s wholly-owned subsidiaries will reinsure certain of their life insurance and annuities businesses to sld. the transaction will result in a loss on sale of $1.1 billion, which is included within the results of the operations of the business to be divested as discontinued operations in the consolidated statement of operations. the loss on sale was calculated as the difference between the carrying value of the business to be divested and the estimated proceeds from the transaction. auditing the company’s loss on sale from discontinued operations was complex due to the multiple elements of the transaction, including the determination of the carrying value of the business to be divested and the estimated proceeds, as well as the assessment of the tax impacts of the transaction. 145 table of contents how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of the controls over the process to estimate the loss on sale, including, among others, controls related to the review and approval process for the calculation of the estimated proceeds, the appropriate accounting for the multiple elements of the transaction, and the tax treatment of the transaction.our audit procedures included, among others, assessing the terms of the mta to determine the completeness and accuracy of the components included in the calculation of the loss on sale, evaluating management’s accounting conclusions and application thereof related to the multiple elements of the transaction, and testing the company’s calculation of the estimated proceeds. in addition, we utilized tax professionals who assisted in the performance of audit procedures, including testing the tax-related elements of the loss on sale calculation./s/ ernst & young llp we have served as the company’s auditor since 2001. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.acquisition of everfi, inc. - valuation of the customer relationships, certain developed technology assets, marketing assets, and content intangible assets as described in notes 2 and 3 to the consolidated financial statements, on december 31, 2021, the company acquired everfi, inc. for an aggregate purchase price of $743.8 million, which resulted in $326.6 million of customer relationships, $72.0 million of developed technology, $40.9 million of marketing assets, and $17.9 million of content intangible assets being recorded. management estimated the fair values of the customer relationships, marketing assets, and a substantial portion of the developed technology based on variations of the income approach, which estimates fair value based upon the present value of cash flows that the assets are expected to generate, and which included the relief-from-royalty method and multi-period excess earnings method, depending on the intangible asset being valued. management estimated the fair value of content and a portion of the developed technology using the replacement cost method. management applied significant judgment in estimating the fair value of intangible assets acquired, which involved the use of significant assumptions including future revenue and operating expenses, customer attrition rates, contributory asset charges, tax amortization benefit, and discount rates used in the valuation of customer relationships; future revenue, proprietary technology obsolescence curve, royalty rate, and discount rate used in the valuation of certain developed technology assets; assumptions about the period of time the brand will continue to be valuable, royalty rate, and discount rate used in the valuation of marketing assets; and cost-based assumptions used in the valuation of content intangible assets.the principal considerations for our determination that performing procedures relating to the valuation of customer relationships, certain developed technology assets, marketing assets, and content intangible assets related to the acquisition of everfi, inc. is a critical audit matter are the significant judgment by management in developing the fair value of the customer relationships, certain developed technology assets, marketing assets, and content intangible assets, which led to significant auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s aforementioned significant assumptions used in the valuation of the customer relationships, certain developed technology assets, marketing assets, and content intangible assets. in addition, the audit effort involved the use of professionals with specialized skill and knowledge.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the customer relationships, developed technology assets, marketing assets, and content intangible assets, as well as controls over the development 2021 form 10-k65of the aforementioned significant assumptions related to the valuation of these intangible assets. these procedures also included, among others, reading the purchase agreement and testing management’s process for estimating the fair value of the customer relationships, certain developed technology assets, marketing assets, and content intangible assets. testing management’s process included (i) evaluating the appropriateness of the valuation methods, (ii) testing the completeness and accuracy of data provided by management, and (iii) evaluating the reasonableness of the aforementioned significant assumptions used in the valuation of the customer relationships, certain developed technology assets, marketing assets, and content intangible assets. evaluating the reasonableness of the future revenue used in the valuation of the customer relationships and certain developed technology assets, operating expenses, customer attrition rates, and contributory asset charges used in the valuation of the customer relationships, and the cost-based assumptions used in the valuation of content intangible assets involved considering the past performance of the acquired business, consistency with external market and industry data, and whether these assumptions were consistent with evidence obtained in other areas of the audit. evaluating the reasonableness of the proprietary technology obsolescence curve used in the valuation of certain developed technology assets and royalty rates used in the valuation of certain developed technology assets and marketing assets involved evaluating the consistency of these assumptions with external market and industry data. evaluating the reasonableness of the discount rates used in the valuation of the customer relationships, certain developed technology assets, and marketing assets involved considering the cost of capital of comparable benchmark rates and other industry factors. professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the company’s relief-from-royalty, multi-period excess earnings, and replacement cost methods and in evaluating the reasonableness of the significant assumptions related to customer attrition rates and tax amortization benefit used in the valuation of the customer relationships, assumptions about the period of time the brand will continue to be valuable used in the valuation of marketing assets, cost-based assumptions used in the valuation of content intangible assets, royalty rates used in the valuation of certain developed technology assets and marketing assets, and discount rates used in the valuation of the customer relationships, certain developed technology assets, and marketing assets.revenue recognition - contracts with multiple performance obligations as described in note 2 to the consolidated financial statements, the company has some contracts with customers that contain multiple performance obligations. for these contracts, management accounts for individual performance obligations separately if they are distinct. as described by management, management exercises judgment and uses estimates in order to (1) determine whether performance obligations are distinct and should be accounted for separately; (2) determine the standalone selling price of each performance obligation; (3) allocate the transaction price among the various performance obligations on a relative standalone selling price basis; and (4) determine whether revenue for each performance obligation should be recognized at a point in time or over time. for the year ended december 31, 2021, the company’s total revenue was $927.7 million.the principal considerations for our determination that performing procedures relating to revenue recognition, contracts with multiple performance obligations, is a critical audit matter are the significant judgment by management in identifying, evaluating and accounting for performance obligations in contracts with multiple performance obligations, which led to significant auditor judgment and effort in performing procedures and evaluating whether contracts with multiple performance obligations were appropriately identified, evaluated and accounted for by management.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the identification, evaluation and accounting for contracts with multiple performance obligations. these procedures also included, among others, testing management’s process for identifying, evaluating and accounting for performance obligations. testing management’s process included, (i) examining revenue arrangements on a test basis, including evaluating the terms and conditions of the arrangements and testing the identification, evaluation and accounting of the performance obligations; (ii) testing the allocation of the transaction price between performance obligations based on the estimated standalone selling prices on a test basis; (iii) performing procedures to test the completeness and accuracy of the data used to determine stand-alone selling price; and (iv) evaluating the reasonableness of the approach used to determine stand-alone selling price./s/ pricewaterhouse coopers llp atlanta, georgia march 1, 2022we have served as the company's auditor since 2000. | 2 |
critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. revenue recognition — refer to note 2 to the financial statements critical audit matter description the company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those products or services. the company’s contract may contain one or more performance obligations, including design and manufacturing services, product supply and engineering services. significant judgment is exercised by the company in determining revenue recognition for these customer agreements, and includes the following: ●determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together. ●determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately. ●the pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation. ●estimation of variable consideration when determining the amount of revenue to recognize (e.g. customer credits, award fees and incentives). given these factors, the related audit effort in evaluating management’s judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment. 48 how the critical audit matter was addressed in the audit our principal audit procedures related to the company’s revenue recognition for these customer agreements included the following: ● we selected a sample of customer agreements and performed the following procedures: o obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement to identify significant terms. o tested management’s identification of significant terms for completeness, including the identification of distinct performance obligations and variable consideration. o assessed the terms in the customer agreement and evaluated the appropriateness of management’s application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions. o inquired with management and evaluated their methodology to estimate stand-alone selling prices for products and services that are not sold separately. ● we tested the mathematical accuracy of management’s calculations of revenue and the associated timing of recognizing the related revenue subject to any constraints. inventory valuation — refer to note 2 to the financial statements critical audit matter description the company computes inventory cost on a first-in, first out basis and applies judgment in determining the forecast for products and the valuation of inventories. the company assesses inventory at each reporting date in order to assert that it is recorded at net realizable value, giving consideration to, among other factors: whether the product is valued at the lower of cost or net realizable value; and the estimation of excess and obsolete inventory or that which is not of saleable quality. most of the company’s inventory provisions are based on the company’s inventory levels and future product purchase commitments compared to assumptions about future demand and market conditions. significant judgment is exercised by the company to determine inventory carrying value adjustments, specifically the provisions for excess or obsolete inventories, and includes the following: ● developing assumptions such as forecasts of future sales quantities and the selling prices, which are sensitive to the competitiveness of product offerings, customer requirements, and product life cycles. given these factors and that the assumptions are forward-looking and could be affected by future economic and market conditions, the related audit effort to evaluate management’s inventory valuation adjustments was extensive and required a high degree of auditor judgment. how the critical audit matter was addressed in the audit our principal audit procedures related to the company’s inventory valuation methodology included the following: ● we selected a sample of inventory items and performed the following procedures: o tested the mathematical accuracy of the schedule by comparing the quantities and carrying value of on-hand inventories to related unit sales, both historical and forecasted. o assessed and tested the reasonableness of the significant assumptions (e.g. sales and marketing forecast, build plans, usage and open sales-order). o inquired with the operations team and evaluated the adequacy of management’s adjustments to sales forecasts by analyzing potential technological changes in line with product life cycles and/or identified alternative customer uses. o assessed whether there were any potential sources of contrary information, including historical forecast accuracy and performed sensitivity analyses over significant assumptions to evaluate the changes in inventory valuation that would result from changes in the assumptions. we have served as the company’s auditor since 2018. | 3 |
critical audit matters critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.17impairment of real estate investments description of the matter as described in note 2 to the financial statements, the partnership tests investments in real estate for recoverability when events or changes in circumstances indicate that the carrying value may not be recoverable. management determines whether impairment has occurred by comparing the property’s probability-weighted future undiscounted cash flows to its carrying value. the partnership’s undiscounted future cash flows analysis requires management to make significant estimates and assumptions related to future rental rates, occupancy levels, costs to obtain a tenant, holding expenses while vacant, and estimated sale proceeds. if the expected future cash flows is less than the carrying value of the property, the partnership recognizes an impairment loss by the amount by which the carrying amount of the property exceeds the fair value of the property. fair value is determined based on independent appraisals, selling prices of comparable properties, sale agreements under negotiation, and/or final selling prices. we identified the impairment of real estate investments as a critical audit matter because of the significant estimates and assumptions management makes to evaluate the recoverability of real estate investments. given these factors, the related audit effort in evaluating management’s assumptions in determining the recoverability of real estate assets was extensive and required a high degree of auditor judgment. how we addressed the matter in our audit our audit procedures related to real estate recoverability analysis included the following, among others: we obtained an understanding and evaluated the design of controls over management’s evaluation of recoverability of real estate property assets, including key inputs utilized in estimating the undiscounted future cash flows. we evaluated the undiscounted cash flow analysis, including estimates of timing of tenant move-ins, future rental income and estimated sale proceeds, for each real estate asset with possible impairment indicators by evaluating the source information and assumptions used by management and the testing of mathematical accuracy. we made inquiries of management regarding the current status of potential transactions and about management’s judgments to understand the probability of future events that could affect the cash flow assumptions for the properties. /s/ boulay pllp we have served as the partnership’s auditor since 1996 | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. inventory reserves as described in notes 1 and 4 to the consolidated financial statements, the company's consolidated net inventories balance was $28.3 million as of december 31, 2019. the company’s inventories are valued at49 table of contents the lower of cost, determined by the last-in, first-out (lifo) method, or market. the company values its inventory under the lifo method at the end of each year based on the inventory levels and the prevailing inventory costs existing at that time. the company also determines a reserve for excess and obsolete inventory based on historical usage, and projecting the year in which inventory will be consumed into a finished product. the valuation of inventories requires management to make significant assumptions, including the assessment of market value by inventory category considering historical usage, future usage and market demand for their products, and qualitative judgments related to discontinued, slow moving and obsolete inventories. we identified inventory reserves as a critical audit matter because of the significant assumptions, manual calculations and judgements used by management in the lifo and excess and obsolete reserves. auditing management’s assumptions was complex and required a high degree of auditor judgement and subjectivity when performing audit procedures and evaluating the audit evidence obtained. our audit procedures related to the company’s inventory reserves included the following, among others: •we obtained an understanding of the relevant controls related to the inventory reserves and tested such controls for operating effectiveness, including controls related to the review of the significant assumptions related to expected future demand and historical sales. •we tested management's process for determining the inventory reserves, including: ◦evaluated the reasonableness of the significant assumptions used by management including those related to forecasted inventory usage by considering historic sales activity and sales forecast ◦tested the completeness, accuracy, and relevance of the underlying data used in management's estimates of slow-moving and obsolete inventory and the lifo reserve ◦tested the calculations and application of management’s methodologies related to the valuation estimates of slow-moving and obsolete inventory and the lifo reserve. ◦developed an independent expectation of inventory write-downs at year-end based on historical trends and compared it to management's estimate. /s/rsm us llp we have served as the company's auditor since 2005. | 4 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.94goodwill impairment assessment as described in notes 2 and 16 to the consolidated financial statements, the company’s goodwill balance was $32,775 million at december 31, 2021. as disclosed by management, an annual goodwill impairment assessment is performed at the reporting unit level as of april 1 of each year, or more frequently if events or circumstances indicate that the carrying value of goodwill may be impaired. management has the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment assessment. in making the qualitative assessment, management considers macroeconomic trends, changes to regulatory environments, capital accessibility, operating income trends, and changes to industry conditions. the quantitative goodwill impairment assessment involves determining the fair value of the company’s reporting units and comparing those values to the carrying value of each reporting unit, including goodwill. fair value is estimated using a combination of discounted cash flow and earnings multiples techniques. the determination of fair value using the discounted cash flow technique requires the use of estimates and assumptions related to discount rates, projected operating income, terminal value growth rates, expected future capital expenditures and working capital levels. the determination of fair value using the earnings multiples technique requires assumptions to be made in relation to maintainable earnings and earnings multipliers for reporting units. in the current year, the quantitative goodwill impairment assessment was performed for the gas transmission and midstream (gas transmission) reporting unit, while the qualitative goodwill impairment assessments were performed for the liquids pipelines and gas distribution and storage reporting units.the principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are the significant judgment required by management when (i) developing the significant assumptions related to operating income trends used in the qualitative assessment for all reporting units outside of the gas transmission reporting unit, and (ii) developing such significant assumptions as discount rates, projected operating income, expected future capital expenditures and earnings multipliers used to estimate the fair value of the gas transmission reporting unit. this led to a high degree of auditor judgment, effort and subjectivity in performing procedures to evaluate the reasonableness of management’s significant assumptions used in the qualitative assessment and the quantitative assessment of the gas transmission reporting unit. in addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing the procedures and evaluating the audit evidence obtained over the quantitative assessment.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over (i) the development of significant assumptions related to operating income trends used in the qualitative assessment and (ii) the determination of the fair value estimate of the gas transmission reporting unit. these procedures also included, among others (i) evaluating the reasonableness of significant assumptions used by management in the qualitative assessment of the company’s reporting units, specifically those related to operating income trends and (ii) testing management’s process for developing the fair value estimate of the gas transmission reporting unit. testing management’s process for developing the fair value estimate of the gas transmission reporting unit included evaluating the appropriateness of the discounted cash flow and the earnings multiples models; testing the completeness, accuracy, and relevance of underlying data used in the models; and evaluating the reasonableness of significant assumptions used by management in determining the fair value estimate including discount rates, projected operating income, expected future capital expenditures and earnings multipliers.95assessing the reasonableness of projected operating income and its trends, and expected future capital expenditures, involved evaluating whether these significant assumptions were reasonable considering the current and past performance of the company’s reporting units, external industry data, and evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of management’s discounted cash flow and earnings multiples models and evaluating the reasonableness of assumptions used in the models, specifically discount rates and earnings multipliers./s/pricewaterhouse coopers llp chartered professional accountants calgary, canada february 11, 2022we have served as the company's auditor since 1949. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.evaluation of income taxes description of the matter:as discussed in note 1 to the consolidated financial statements, the company operates in many parts in the world through its’ subsidiaries. the company or one of its’ subsidiaries will file a tax return in the u.s. federal jurisdiction, in the united kingdom, in australia, in ireland, and in canada. due to the complexity with dealing in multiple currencies/countries, along with the various tax laws and significant management judgment, we believe the account to be a critical audit matter.how we addressed the matter in our audit:we evaluated the appropriateness and consistency of management's methods and assumptions used in the identification, recognition, measurement, and disclosures of its' taxes. we read and evaluated management's documentation, including relevant accounting policies and information obtained by management from the outside tax specialists engaged to assist with their taxes. /s/ haynie & company haynie & company salt lake city, utah march 25, 2022firm id: 457we have served as the company’s auditor since 2018. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.commercial services revenue description of the matter as described in notes 2 and 18 to the consolidated financial statements, the company generated aggregate commercial services revenue of $276.5 million for the year ended december 31, 2019 from the following service lines: toll and violation services, citation management services, and title and registration. 64 the company‘s revenue recognition process involves several applications and data sources needed for the initiation, processing, and recording of transactions from the company’s various revenue sources, as well as the calculation of revenue in accordance with the company’s accounting policy. auditing the company's accounting for revenue from contracts with customers was challenging and complex primarily due to the high volume of transactions, as well as the multiple applications and data sources associated with the revenue recognition process. how we addressed the matter in our audit to test the company’s accounting for revenue from contracts with customers, we performed substantive audit procedures that included, among others, testing on a sample basis the completeness and accuracy of the underlying data within the company’s revenue systems, performing data analytics to test recorded revenue, tracing a sample of sales transactions to supporting documentation, and testing a sample of cash to billings reconciliations. pagatelia acquisition description of the matter on october 31, 2019, the company completed the acquisition of pagatelia, s.l. for purchase consideration of $26.6 million. as discussed in note 3 to the consolidated financial statements, the company accounted for this acquisition as a business combination. auditing the accounting for the acquisition was complex due to the significant estimation uncertainty in determining the fair values of identified intangible assets, which primarily consisted of developed technology of $4.6 million and customer relationships of $5.9 million. the significant estimation uncertainty was primarily due to underlying assumptions about future performance of the acquired business and due to the limited historical data on which to base these assumptions. the significant assumptions used to form the basis of the forecasted results included revenue growth rates, earnings metrics, and discount rates. these significant assumptions were forward-looking and could be affected by future economic and market conditions. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of the company’s controls over its accounting for the acquisition. this included testing controls over the estimation process supporting the recognition and measurement of identified intangible assets, and management’s judgment and evaluation of underlying assumptions and estimates with regards to the fair values of the identified intangible assets. to test the estimated fair values of the identified intangible assets, our audit procedures included, among others, the involvement of internal valuation specialists to assist in the evaluation of the company’s valuation methodology and testing of the significant assumptions described above. for example, we compared the revenue growth rates and earnings metrics to current industry and market trends. we also performed sensitivity analyses of these significant assumptions to evaluate the changes in the fair value of the developed technology and customer relationship intangible assets that would result from changes in the assumptions. additionally, we tested the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. /s/ ernst & young llp we have served as the company’s auditor since 2013. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.fair value - investments - refer to footnote 2, 3, and 4 in the financial statements critical audit matter description the company invests in debt securities, including first and second lien debt, notes, bonds, mezzanine securities, and equity interests, classified as level 3 investments. the company’s determination of fair value for these investments involves subjective judgments and estimates utilizing a market approach, an income approach, or both approaches, as appropriate. these approaches require management to make judgments and estimates related to significant unobservable inputs including market value cash flow (ebitda), multiples of publicly traded comparable 89table of contentscompanies and comparable transactions, and the discount rate established utilizing a yield calibration approach, which incorporates changes in the credit quality (as measured by relevant statistics) of the investment, as compared to changes in the yield associated with comparable credit quality market indices, between the date of origination and the valuation date. we identified the valuation of level 3 investments as a critical audit matter given the significant judgments made by management to estimate the fair value of certain debt and equity positions. this required a high degree of auditor judgment and extensive audit effort, including the need to involve fair value specialists who possess significant valuation experience and modeling expertise, to evaluate the appropriateness of the valuation techniques and the significant unobservable inputs.how the critical audit matter was addressed in the audit our audit procedures related to the unobservable inputs and assumptions used by management to estimate the fair value of level 3 investments included the following, among others: •we tested the operating effectiveness of controls over the valuation of investments, including those over the development of unobservable inputs.•we evaluated the reasonableness and consistency of application of the company's valuation polices over level 3 investments, including those surrounding the selection of valuation methodologies and the derivation of valuation inputs.•we evaluated the reasonableness of management's estimates and assumptions used to develop valuation models by comparing them to:•historical operating results of the investment as obtained from, among other sources, the financial statements and board of directors’ materials of the investment. •available market data for comparable companies.•with the assistance of our internal fair value specialists, we evaluated the reasonableness of the significant unobservable valuation inputs in the level 3 valuation models by:•testing the source information underlying the determination of the valuation input and the mathematical accuracy of the calculation, if any, used to compute the input.•testing the valuation models and management’s significant valuation assumptions and unobservable inputs into the valuation models by comparing those inputs to market data and/or to subsequent events and transactions, where available.•with the assistance of our fair value specialists, we developed independent fair value estimates and compared our estimates to the company's estimates./s/ deloitte & touche llp february 26, 2020we have served as the company's auditor since 2008. | 1 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to the accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgements. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate. investment in unconsolidated entity as described in note 4 to the consolidated financial statements, the company uses the equity method of accounting to report its investment in its unconsolidated entity. as of april 30, 2021, the carrying value of the investment was $60,977,000. on an annual basis, management performs an impairment assessment to ensure that the carrying value of the investment in its unconsolidated entity is properly reflected. the principal considerations for our determination that performing procedures relating to such assessment is a critical audit matter are that there were significant judgements made by management in estimating the fair value of the investment and the fact that management utilized a specialist to assist in its determination of fair value. this in turn led to a high degree of auditor judgement, subjectivity, and audit effort in evaluating management’s estimation of the fair value of the investment in its unconsolidated entity, including management’s assessment of the unconsolidated entity’s financial condition and results of operations. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included, among others, reviewing management’s process for estimating the fair value of the investment in its unconsolidated entity, evaluating the appropriateness of the valuation model, testing the completeness and accuracy of data used in the model, and evaluating the significant assumptions used by management. /s/ horowitz & ullmann, p.c. we have served as the company’s auditor since 1996. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 74table of contents accrued receivables and accrued claims payable description of the matter as of december 31, 2020, accrued receivables and accrued claims payable were $28.2 million and $22.8 million, respectively. as discussed in note 2 to the consolidated financial statements, the company estimates accrued receivables for those fertility benefit services provided but for which a claim has not been received from the provider clinic based on historical claims experience. the estimated cost of the related services and accrued claims payable are determined based upon the historical costs paid to the provider clinic and the historical gross margin achieved for each related fertility benefit service estimated to have been provided. auditing the company’s estimates of accrued receivables and the related accrued claims payable was complex and required significant judgment as the estimates were sensitive to changes in the significant assumptions, including management’s assumptions regarding the lag between authorization date and service date, service changes and cancellations. how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of the controls over the company’s process to estimate accrued receivables and the associated claims payable. for example, we tested controls over management’s review of the methodology, significant assumptions and the underlying data used to determine these estimates. to test the accrued receivables and the related claims payable, our audit procedures included, among others, assessing the methodology, evaluating the significant assumptions described above and testing the completeness and accuracy of the underlying data used in the company’s analysis. for example, we tested the company’s assumptions of the lag between the authorization date and service date, service changes and cancellations based on historical claims data, historical gross margin per service and tested the clerical accuracy of management’s analysis. additionally, we evaluated the historical accuracy of management’s estimate by testing management’s retrospective review analysis that compared the prior period estimated accrued receivables and accrued claims payable to actual billing and claims data. valuation of deferred tax assets description of the matter as of december 31, 2020, the company had deferred tax assets related to deductible temporary differences and carryforwards of $40.8 million, net of a valuation allowance of $0.2 million. as discussed in note 14 to the consolidated financial statements, the company recognizes a valuation allowance to reduce the carrying value of its deferred tax assets to the amount that management believes is more likely than not to be realized. auditing the company’s assessment of the realizability of its deferred tax assets involved complex auditor judgment because management’s estimates of future taxable income are highly judgmental and based upon significant assumptions that may be affected by future market conditions and the company’s performance. how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the company’s income tax process, including management’s assessment of the realizability of the deferred tax assets. for example, we tested controls over management’s review of the significant assumptions and the underlying data used to determine the timing and amount of projected future taxable income. among other audit procedures performed, we evaluated the company’s assessment of the realizability of deferred tax assets and the resultant valuation allowance including management’s estimates of future taxable income. we compared management’s estimates of future taxable income, with actual results of prior periods, economic trends and other forecasted financial information prepared by the company. we involved our tax professionals to evaluate the application of tax law in the company’s assessment. we also tested the company’s scheduling of the timing and amount of reversal of taxable temporary differences. 75table of contents /s/ ernst & young llp we have served as the company’s auditor since 2012. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.33table of contents assessment of the write-down of inventories as discussed in note 1 to the consolidated financial statements, the inventory balance as of may 31, 2020 was $623.1 million. the company records inventory within the aviation services segment at the lower of cost or net realizable value. the write-down of slow moving inventory is recorded for excess or obsolete inventory based on certain inputs and assumptions used to determine the net realizable value. these assumptions include the number of days transpiring from the date the inventory was originally received, and the historical sales of inventory to determine recovery rates. other inputs include current and expected future aviation usage trends, replacement values, expected future demand, and historical scrap recovery rates. we identified the assessment of the write-down of inventories for a portion of the inventory within the aviation services segment as a critical audit matter. the primary inputs and assumptions used in determining the write-down of slow moving inventory include the historical recovery rates, which are based on the number of days transpiring from the date the inventory was originally received, the historical sales of inventory, and the identification of specific inventories used to service customers no longer under contract. the assessment of these inputs required a higher degree of subjective auditor judgment in evaluating the future customer demand for slow moving inventory. the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s inventory process, including controls over the company’s evaluation of the impact on the estimate of net realizable value based on 1) the number of days transpiring from the date the inventory was originally received, 2) historical sales of inventory, and 3) specific inventory used to service customers no longer under contract. we also tested relevant information technology application controls over the determination of the number of days transpiring from the date the inventory was originally received. we evaluated the write-down to determine that it was recorded using the company’s policy based on the number of days transpiring from the date the inventory was originally received, and the recovery rates of existing inventory based on historical sales. we also assessed that the recovery rates applied to slow moving inventory were consistent with historical sales of these inventory items. we determined that the specific inventory items written down were valued at the lower of cost or net realizable value based on observable market prices. evaluation of the key inputs and assumptions used in the estimation of costs at completion of the performance obligations as discussed in note 1 to the consolidated financial statements, the company recognizes revenue over time upon the satisfaction of component inventory management and repair services performance obligations based on the cost-to-cost input method, which is based on the relationship of costs incurred to date to the estimated total costs at completion of the performance obligation within the aviation services segment. the net favorable cumulative catch-up adjustments recognized during fiscal year 2020 associated with the company’s component inventory management and repair services totaled $3.9 million, which resulted from changes in the estimated costs at completion of the performance obligations.we identified the evaluation of the key inputs and assumptions used in the estimation of costs at completion of the inventory management and repair services performance obligations for certain contracts within the aviation services segment as a critical audit matter. the key inputs and assumptions used in determining the revenue to be recognized include current and future costs to support the program, and future labor costs. the testing of the inputs and assumptions required the application of subjective auditor judgment because of the estimation associated with the inputs and assumptions.the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s revenue process, including controls over 1) the assessment of the estimated future costs, 2) actual costs incurred for each performance obligation that are used by the company in their assessment of the measure of progress, and 3) the approval of costs recorded for each performance obligation to assess the allowability per the contract. we obtained the company’s forecast for the cost of a selection of component inventory management and repair services and assessed that the measure of progress was determined using actual costs to date plus the estimated future costs to support the satisfaction of performance obligations. we selected a sample of contracts to test fiscal year 2020 program costs. we assessed the company’s historical estimates to determine the consistency with the company’s historical projected costs. /s/ kpmg llp we have served as the company’s auditor since 1985. | 4 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.valuation of goodwill for the services and european reporting units as discussed in note 1 to the consolidated financial statements, the company tests goodwill for impairment annually on october 1 or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. the company considers the income and market approaches to estimate the fair value of its reporting units. as of december 31, 2020, the company had goodwill of $206.0 million, of which a portion related to the services and european reporting units. during the year ended december 31, 2020, the company recognized goodwill impairment charges of $77.1 million, of which $57.2 million pertained to the services reporting unit and $19.3 million pertained to the european reporting unit.we identified the evaluation of goodwill impairment for the services and european reporting units as a critical audit matter. auditor judgment was required to evaluate the selection of discount rates, revenue growth rates, gross margins, and selling, general, and administrative expense used in the income approach as they represented subjective determinations of future market or economic conditions. additionally, the audit effort associated with the evaluation of goodwill for impairment for the services and european reporting units required specialized skills and knowledge.the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls related to the company’s goodwill impairment evaluation process, including controls related to management’s selection of discount rates, revenue growth rates, gross margins, and selling, general, and administrative expense. we evaluated the reasonableness of management’s forecasted revenue growth rates, gross margins, and selling, general, and administrative expense by comparing the forecasts to historical revenue growth rates, gross margins, and selling, general, and administrative expense and relevant industry reports. we evaluated the company’s ability to accurately estimate future revenue growth rates, gross margins, and selling, general, and administrative expense by comparing the historical projected revenue growth rates, gross margins, and selling, general, and administrative expense to actual results for the same period. in addition, we involved valuation professionals with specialized skills and knowledge who assisted in:•evaluating the company’s methodology used to estimate the discount rates•evaluating the company’s discount rate by comparing it against a discount rate range that was independently developed using publicly available market data for comparable entities•testing the estimate of fair value of the services and european reporting units by using the company’s projected cash flows as well as our discount rate range and comparing the results to the company’s fair values.assessment of impairment of a certain asset group within the services segment as discussed in note 1 to the consolidated financial statements, the company reviews the recoverability of its long-lived asset groups whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset group might not be recoverable. the assessment for potential impairment is based on the company’s ability to recover the carrying value of its long-lived assets from expected future undiscounted cash flows. if the total expected future undiscounted cash flows are less than the carrying amount of the assets, an impairment loss is recognized for the amount by which the carrying amount of the asset group exceeds its fair value. the company considers the income and market approaches to estimate the fair value of its asset groups. during the year ended december 31, 2020, the company recognized long-lived asset impairment charges of $28.8 million of which $28.5 million related to a certain asset group within the services segment.we identified the assessment of impairment of a certain asset group as a critical audit matter. auditor judgment was required to evaluate the selection of the discount rate, revenue growth rates, gross margins, and selling, general, and administrative expense used in the income approach as they represented subjective determinations of future market or 47table of contentseconomic conditions. additionally, the audit effort associated with the evaluation of the asset group for impairment required specialized skills and knowledge.the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls related to the company’s long-lived asset impairment evaluation process, including controls related to management’s selection of the discount rate, revenue growth rates, gross margins, and selling, general, and administrative expense. we evaluated management’s forecasted revenue growth rates, gross margins, and selling, general, and administrative expense by comparing them to historical revenue growth rates, gross margins, and selling, general, and administrative expense and relevant industry reports. we evaluated the company’s ability to accurately estimate future revenue growth rates, gross margins, and selling, general, and administrative expense by comparing the historical projected revenue growth rates, gross margins, and selling, general, and administrative expense to actual results for the same period. in addition, we involved valuation professionals with specialized skills and knowledge who assisted in:•evaluating the company’s methodology used to estimate the discount rate•evaluating the company’s discount rate by comparing it against a discount rate range that was independently developed using publicly available market data for comparable entities•testing the estimate of fair value of the asset group by using the company’s projected cash flows as well as our discount rate range and comparing the results to the company’s fair value./s/ kpmg llp we have served as the company’s auditor since 2013 | 3 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. allowance for loan losses - qualitative factors as more fully described in note 1 and note 7 to the consolidated financial statements, the company’s allowance for loan losses represents management’s best estimate of probable incurred losses in the loan portfolio. a quantitative and qualitative analysis is performed in determination of the general reserve portion of the allowance for loan losses. historical loss experience is adjusted using a systematic weighted probability of potential risk factors that could result in actual losses deviating from prior loss experience. risk factors considered by the company in completing this analysis include: (1) unemployment and economic trends in the company’s markets, (2) concentrations of credit, if any, among any industries, (3) trends in loan growth, loan mix, delinquencies, losses or credit impairment, (4) adherence to lending policies and others. each risk factor is designated as low, moderate/increasing, or high based on the company’s assessment of the risk of loss associated with each factor. each risk factor is then weighted to consider inherent risk in the portfolio.the principal consideration for our determination that auditing the allowance for loan losses risk factors applied to adjust historical loss experience (qualitative factors) is a critical audit matter is the high degree of subjectivity involved in management’s assessment of the risk of loss associated with each risk factor, and the determination of weightings applied to each risk factor. our audit procedures related to the allowance loan losses qualitative factors included the following procedures to address the critical audit matter. •we tested management review controls over the reasonableness of the qualitative factors and the underlying documentation used in the review. •we tested management’s control over the mathematical application of the qualitative factors to adjust the historical loss experience.•we substantively tested management’s qualitative factors by evaluating the reliability of the underlying objective data used to derive the qualitative factors. based on the underlying data, we evaluated the reasonableness of management’s designation of the risk factor as low, moderate/increasing or high and the resulting adjustment to the historical loss experience. we also evaluated the reasonableness of weightings applied to each risk factor. •we substantively tested the accuracy of the mathematical application of the qualitative factors to adjust the historical loss experience.•we performed analytical review procedures to determine if the overall result was consistent with trends in the loan portfolio and economic conditions./s/ crowe llp we have served as the company's auditor since 2019. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the board of directors and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. share-based compensation as discussed in note 4 to the financial statements, on march 5, 2020, prior to the issuance of the company’s 2019 financial statements, the company issued 60 million shares of restricted common stock valued at $93 million based on the company’s stock weekly trading price at $1.55 per share to letterston investments limited, as compensation for the payment of the chief executive officer’s salary for the years 2019 and 2020. auditing management’s application of fair value for the restricted common stocks can be a significant judgment, given the fact that the company’s common stock is a thinly traded security listed in u.s. otc markets. to evaluate the appropriateness and accuracy of the fair value applied by management, we examined the closing price on the date of issuance and the preceding weekly and monthly average closing prices, as discussed in the sec staff accounting bulletin no. 107. we also reviewed the underlying accounting codifications for this accounting treatment applied by management. in addition, we evaluated the company’s disclosure in relation to this matter included in note 4 to the financial statements. /s/ bf borgers cpa pc we have served as the company’s auditor since 2014. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.goodwill impairment assessment as described in note 8 to the consolidated financial statements, goodwill is tested for impairment at a level of reporting referred to as a reporting unit. a reporting unit is an operating segment or one level below an operating segment for which discrete financial information is available and regularly reviewed by segment management. management tests goodwill to determine whether an impairment has occurred at least annually (as of june 30) and on an interim basis if it is more likely than not that a reporting unit’s fair value is less than its carrying value. during the first quarter of 2020, the partnership’s market capitalization declined significantly driven by macroeconomic and geopolitical conditions that occurred in 2020, including the collapse of oil prices driven by both the decrease in demand caused by the covid-19 pandemic and excess supply, as well as changing market conditions and expected lower crude oil production in certain regions, that resulted in expected decreases in future cash flows for certain assets, which was a triggering event that required management to perform a quantitative impairment test as of march 31, 2020. as a result of this quantitative impairment test as of march 31, 2020, the partnership recorded an impairment loss of $2,515 million and the consolidated goodwill balance was $0 as of december 31, 2020. in the quantitative test, management compares the fair value of the reporting unit with the respective book values, including goodwill, by using an income approach based on a discounted cash flow model. this approach requires management to make long-term forecasts of future revenues, expenses and other expenditures. those forecasts require the use of various assumptions and estimates, the most significant of which are net revenues (total revenues less purchases and related costs), operating expenses, general and administrative expenses and the weighted average cost of capital.the principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the partnership’s reporting units is a critical audit matter are (i) the significant judgment by management when developing the fair value measurement of the reporting units; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions relating to the weighted average cost of capital; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of reporting units. these procedures also included among others (i) testing management’s process for developing the fair value estimates; (ii) evaluating the appropriateness of the discounted cash flow models; (iii) testing the completeness and accuracy of underlying data used in the models; and (iv) evaluating the reasonableness of the weighted average cost of capital assumptions used by management. professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the discounted cash flow models and evaluating the reasonableness of the weighted average cost of capital assumption.f-4table of contents index to financial statements impairment assessment of certain pipeline assets in the transportation segment as described in note 6 to the consolidated financial statements, the partnership’s consolidated net property, plant and equipment balance was $14,611 million as of december 31, 2020. management periodically evaluates property and equipment and other long-lived assets for impairment when events or circumstances indicate that the carrying value of these assets may not be recoverable. the carrying value of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. if the carrying value exceeds the sum of the undiscounted cash flows, an impairment loss equal to the amount by which the carrying value exceeds the fair value of the asset is recognized. the subjective assumptions used to determine the existence of an impairment in carrying value include whether there is an indication of impairment, the grouping of assets, the intention of “holding”, “abandoning” or “selling” an asset, the forecast of undiscounted expected future cash flow over the asset’s estimated useful life and, if an impairment exists, the fair value of the asset or asset group. during the year ended december 31, 2020, the macroeconomic and geopolitical conditions, including the collapse of oil prices driven by both the decrease in demand caused by the covid-19 pandemic and excess supply, as well as changing market conditions and expected lower crude oil production in certain regions, resulted in expected decreases in future cash flows for certain assets, which was a triggering event that required management to assess the recoverability of the partnership’s carrying value of such long-lived assets. as a result, management recognized approximately $541 million of non-cash impairment losses of which approximately $415 million was associated with certain pipeline assets in the transportation segment located in the central region. the evaluation is highly dependent on management’s key assumptions relating to the cash flows, including (i) future commodity volumes, (ii) tariff rates, (iii) future commodity prices, and (iv) estimated fixed and variable costs. the principal considerations for our determination that performing procedures relating to the impairment assessment of certain pipeline assets included in the transportation segment is a critical audit matter are (i) the significant judgment by management when developing the fair value measurement of these assets due to the forecasted cash flows; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumption related to future commodity volumes; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the impairment assessment of pipeline assets, including controls over management’s process to estimate fair value associated with certain pipeline assets included in the transportation segment located in the central region. these procedures also included, among others (i) testing management’s process for developing the fair value of certain pipeline assets in the transportation segment located in the central region; (ii) evaluating the appropriateness of the discounted cash flow models; (iii) testing the completeness and accuracy of underlying data used in the models; and (iv) evaluating the reasonableness of significant assumptions used by management related to future commodity volumes. evaluating management’s assumptions related to future commodity volumes involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the asset groups; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the discounted cash flow models./s/ pricewaterhouse coopers llp houston, texas february 26, 2021we have served as the partnership’s auditor since 1998. | 1 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. goodwill – maintenance reporting unit – refer to notes 2 and 7 to the financial statements critical audit matter description the company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value annually in the fourth quarter of each year using data as of july 1 of that year. the company performed a quantitative test to determine the fair value of each reporting unit, which required management to make significant estimates and assumptions related to long-term future growth rates, operating margins, discount rate and future economic and market conditions. changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. the fair value of the maintenance reporting unit as of the measurement date of july 1, 2021 exceeded the carrying value. therefore, no impairment was recognized. we identified the valuation of goodwill allocated to the maintenance reporting unit as a critical audit matter because of the significant judgments made by management to estimate the fair value of the maintenance reporting unit. auditing the income approach fair value of this reporting unit involved a high degree of auditor judgment and an increased effort, which included the involvement of our fair value specialists, as it related to evaluating whether management’s significant estimates and assumptions related to long-term future growth rates, operating margins, discount rate and future economic and market conditions were appropriate. f-2 how the critical audit matter was addressed in the audit our audit procedures related to the significant estimates and assumptions of long-term future growth rates, operating margins, discount rate and future economic and market conditions used by management to estimate the fair value of the maintenance reporting unit included the following, among others:we tested the effectiveness of internal controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the maintenance reporting unit, including controls related to management’s significant estimates and assumptions of long-term future growth rates, operating margins, discount rate and future economic and market conditions.we evaluated management’s ability to accurately forecast future maintenance reporting unit revenue and operating margin by comparing actual results to management’s historical forecasts.we evaluated the reasonableness of management’s maintenance reporting unit revenue and operating margin forecasts by comparing the forecasts to:ohistorical results,ointernal communications to management and the board of directors, andoforecasted information included in analyst and industry reports for the company and certain peer companies.with the assistance of our fair value specialists, we evaluated (1) the valuation methodology used and (2) the projections of long-term future growth rates and the discount rate by testing the underlying source information, and by developing a range of independent estimates and comparing those to the rate selected by management. /s/ deloitte & touche llp philadelphia, pa november 17, 2021 we have served as the company’s auditor since 2014. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 75table of contents discontinued operations - refer to notes 1 and 4 to the consolidated financial statements.critical audit matter description as described in note 4 to the consolidated financial statements, in 2019 the company made a decision to sell its united states book business (the “book business”). management has reflected the results of this business as a discontinued operation in the consolidated statements of earnings for all periods presented. management presents discontinued operations when there is a disposal or anticipated disposal of a component group or a group of components that, in management’s judgment, represents a strategic shift that will have a major effect on operations and financial results. upon the decision to sell the book business in 2019, the net assets of the book business were reclassified as held for sale in accordance with the authoritative guidance. accordingly, the company is required to assess and measure the net assets at their fair value. in conjunction with this assessment, the fair value of long-lived assets, contract assets and goodwill was determined to be below the carrying value of the related assets. the company recorded impairment charges of $86.5 million, $5.6 million and $10.1 million, respectively, to reduce the carrying values to the estimated fair values. the fair value was determined by the company based on internal discounted cash flows estimates, quoted market prices where available and independent appraisals, as appropriate.the principal considerations for our determination that performing procedures relating to the planned divestiture and determination of fair value of the book business is a critical audit matter is that there was a high degree of auditor effort, judgment and subjectivity involved in designing and performing procedures to evaluate the planned divestiture transaction, due to the estimates and assumptions made by management when assessing whether the book business met the criteria to be classified as held for sale, including the probability of the sale being complete within one year, to estimate the fair value of the assets given the sensitivity of operations to changes in demand, historical results and the strategic plan of the company. this required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the determination of the fair value of the book business and the audit effort required to review the accuracy of the company’s restatement of the prior period financial statements.how the critical audit matter was addressed in the audit our audit procedures related to the classification of the book business as a discontinued operation and impairment of assets within the book business included the following, among others:•we tested the effectiveness of controls related to management’s assertion that the book business met the criteria to be presented as a discontinued operation and the effectiveness of controls over management’s goodwill and long-lived asset impairment evaluation.•we inquired of management to understand progression of potential divestiture transactions.•we inquired of management and reviewed management’s plan to sell the business.•we evaluated the evidence used by the company in the evaluation of whether the planned divestiture met the criteria for discontinued operations, including the probability of the sale being completed within one year.•we evaluated the allocation of goodwill to the book business based on the weighting of the relative fair value of the book business compared to the remainder of the core print reporting unit.•we evaluated the reasonableness of management’s forecasts of future net sales and ebitda margins by comparing the forecasts to (1) historical growth of net sales and historical ebitda margins, (2) management’s long-range strategic plan which was communicated to the board of directors, and (3) forecasted information included in company press releases, as well as, in analyst and industry reports for the company and companies in its peer group. 76table of contents•we evaluated the reasonableness of the (1) valuation methodology and (2) weighted average cost of capital by comparing the fair value calculated under the market approach and income approach, evaluating the weighting of each valuation methodology, testing the source information underlying the determination of the weighted average cost of capital and the mathematical accuracy of the calculation as well as developing a range of independent estimates and comparing those to the weighted average cost of capital selected by management.•we evaluated the reasonableness of the assessment performed by management’s specialist in the determination of the fair value of the real estate of the long-lived assets by comparing the determined fair value to our independent estimate through comparison to external sources.•we reviewed the accuracy of the company’s restatement of the prior period financial statements.revenues - refer to notes 1 and 2 to the consolidated financial statements critical audit matter description the company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those products or services. the company has various products and service lines which have differing levels involvement of management judgment and timing of revenue recognition. we identified revenues as a critical audit matter because of the diversity in products and service lines and diversity in audit evidence obtained as each billing arrangement is individually unique which requires a higher degree of auditor judgment and an increased extent of effort when designing and performing audit procedures to evaluate the appropriateness of management’s estimates and audit evidence related to the recognition of revenues.how the critical audit matter was addressed in the audit our audit procedures related to revenues included the following:•we tested the effectiveness of controls related to the revenue recognition process.•we evaluated management’s significant accounting policies related to revenue recognition for reasonableness.•we selected a sample of recorded revenue transactions and performed the following procedures:◦obtained customer source documents and the contract for each selection, including master agreements and related amendments to evaluate if relevant contractual terms have been appropriately considered by management.◦evaluated management’s application of their accounting policy and tested revenue recognition for specific performance obligations by comparing management’s conclusions to the underlying master agreement and any related amendments.◦tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the financial statements./s/ deloitte & touche llp milwaukee, wisconsin february 19, 2020we have served as the company's auditor since 2002. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. claims liabilities as described further in note 6 to the consolidated financial statements, the company is self-insured for a portion of its risk related to auto liability and workers’ compensation. self-insurance results when the company insures itself by maintaining funds to cover possible losses rather than purchasing an insurance policy. the company accrues for the cost of the self-insured portion of unpaid claims by evaluating the nature and severity of individual claims and by estimating future claims development based upon historical development trends. the actual cost to settle self-insured claim liabilities may differ from the company’s reserve estimates due to legal costs, claims that have been incurred but not reported, and various other uncertainties. - 31 - we identified the estimation of auto liability and workers’ compensation claims accruals, subject to certain self-insured retention, as a critical audit matter. auto liability and workers’ compensation unpaid claim liabilities are determined by projecting the estimated ultimate loss related to a claim, less actual costs paid to date. these estimates rely on the assumption that historical claim patterns are an accurate representation for future claims that have been incurred but not completely paid. the principal considerations for assessing auto liability and workers’ compensation claims as a critical audit matter are the high level of estimation uncertainty related to determining the severity of these types of claims, as well as the inherent subjectivity in management’s judgment in estimating the total costs to settle or dispose of these claims. our audit procedures related to this critical audit matter included the following, among others: ● we tested the design and operating effectiveness of controls over auto liability and workers’ compensation claims, including the completeness and accuracy of claim expenses and payments. ● we tested management’s process for determining the auto liability and workers’ compensation accruals, including evaluating the reasonableness of the methods and assumptions used in estimating the ultimate claim losses. ● we tested the claims data used in the reserve calculation by inspecting source documents to test key attributes of the claims data. /s/ grant thornton llp we have served as the company’s auditor since 2005. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. valuation of the reserve for losses and loss adjustment expenses as described in notes 1 and 3 to the consolidated financial statements, the company maintains reserves equal to the estimated ultimate liability for losses and loss adjustment expense for reported and unreported claims for both insurance and reinsurance businesses. the company’s reserve for losses and loss adjustment expenses as of december 31, 2020 was $16.4 billion. reserves are based on estimates of ultimate losses and loss adjustment expenses by underwriting or accident year. management uses a variety of statistical and actuarial techniques to monitor reserve adequacy over time, evaluate new information as it becomes known and adjust reserves as warranted. management considers many factors when setting reserves including (i) exposure base and projected ultimate premium; (ii) expected loss ratios by product and class of business, which are developed collaboratively by underwriters and actuaries; (iii) actuarial methodologies and assumptions which analyze loss reporting and payment experience, reports from ceding companies and historical trends, such as reserving patterns, loss payments and product mix; (iv) current legal interpretations of coverage and liability; and (v) economic conditions. the principal considerations for our determination that performing procedures relating to the valuation of the reserve for losses and loss adjustment expenses is a critical audit matter are the significant judgment by management when developing their estimate; this in turn led to a high degree of auditor subjectivity, judgment and effort in performing procedures and evaluating the audit evidence relating to the methodologies and the significant assumptions related to expected loss ratios and historical trends, such as reserving patterns, loss payments and product mix, and the audit effort involved the use of professionals with specialized skill and knowledge. f-3 addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s valuation of the reserve for losses and loss adjustment expenses, including controls over the selection of methodologies and development of significant assumptions. these procedures also included, among others, testing the completeness and accuracy of data provided by management and the involvement of professionals with specialized skill and knowledge to assist in performing procedures for a sample of products and lines of business including: (i) evaluating management’s methodologies and assumptions related to expected loss ratios and historical trends, such as, reserving patterns, loss payment and product mix used for determining reserves for losses and loss adjustment expenses; and (ii) developing an independent estimate of the reserve for losses and loss adjustment expenses and comparing the independent estimate to management’s actuarially determined reserves. /s/ pricewaterhouse coopers llp new york, new york march 1, 2021 we have served as the company’s or its predecessor's auditor since 1996. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. evaluation of the estimate of the liability for unpaid losses and loss adjustment expenses as described in notes 1 and 8 to the financial statements, the liability for unpaid losses and loss adjustment expenses (“lae”) is management’s best estimate of the ultimate payments that it anticipates will be made to settle all losses incurred and all related lae incurred as of the reporting date for both reported and unreported claims. the company establishes reserves for reported losses based on historical experience, upon case-by-case evaluation of facts surrounding each known loss, and upon the related policy provisions. the amount of reserves for unreported losses is estimated by analysis of historical and statistical information. at december 31, 2021, the liability for unpaid losses and lae was approximately $82.5 million. due to the significance of the liability for unpaid losses and lae to the company’s financial statements and the inherent complexity and subjective judgment required to estimate the liability, we determined that the liability for unpaid losses and lae was a critical audit matter, which required significant auditor judgment and specialized skill and knowledge. how the critical audit matter was addressed in the audit the primary procedures we performed to address the company’s liability for unpaid losses and lae included, but were not limited to, testing the company’s reserving process, including the actuarial analyses and the determination of the company’s estimate of the liability for unpaid losses and lae as follows: ·with the assistance of consulting actuarial specialists with specialized skills and knowledge, we analyzed the appropriateness of the methodologies used by the company to estimate reserves and to determine the reasonableness of the unpaid loss and lae reserves recorded by the company as of december 31, 2021. ·utilized consulting actuarial professionals to analyze the methodology, assumptions and the amounts of the loss and lae reserves documented in the actuarial reports prepared by the independent actuarial firm engaged by the company. ·analyzed the consistency of the company’s recorded reserves relative to the central estimates of the reserve range determined by the company’s independent actuarial firm at december 31, 2021 in comparison to december 31, 2020 and performed analytical procedures. ·performed hindsight analysis to determine the completeness and accuracy of reserves recorded in the prior year and to identify potential management bias in the determination of the estimate of the liability for unpaid losses and lae. ·read the actuarial report prepared by the independent actuarial firm engaged by the company as of march 31, 2022 to determine the reasonableness of the liability for unpaid losses and lae recorded by the company as of december 31, 2021. ·tested the claims handling process, including the establishment of individual case reserves and the settlement of claims. ·verified the accuracy and completeness of the underlying data provided to the independent actuarial firm engaged by the company for the purpose of preparing the actuarial report at december 31, 2021. /s/ marcum llp hartford, ct july 11, 2022 we have served as the company’s auditor since 2021. | 2 |
critical audit matters thecritical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicatedor required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financialstatements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit mattersdoes not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical auditmatters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. identificationand evaluation of related party transactions and disclosures asdiscussed in note 7 to the consolidated financial statements, jason c. chang, the chief executive officer, chief financial officer and director, is the majority beneficial owner of the company and a related party. historically, the company has entered into numerous transactionswith mr. chang, including various debt and equity agreements. we identified the identification and evaluation of related party transactionsand disclosures as a critical audit matter. auditor judgment was involved in assessing the sufficiency of the procedures performed toidentify related parties, and related party transactions and disclosures. thefollowing are the primary procedures we performed to address this critical audit matter. ●received confirmation from mr. chang and compared response to the company’s records;●read debt and equity agreements and contracts between the company and the related party;●reviewed attorney letter for reference to undisclosed related party transactions or obligations;●reviewed bank statements and accounting records for large, unusual, or nonrecurring transactions that may not have been identified as related party;●reviewed confirmation with stock transfer agent for all related party common and preferred stock outstanding at december 31, 2021;●evaluated the price at which common stock was issued to the related party for the settlement of debt during the year ended december 31, 2021 and obtained the fair market value of the common stock from an independent source;●inquired with executive officers and key members of management regarding related party transactions. /s/ fruci & associates , pllc we have served as the company’s auditor since 2022. | 3 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. allowance for credit losses for loans the allowance for credit losses for loans (“acl”) was $27.9 million at december 31, 2021. as described in note 1, the company adopted asc topic 326 financial instruments – credit losses as of january 1, 2021. as described in note 1 to the consolidated financial statements, management estimates the acl by considering the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. the company’s estimate of its acl involves a high degree of judgment and reflects management’s best estimate within the range of expected credit losses over the contractual term of the loans, adjusted for expected prepayments. loans that share similar risk characteristics are collectively evaluated and generally segmented by loan purpose. for collectively evaluated loans, the company uses a combination of discounted cash flows and remaining life methods to estimate expected credit losses. management utilizes both company and peer bank historical loss experience with similar risk characteristics to assess expected credit loss within the segments over an economic cycle based on call report data. management also determines the economic variables to use for the one-year reasonable and supportable forecast period. for contractual terms that extend beyond the forecast period, the company reverts to historical loss information over eight quarters using a straight-line approach. we identified the acl as a critical audit matter. the principal considerations for our determination of the acl as a critical audit matter includes the high degree of judgment and subjectivity involved in management’s determination of significant model assumptions, including the selection and application of macroeconomic data within the forecasts. in turn, auditing management’s judgments regarding loan credit loss estimates and assumptions involved a high degree of subjectivity, including specialized skill and knowledge, and an increased extent of audit effort. 97 table of contents the primary procedures we performed to address this critical audit matter included: ● we obtained an understanding of the company’s methodology and process for establishing the acl, and evaluated the design and operating effectiveness of controls relating to management’s determination of the acl, including controls over: ●the development of the allowance for credit losses model, including approval of key policies adopted under implementation of the new accounting standard and selection of reasonable and supportable economic forecasts used in the model, ●the completeness and accuracy of data input into the model used to determine the acl, and ●management’s review and approval of the acl, including management’s selection and application of macroeconomic data within the forecasts. ● we evaluated management’s selection and application of macroeconomic data within the forecasts, including comparing key economic forecasts to independent sources, as well as involving our valuation specialists in testing the application of forecasts in the model calculation. ● we tested the completeness and accuracy of the loan data uploaded into the model software and reconciled the loan data to the company’s core system by segment. /s/ dixon hughes goodman llp we have served as the company’s auditor since 2006. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.assessment of the estimated offering period as discussed in note 2 to the consolidated financial statements, revenue for transactions that include future update rights and/or online hosting performance obligations are subject to deferral and recognized over the estimated offering period. determining the estimated offering period is inherently subjective because it is not an explicitly defined period. the company’s methodology and model to determine the estimated offering period considers the following inputs and assumptions:•the average period of time customers are online,•for physical games sold at retail, the period of time between the date a game unit is sold to a reseller and the date the reseller sells the game unit to the customer,•known and expected online gameplay trends, and •disclosed service periods for competitors’ games.we identified the assessment of the estimated offering period as a critical audit matter. due to the complexity and subjectivity of the methods and assumptions used within the company’s model, challenging auditor judgment was required to evaluate the results of the procedures performed over the estimated offering period. the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s process to determine the estimated offering period, including controls over the relevance and reliability of data used to estimate the inputs and assumptions, and the company’s review of the estimated offering period concluded for use in recognizing revenue. we evaluated the method and model the company used to develop the estimated offering period against the accounting requirements and considered potential management bias in developing or applying their methodology. we computed the average period of time customers are online as well as the period of time between the date a game unit is sold to a reseller and the date the reseller sells the game unit to the customer by using the company’s internal data. we compared the results of this computation against the periods used by the company in their estimated offering period model. we evaluated other third-party data, such as publicly available competitor data and compared it against the third-party data used by the company in their model. we evaluated known and expected online gameplay trends and performed a sensitivity analysis of the company’s estimated offering period to assess the impact of potential changes in the estimated offering period on revenue. we evaluated the overall results of the procedures performed over the estimated offering period.evaluation of the realizability of the swiss deferred tax assets as discussed in notes 2 and 10 to the consolidated financial statements, during the year ended march 28, 2020, the company recognized $1.840 billion of deferred tax benefits related to an intra-entity sale of some of its intellectual property rights to its swiss subsidiary, which is net of the impact of a $131 million valuation allowance and a $393 million reduction due to the altera opinion. the company periodically performs an analysis to determine whether it is more likely than not that all or a portion of its swiss deferred tax assets will be realized. the company’s realizability analysis considers whether sufficient taxable income will be generated by the swiss subsidiary over the 20-year period over which the swiss deferred tax assets will generally reverse. the company determined that there is a greater than 82table of contents50% likelihood that its swiss deferred tax assets will not be fully realized. as a result, the company reduced the swiss deferred tax assets by a valuation allowance of approximately $131 million as of march 28, 2020. we identified the evaluation of the realizability of the company’s swiss deferred tax assets as a critical audit matter. this evaluation required especially challenging auditor judgment to assess the company’s estimated future swiss taxable income over the 20-year period over which the swiss deferred tax assets will generally reverse. specifically, the company’s assumptions of expected future growth rates of swiss taxable income were based primarily on third-party market and industry growth data. changes in assumptions regarding estimated future swiss taxable income could have a significant impact on the realization of the company’s swiss deferred tax assets and the amount of the valuation allowance. the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s income tax process over the valuation allowance, including controls over the process to develop estimates of future swiss taxable income. we performed a sensitivity analysis of the valuation allowance to assess the impact of reasonably possible changes in expected future growth rates. we compared the company’s estimated future swiss taxable income to historical growth rates and other projected financial information prepared by the company. we involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the company’s benchmarking study of third-party market and industry growth data by assessing the relevance and reliability of the benchmarking data./s/ kpmg llp we have served as the company’s auditor since 1987. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.fair value of the contingent consideration liability related to zunsemetinib as described in notes 2 and 4 to the consolidated financial statements, the company’s contingent consideration balance was $28.4 million as of december 31, 2021, of which a significant portion of the liability relates to zunsemetinib. management initially recorded a contingent consideration liability at fair value on the date of acquisition related to future potential payments resulting from the acquisition of confluence based upon significant unobservable inputs including the achievement of development, regulatory and commercial milestones, as well as estimated future projected sales levels and the discount rates applied to calculate the present value of the potential payments. management evaluates fair value estimates of the contingent consideration liability on a quarterly basis using a probability-weighted expected payment model for regulatory milestone payments and a monte carlo simulation model for commercial milestone and royalty payments and then applying a risk-adjusted discount rate to calculate the present value of the potential payment. changes in the fair value of the contingent consideration are recorded as income or expense in the company’s consolidated statement of operations and comprehensive loss. significant assumptions used in management’s estimates include the probability of achieving regulatory milestones and commencing commercialization, which are based upon an asset’s current stage of development and review of existing clinical data. the principal considerations for our determination that performing procedures relating to the fair value of the contingent consideration liability related to zunsemetinib is a critical audit matter are (i) the significant judgment by management, when developing the fair value estimate, which in turn led to (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to the probability of achieving regulatory milestones and commencing commercialization. in addition, the audit effort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s contingent consideration evaluation, including controls over the valuation of the company’s contingent consideration liability related to zunsemetinib. these procedures also included, among others, (i) testing management’s process for developing the fair value of the contingent consideration liability, (ii) evaluating the appropriateness of the probability-weighted expected payment and monte carlo simulation valuation models, (iii) testing the completeness and accuracy of the underlying data used in the models, and (iv) evaluating the reasonableness of the significant assumptions used by management related to the probability of achieving regulatory milestones and commencing commercialization. evaluating management’s assumptions related to the probability of achieving regulatory milestones and commencing commercialization involved evaluating whether the assumptions were reasonable considering the agreements associated with the transaction as well as the consistency with industry information, the stage of product development and whether the assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of the company’s probability-weighted expected payment and monte carlo simulation valuation models. /s/ pricewaterhouse coopers llp philadelphia, pennsylvania february 24, 2022we have served as the company’s auditor since 2015. | 1 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. valuation of self-insurance reserves as described in notes 3 and 15 to the consolidated financial statements, the company is self-insured for costs related to workers’ compensation, general liability and employee health benefits up to certain stop-loss limits. as of january 2, 2022, the company’s recorded amounts for general liability, workers’ compensation and team member health benefit liabilities was $50.5 million, with the most significant portion of the reserve balance related to workers’ compensation and general liability self-insurance reserves. management estimates the self-insurance reserves based on independent actuarial estimates, which are based on historical information and assumptions about future events. management utilizes various techniques, including analysis of historical trends and actuarial valuation methods, to estimate the cost to settle reported claims and claims incurred but not yet reported as of the balance sheet date. when estimating the self-insurance reserves, several factors are considered by management, including (i) loss development factors, which include the development time frame and expected claim reporting and settlement patterns, and (ii) expected loss costs, which include the expected frequency and severity of claim activity. the principal considerations for our determination that performing procedures relating to the valuation of self-insurance reserves is a critical audit matter are (i) the significant judgment by management when estimating the self-insurance reserves due to the use of various techniques to estimate the cost to settle reported claims and claims incurred but not yet reported; (ii) the high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to the loss development factors and expected loss costs; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. 56 addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the valuation of self-insurance reserves, including controls over the historical information and assumptions about future events used in the actuarial valuation methods. these procedures also included, among others (i) evaluating management’s self-insurance program agreements and (ii) testing the completeness and accuracy of the underlying historical claims data used in management’s assessment. professionals with specialized skill and knowledge were used to assist in testing management’s process for estimating the valuation of the self-insurance reserves, including evaluating (i) the appropriateness of the actuarial valuation methods and (ii) the reasonableness of significant assumptions related to loss development factors and expected loss costs by considering (i) current and past claim and settlement activity and (ii) whether the assumptions were consistent with evidence obtained in other areas of the audit. /s/ pricewaterhouse coopers llp phoenix, arizona february 24, 2022we have served as the company’s auditor since 2011. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.proved oil and gas properties, depletion, impairment, and deferred tax asset valuation allowance - crude oil and condensate, ng ls, and natural gas reserves — refer to notes 2, 5, and 11 to the financial statements critical audit matter description the company’s proved oil and natural gas properties are depleted using the units of production method based on estimated proved oil and gas reserves developed under securities and exchange commission guidelines and are evaluated for impairment by comparison of their carrying value to the undiscounted value of net future cash flows of the underlying proved and unproved oil and natural gas reserves. the company’s deferred tax asset is evaluated for expected future realization through an undiscounted cash flow model using proved and unproved oil and gas reserves utilized in forecasting future taxable income. the development of the company’s oil and natural gas reserve quantities and the related future net cash flows requires management to make significant assumptions related to the five-year development rule for proved undeveloped reserves, future commodity prices and the existence and timing of forecasted production. the company engages an independent reserve engineer to estimate proved and support in estimating unproved oil and natural gas reserve quantities using engineering data, including the existence and timing of forecasted production. changes in these assumptions could have a significant impact on the amount of depletion, any proved oil and gas impairment, or the expected future realization of the deferred tax asset. the proved oil and gas properties balance, net of accumulated amortization, was $165.8 f-1 million as of december 31, 2021. depletion, depreciation, and amortization was $15.2 million for the year ended december 31, 2021. no impairment was recognized during 2021. the deferred tax asset was $52.1 million as of december 31, 2021. no valuation allowance was recorded as of december 31, 2021.given the significant judgments made by management and the reserve engineer, performing audit procedures to evaluate the company’s oil and natural gas reserve quantities and the related net cash flows and future taxable income, including management’s estimates and assumptions related to the five-year development rule, future commodity prices and the existence and timing of forecasted production, requires a high degree of auditor judgment.how the critical audit matter was addressed in the audit our audit procedures related to management’s significant judgments and assumptions to oil and natural gas reserves quantities and estimates of the existence and timing of forecasted production and commodity price, included the following, among others:•we tested the design and implementation of controls related to the company’s estimation of oil and natural gas reserve quantities and the related future net cash flows and future taxable income. •we assessed management’s reserve report assumptions related to the forecasted production, production taxes, commodity pricing and differential, and other such economic assumptions on the basis of the company’s historical financial operating data. •we evaluated the reasonableness of management’s development plan by comparing the forecasts to: -historical conversions of proved undeveloped reserves as compared to the number of proved undeveloped locations forecasted to be developed in the next five years. -communications between management and the independent reserve engineer. -investor presentations related to rig count and development timing of the company’s major operators. -publicly available data on the development status of certain wells reported to state regulatory agencies. -our understanding obtained from inquiries with the company’s external reserve engineer. -the reserve report published by the company’s independent reserve engineer.•we evaluated the company’s oil and natural gas reserve volumes by: -comparing the company’s forecasted production to historical production volumes. -evaluating the reasonableness of the forecasted production decline curves. -understanding the experience, qualifications, and objectivity of the company’s reserve engineers. -inspecting investor presentations and other disclosures from the company’s major operators related to well shut in and/or curtailment activity due to adverse economic conditions. -assessing the oil and natural gas reserves volumes used in each accounting estimate for consistency. /s/ deloitte & touche llp houston, texas march 11, 2022 we have served as the company's auditor since 2012. | 4 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 86 revenue and deferred revenue – accounting for out- license agreement – refer to note 2 and 7 to the financial statements critical audit matter description the company has entered into certain out-license agreements with bayer and pierre fabre. during 2021, the company entered into a technology transfer agreement and a manufacturing and supply agreement with bayer ag (“bayer”), both of which were contemplated as part of the existing bayer license agreement. under the terms of these agreements, the company will be responsible for technology transfer services, supply of materials required for technology transfer services, and for manufacturing, storage, and distribution of therapies to bayer. additionally, during 2021, the company entered into a commercialization agreement with pierre fabre medicament (“pierre fabre”). under the terms of the agreement, the company granted pierre fabre a license to commercialize and distribute therapies and will be responsible for manufacturing and supplying the therapies to pierre fabre, along with related cell selection services. the company recognizes revenue on out-license agreements as they satisfy their performance obligations and when a customer obtains control of the promised goods or services. as of december 31, 2021, the company recognized $20.3 million of revenue under the out-license agreements and deferred revenue amounted to $96.5 million, of which $40.8 million is included in current liabilities and $55.7 million is included in long-term liabilities. we identified accounting for the out-license agreements, the revenue recognized, and the estimated deferred revenue to be recognized as revenue over time as a critical audit matter. given the judgments necessary to determine the accounting literature to apply to an out-license agreement, the method to estimate and measure the progress toward the completion of the performance obligation and the estimated contractual term over which the performance obligation would be completed, auditing such judgments and estimates required extensive audit effort due to the complexity of the out-license agreements and the high degree of auditor judgment applied when performing audit procedures and evaluating the results of those procedures. how the critical audit matter was addressed in the audit our audit procedures related to determining the accounting literature to apply to the agreements and, where applicable, assessing management's estimates of costs used in the cost-based input method for measuring progress included the following, among others: •we tested the operating effectiveness of controls over out-license related revenue, including those related to the identification of distinct performance obligations and the determination of the timing and amount of revenue recognized. •we reviewed and obtained an understanding of the company’s revenue generating agreements and related transactions during and at the end of the year via review of internal and external presentations, news and publications, and discussions with management. •we evaluated management’s determination that the agreement is within the scope of asc 606. •we tested management's identification of the performance obligation(s) by evaluating whether the promises were highly interdependent and interrelated. •we evaluated management's determination of the contractual term and the appropriateness of management's method to measure its progress over that term. •we evaluated the assumptions used in the estimates of total costs and the estimated measure of progress for recognizing revenues over time revenue by: o performing corroborating inquiries with the company's project and business development managers, and comparing the assumptions used in the estimates to management's work plans and cost estimates, and costs reported to date o comparing costs incurred for activities completed to date to the costs forecasted for those activities. o testing the mathematical accuracy of management’s revenue and current and long-term deferred revenue balances based on the estimated revenue to be recognized over time.87 accrued research and development expenses & prepaid research and development expenses (clinical trial accrued and prepaid expenses) - refer to note 2 to the financial statements critical audit matter description the company recognizes costs it incurs for preclinical studies, clinical studies, and manufacturing activities as research and development expenses based on an evaluation of its vendors’ progress toward completion of specific tasks. payment timing may differ significantly from the period in which the costs are recognized as expense. costs that are paid in advance are deferred as a prepaid expense and amortized over the service period as the services are provided. costs for services incurred that have not yet been be paid are recognized as accrued expenses.in estimating the vendors’ progress toward completion of specific tasks, the company uses data such as patient enrollment, clinical site activations or vendor information of actual costs incurred. this data is obtained through reports from or discussions with company personnel and outside service providers as to the progress or state of completion of trials, or the completion of services.given the number of ongoing preclinical study, clinical study, and manufacturing activities and the subjectivity involved in estimating clinical study accrued and prepaid expenses, auditing the clinical study accruals and prepaid expenses involved especially subjective judgment. how the critical audit matter was addressed in the audit our audit procedures related to clinical study accrued and prepaid expenses included the following, among others: •we tested the design and effectiveness of controls over the estimation of clinical study accrued and prepaid expenses. •we obtained and read a sample of research, collaboration, and manufacturing agreements and contracts, as well as amendments thereto. •we evaluated publicly available information (such as press releases and investor presentations) and board of directors’ materials regarding the status of clinical trial and manufacturing activities. •we obtained the listing of all contracts related to research and development expenses to evaluate the completeness of accruals and prepaid expenses. •for a sample of agreements and contracts, we compared the amount of accrual or prepaid expenses at the end of the prior period to current year activity and evaluated the accuracy of the company’s estimation methodology. •we obtained a written confirmation of the ending inventory balance held at the company’s manufacturing vendor. •we made selections of specific amounts recognized as research and development expense as well as those recognized as accrued and prepaid expenses to evaluate management’s estimate of the vendor’s progress and performed the following procedures: o read the related statement of work, purchase order, or other supporting documentation (such as communications between the company and vendors). o performed corroborating inquiries with company clinical operations and manufacturing operations personnel. o confirmed progress directly with the vendor and compared the reported amounts to the company's estimate. o evaluated management’s judgments compared to the evidence obtained./s/ deloitte & touche llp san francisco, california february 28, 2022 we have served as the company’s auditor since 2013. | 4 |
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