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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. 42 table of contents revenue recognition – estimated costs to complete the research and development services (“r&d”) performance obligations for the 19c barda and iv formulation r&d contracts as discussed in notes 2 and 3 to the consolidated financial statements, all of the company’s revenue for the year ended december 31, 2020 was generated from long-term contracts. for these contracts, all revenue associated with r&d performance obligations for the 19c barda and iv formulation r&d contracts, which totaled approximately $7.5 million and $1.4 million respectively, is recognized over time, because the customer simultaneously receives and consumes the benefits provided by the services as the company performs these services. management recognizes revenue based on the progress toward complete satisfaction of the performance obligation and measures this progress under an input method, which is based on the company’s costs incurred relative to total estimated costs. under this method, progress is measured based on the cost of resources consumed compared to the total estimated costs to completely satisfy the performance obligation. as disclosed by management, due to the nature of the work required to be performed on many of the performance obligations, management’s estimation of total revenue and costs to satisfy the obligations is complex, subject to many variables, and requires significant judgment. the incurred and estimated costs used in the measure of progress include third-party services performed, direct labor hours, and material consumed. the principal considerations for our determination that performing procedures relating to revenue recognition – estimated costs to complete the r&d performance obligations for the 19c barda and iv formulation r&d contracts is a critical audit matter are the significant judgment by management when determining the estimated costs to completely satisfy the performance obligations. this in turn led to significant auditor judgment, subjectivity and effort in performing procedures and in evaluating the estimates of the costs to complete related to management’s estimates of total forecasted 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, among others, evaluating and testing management’s process for determining the estimated costs to completely satisfy each performance obligation for the 19c barda and iv formulation r&d contracts, which included evaluating the reasonableness of management’s estimates of total forecasted costs. evaluating the reasonableness of management’s estimates of total forecasted costs involved assessing management’s ability to reasonably estimate costs to complete the performance obligation by (i) comparing, on a test basis, the underlying cost estimates to approved contracts or modifications; (ii) comparing, on a test basis, the underlying transaction price to original contracts or modifications; and (iii) testing actual costs incurred and their eligibility for billing under the research and development performance obligations. /s/ pricewaterhouse coopers llp florham park, new jersey march 4, 2021 we have served as the company’s auditor since 1997.	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. self-insurance reserves description of the matter at december 31, 2020, the company’s aggregate self-insurance reserves accrual was $97.6 million, which is primarily related to workers’ compensation and third-party casualty claims, inclusive of amounts expected to be paid by the company’s insurers above its self-insured retention limits. as discussed in note b of the financial statements, liabilities for self-insured workers’ compensation and third-party casualty claims are based on the case-basis reserve amounts (recognized at the time of the incident based on the nature and severity of the claim) plus an estimate of loss development and incurred but not reported (ibnr) claims, which is developed with the assistance of a third party actuarial specialist. auditing the company's self-insurance reserves is complex as it includes significant measurement uncertainty associated with the estimate, involves the application of significant management judgment, and employs the use of various actuarial methods. in addition, the estimate for self-insurance reserves is sensitive to significant management assumptions, including the frequency and severity assumptions used to derive the computation of the ibnr reserve, and the case reserves and loss development factors for reported claims.68table of contents how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the self-insurance reserves process, including management’s assessment of the assumptions and data underlying the ibnr reserve. to evaluate the self-insurance reserves, our audit procedures included, among others, testing the completeness and accuracy of the underlying claims data provided to management’s actuarial specialist by performing test of details over a representative sample. furthermore, we involved our actuarial specialist to assist in our evaluation of the methodologies applied and significant assumptions used in determining the calculated reserve. we compared the company’s reserve amount to an estimated range that our actuarial specialist developed based on independently selected assumptions. impairment analysis of goodwill and indefinite-lived intangible assets description of the matter at december 31, 2020, the company’s goodwill and indefinite-lived intangible assets were $120.6 million. as discussed in note d of the financial statements, goodwill and intangible assets are tested for impairment at least annually at the reporting unit level and asset level, respectively. auditing management’s annual goodwill and indefinite-lived intangible assets impairment test was complex and highly judgmental due to the significant estimation required in determining the fair value of the reporting units and indefinite-lived intangible assets. in particular, the fair value estimates were sensitive to significant assumptions such as the weighted average cost of capital, revenue growth rate, operating margin, working capital requirements, terminal value and market multiples, which are affected by expectations about future market or economic conditions. 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 and indefinite-lived intangible assets impairment review process. for example, we tested controls over management’s review of the quantitative impairment analyses of goodwill and intangible assets, including their review of valuation models and underlying assumptions used to develop such estimates. to test the estimated fair value of the company’s reporting units and intangible assets, 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. with the assistance of our valuation specialists, we compared the significant assumptions used by management to current industry and economic trends and performed procedures to identify information that might contradict the company’s selected methodologies and associated 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 units and indefinite-lived intangible assets that would result from changes in the assumptions. in addition, we tested the reconciliation of the fair value of the reporting units to the market capitalization of the company. /s/ ernst & young llp we have served as the company’s auditor since 1972.	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.62table of contents brazil deductibility of goodwill amortization – uncertain tax position – refer to note 10 to the financial statements critical audit matter description the company accounts for uncertain tax positions on the basis of a two‐step process in which management (1) determines whether it is more likely than not that the tax position will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more‐likely‐than‐not recognition threshold, recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. specialized skill and knowledge and significant judgment is often required to evaluate each uncertain tax position to determine whether the more likely than not recognition threshold has been met and, if met, to determine the largest amount of benefit greater than 50 percent likely of being realized upon settlement with the taxing authorities.the brazilian federal revenue service has challenged the deductibility of goodwill amortization generated in a 2007 acquisition by sylvamo do brasil ltda., a wholly‐owned subsidiary of the company. the company has determined this tax position meets the more likely than not threshold for recognition, and no liability for this uncertain tax position has been recorded as the company has determined that the full benefit should be sustained based on brazilian tax law.we identified the company’s accounting for this tax position as a critical audit matter because of the complexity of the brazilian tax laws and regulations, the materiality of the potential tax consequences, and the need to involve our income tax specialists when performing audit procedures to evaluate the company’s conclusion that its position will be sustained based on brazilian tax law.how the critical audit matter was addressed in the audit with the assistance of our income tax specialists, the audit procedures we performed related to the company’s conclusion that its position will be sustained based on brazilian tax law included the following, among others: •we read and evaluated management's documentation, including relevant accounting policies and information obtained by management from outside tax specialists, that detailed the basis of the uncertain tax position. •we tested the reasonableness of management's judgments regarding the future resolution of the uncertain tax position, including an evaluation of the technical merits of the uncertain tax position.•we evaluated whether management has appropriately considered new information that could significantly change the recognition, measurement or disclosure of the uncertain tax position, including information gathered from inquiries of international paper company management regarding their intent to vigorously defend the tax position. •we evaluated the reasonableness of management’s estimates by considering how brazilian tax law, including statutes, regulations and case law, impacted management’s judgments. we evaluated the appropriateness and consistency of management's methods and assumptions used in the identification, recognition, measurement, and disclosure of the uncertain tax position. /s/ deloitte & touche llp memphis, tennessee march 2, 2022we have served as the company's auditor since 2020.	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 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.critical audit matter description for the year ended december 31, 2020, the company recognized revenue related to certain healthcare contracts using an output method based upon the date of delivering the results of claims audits and the expected future collections of such claims submitted. as of december 31, 2020 and for the year ended december 31, 2020, the company recognized $4.5 million of contract assets and $13.5 million of revenue related to these contracts. as described in note 1(l) to the company’s consolidated financial statements, the company may recognize revenue upon delivering the results of healthcare claims audits when sufficient reliable information is available to the company for estimating variable consideration earned based on an output method that reasonably measures the company’s satisfaction of its performance obligation. recognition of revenue under this output method is highly judgmental as it requires an evaluation of when the company believes it has enough experience with eligible contracts to begin to recognize revenue under an output method. it also requires an estimate of expected future collections for claims submitted under each eligible contract. these estimates are dependent upon a number of factors, including the company’s historical collections.auditing contracts under this output method of revenue recognition is complex and highly judgmental due to the variability and uncertainty associated with assessing when a contract is eligible for this output method as well as estimating amounts expected to be recovered for submitted claims. changes in these estimates could have a significant effect on the amount of revenue recognized. f-2how the critical audit matter was addressed in the audit the primary procedures we performed to address this critical audit matter included the following:we obtained an understanding and evaluated the design and implementation of key controls that address the risks of material misstatements relating to revenue recognition for the healthcare contracts described above including controls over the review and evaluation of contract terms, review of the estimated variable consideration to be recognized under the output method, and review of journal entries related to the recognition of variable consideration under the output method. to evaluate the company’s selection of contracts accounted for under this output method, we obtained and reviewed each eligible contract and tested management’s identification of significant contract terms, including its enforceable rights within the contract, and resulting revenue recognized in conformity with accounting principles generally accepted in the united states of america. we evaluated the factors used by management in determining the amount of revenue recognized and related contract asset, including an assessment of the reliability of the company’s historical collection activity.we also tested management’s estimate of the historical collection activity and corresponding revenue recognition and contract asset. this included testing the inputs utilized by management to third party sources as well as testing the mathematical accuracy of management’s calculations./s/ baker tilly us, llp we have served as the company's auditor since 2018.	2
critical audit matter thecritical audit matter communicated below is a matter arising from the current-period audit of the financial statements that wascommunicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are materialto the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication ofcritical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, bycommunicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts ordisclosures to which it relates. development services revenue and contract liabilities – refer to note 2j. and note 10 to the consolidated financial statements critical audit matter description the company generates revenues from development services. the company determines at contract inception whether development servicesare distinct from the performance obligation to manufacture the product under development. revenues from development servicesthat are determined as not distinct from the performance obligation to manufacture the product under development are deferreduntil commencement of manufacturing and are recognized over the manufacturing term. during 2020, all development services revenuesbilled have been deferred and recorded as contract liabilities (representing the majority of the contract liabilities balanceof $848,000 as of december 31, 2020) and the respective service costs have been deferred and recorded as contract fulfillmentassets ($1,130,000 as of december 31, 2020), as the development services were determined as not distinct from the performanceobligation to manufacture the product under development. weidentified the assessment of whether development services were a distinct performance obligation and the impact on the timingof revenue recognition as a critical audit matter. evaluating whether development services should be accounted for separatelyrequired judgment and increased audit effort in comparison to our audit as a whole, because of the complexity of the technicalaccounting analysis and due to the magnitude of the related contract liabilities as of december 31, 2020. howthe critical audit matter was addressed in the audit ouraudit procedures related to the company’s determination of the performance obligations and the timing of revenue recognitionfor development service contracts included the following, among others: ●we read the agreements and analyzed the terms of the company’s development service contracts. ●we read communications between the company and its clients relating to development services contracts. ●we inquired of company research and development personnel to understand the commercial facts and circumstances relating to development services contracts. ●we evaluated the company’s interpretation and application of the relevant requirements of generally accepted accounting principles in relation to the development services contracts and the related contract liabilities. brightman almagor zohar & co.certified public accountants afirm in the deloitte global network tel aviv, israel march31, 2021 wehave 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 separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.net sales — revenue recognition for long-term contracts in the architectural services segment — refer to notes 1, 2, and 15 to the consolidated financial statements the architectural services segment, which provides building glass and curtainwall installation services and operates under long-term, fixed-price contracts, accounted for approximately $349.4 million, or 27 percent of total net sales for the year ended february 26, 2022. the contracts for this business typically have a single, bundled performance obligation, as the business generally provides interrelated services and integrates these services into a combined output specified by the customer. the customer obtains control of this combined output, generally installed window and curtainwall systems, over time. the company measures progress on these contracts following an input method, by comparing total costs incurred to-date to the total estimated costs for the contract and recording that proportion of the total contract price as revenue.given the judgments necessary to estimate total costs and profit for the contract performance obligations used to recognize revenue for long-term, fixed-price contracts in the architectural services segment, auditing such estimates required extensive audit effort due to the complexity of long-term contracts and a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures. 28table of contents how the critical audit matter was addressed in the audit our audit procedures related to management’s estimates of total costs and profit for the contract performance obligations used to recognize revenue for certain long-term contracts in the architectural services segment included, but were not limited to the following:•we tested the effectiveness of controls over long-term contract revenue in the architectural services segment, including those over the estimates of total costs and profit for performance obligations.•we developed an expectation of the amount of total long-term contract revenue in the architectural services segment based on prior year margins applied to cost of sales in the current year and compared our expectation to the amount of long-term contract revenue ultimately recorded by management. •we evaluated management’s ability to estimate total costs and profit by comparing actual costs and profit to management’s historical estimates for performance obligations that have been fulfilled.•we selected a sample of long-term contracts from the architectural services segment contract portfolio and performed the following procedures: •evaluated whether the long-term contracts were properly included in management’s calculation of long-term contract revenue based on the terms and conditions of each contract, including whether continuous transfer of control to the customer occurred as progress was made toward fulfillment of the performance obligations.•compared the transaction prices to the consideration expected to be received based on current rights and obligations under the long-term contracts and any modifications that were agreed upon with the customers.•tested management’s identification of distinct performance obligations by evaluating whether the underlying services are highly interdependent and interrelated.•tested the accuracy and completeness of the costs incurred to date for the performance obligations.•we tested the mathematical accuracy of management’s calculation of long-term contract revenue for the performance obligation.•evaluated the estimates of total cost and profit for the performance obligations by: •comparing costs incurred to date to the costs management estimated to be incurred to date.•evaluating management’s ability to achieve the estimates of total cost and profit by performing corroborating inquiries with the company’s project managers and engineers, and comparing the estimates to management’s work plans, engineering specifications, and supplier contracts.•comparing management’s estimates for the selected contracts to costs and profit of similar performance obligations, when applicable. goodwill — window and wall systems reporting unit — refer to notes 1 and 6 to the consolidated financial statements 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 both the income approach and the market approach. the income approach uses a discounted cash flow methodology that involves significant judgment and projections of future performance, including future revenues, future operating expenses, and discount rates. changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. the company’s goodwill balance was $130 million as of february 26, 2022, of which $55.6 million relates to the window and wall systems reporting unit. the fair value of the window and wall systems reporting unit exceeded its carrying value as of the measurement date and, therefore, no impairment was identified. given the significant judgments made by management to estimate the fair value of the window and wall systems reporting unit, performing audit procedures to evaluate the reasonableness of management's estimates and assumptions related to selection of future revenues, future operating expenses, and discount rates 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 future revenues, future operating expenses, and discount rates used by management to estimate the fair value of the window and wall systems 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 units, such as controls related to management's selection of future revenues, future operating expenses, and discount rates. •with the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate, including testing the source information underlying the determination of the discount rate, testing the mathematical accuracy of the calculation, and developing a range of independent estimates and comparing those to the discount rate selected by management. •we evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) internal communications to management and the board of directors, (3) industry information, and (4) forecasted information 29table of contentsincluded in company press releases as well as in analyst and industry reports of the company. •we evaluated management’s ability to accurately forecast future revenue and future operating expenses by comparing actual results to management’s historical forecasts.•we evaluated the allocation of the company’s estimated fair value to its reporting units and the comparison of the company’s estimated fair value to its market capitalization./s/ deloitte & touche llp minneapolis, mn april 22, 2022we have served as the company's auditor since 2003.	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. contingent liabilities and other matters — large power projects in south africa — refer to notes 2 and 15 to the financial statements critical audit matter description since 2008, dbt technologies (pty) ltd (“dbt”) (south african subsidiary of the company) had been executing on two large power projects in south africa (kusile and medupi), which it has now substantially completed its scope of work. over such time, the business environment surrounding these projects was difficult, as dbt, along with many other contractors on the projects, experienced delays, cost over-runs, and various other challenges associated with a complex set of contractual relationships among the end customer, prime contractors, various subcontractors (including dbt and its subcontractors), and various suppliers. these matters resulted in claims and disputes between dbt and other parties involved with the projects, including allegations that dbt provided defective product and failed to meet certain project milestones. it is the company’s policy to accrue for estimated losses from legal actions or claims when events exist that make the realization of the losses probable and they can be reasonably estimated. the company does not believe it has probable losses associated with these claims and disputes.52we identified the south african power project claims and disputes as a critical audit matter because the evaluation of the probability of potential outcomes of these various claims and disputes and related disclosures involves significant judgment by management. this required a high degree of auditor judgment and an increased extent of effort when evaluating the company’s legal and accounting positions and related disclosures.how the critical audit matter was addressed in the audit our audit procedures related to the south african power project claims and disputes included the following, among others:•we tested the effectiveness of controls related to the south african power project claims and disputes.•we obtained and evaluated legal confirmations from the company’s internal and external counsels.•we held discussions with the company’s internal and external counsels to determine the status of the south african power project claims and disputes, the contractual provisions for settlement or other legal resolution, and their awareness of any pending or threatened litigation, claims, and assessments omitted.•we read minutes of meetings of the board of directors and its committees and conducted public domain searches for evidence of unrecorded loss contingencies or contradictory evidence related to the company’s positions related to the south african power project claims and disputes.•we evaluated the accuracy and completeness of the company’s disclosures in the financial statements for consistency with our knowledge of matters related to the south african power projects claims and disputes.contingent liabilities and other matters — asbestos product liabilities and insurance recovery assets — refer to notes 2 and 15 to the financial statements critical audit matter description the company maintains liabilities for asbestos-related claims. these claims are largely offset by insurance recovery assets. recorded asbestos product liabilities are based on a number of assumptions, including historical claims and payment experience, and actuarial estimates of the future period during which additional claims are reasonably foreseeable. insurance recovery assets are based on certain assumptions, including the continued solvency of the insurers and legal interpretation of rights for recovery under the insurance policies.we identified asbestos product liabilities and insurance recovery assets as a critical audit matter given the subjectivity of estimating projected claims, the projected settlement values of reported and unreported claims, the complexity of determining the associated insurance recovery assets, and a material weakness related to the insurance recovery assets as described in “management's report on internal control over financial reporting”. this required a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial and insurance specialist, when performing audit procedures to evaluate the reasonableness of the asbestos product liabilities and the associated insurance recovery assets.how the critical audit matter was addressed in the audit our audit procedures related to asbestos product liabilities and insurance recovery assets included the following, among others:•we tested the effectiveness of controls related to asbestos product liabilities.•we evaluated the methods and assumptions used by management to estimate the asbestos product liabilities by testing the underlying data that served as the basis for the actuarial estimates, including historical claims and payment experience, to test that the inputs to the actuarial estimates were complete and accurate.•with the assistance of our actuarial and insurance specialist, we:◦developed independent estimates of the asbestos product liabilities and compared our estimates to management’s estimates.◦assessed the ongoing financial solvency of insurance carriers and the recoverability of the recorded insurance recovery assets.•we independently confirmed a selection of insurance policies directly with insurance carriers.•we independently confirmed a selection of defense costs directly with external legal counsel.•we developed an independent expectation of the insurance recovery assets and compared our estimates to management’s estimates and recalculated the insurance recovery assets for entities under coverage-in-place agreements./s/ deloitte & touche llp charlotte, north carolina february 25, 2022we have served as the company’s auditor since 2002.	5
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. environmental liabilities as more fully described in note 11 to the financial statements, the company records accruals for environmental liabilities based on its current interpretation of environmental laws and regulations when it is probable a liability has been incurred and the amount of such liability is estimable. accruals for environmental liabilities totaled approximately $172 million at december 31, 2020. these liabilities are established based on projected spending over many years and require significant estimates and specialized knowledge to determine the proper amount at any point in time. in addition to the estimated liabilities, the company is subject to the risk of reasonably possible additional liabilities in excess of the established liabilities due to potential changes in circumstances and future events. the company estimates this exposure could range up to approximately $78 million in addition to the liabilities recorded and has disclosed this exposure in note 11.the principal considerations for our determination that the accruals for environmental liabilities is a critical audit matter are that the length of time over which the obligation will be resolved is significant and the estimate requires specialized knowledge of environmental engineering. the estimate, which involves assumptions such as the nature and extent of contamination at each site, the nature and extent of required cleanup efforts, the duration and effectiveness of the chosen remedial strategy and changes in environmental regulations is subjective in nature and involved our complex and subjective judgment.our audit procedures related to the accruals for environmental liabilities included the following procedures, among others. we evaluated the design and tested the operating effectiveness of relevant controls over the company’s estimation process and accounting for the accruals, and the completeness and accuracy of the underlying data used in the reserve estimates. we performed a public domain search to determine whether the sites being accounted for by the company is complete and whether all information from regulators is being considered in the estimation process. we used an environmental reserve specialist to assist us in evaluating the appropriateness of the company’s remediation plans and the reasonableness of management’s estimates in relation to the regulatory requirements and to review the estimated costs used by the company, including consideration of information available from external data from other sources. with the support of our environmental reserve specialists, we evaluated the competency of the specialists used by the company in addition to whether the method, models and assumptions utilized in estimating the reserve balances were appropriate based on testing of engineering studies and historical experience. f-3realizability of deferred tax assets as more fully described in note 20, at december 31, 2020, the company had gross deferred tax assets of approximately $571 million, reduced by a valuation allowance of approximately $81 million, primarily related to its canadian operations. deferred tax assets must be reduced by a valuation allowance if, based upon 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. the ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the deferred tax assets will become realized. the company assesses the need for a valuation allowance by evaluating both the positive and negative evidence that may exist. the principal considerations for our determination that the realizability of the deferred tax assets is a critical audit matter are that the length of time of the forecast period is significant and the estimate of future taxable income of the company’s canadian operations is an accounting estimate subject to a high level of estimation uncertainty. our audit procedures related to the realizability of the deferred tax assets included the following procedures, among others. we evaluated the design and tested the operating effectiveness of the key controls over the company’s forecasting process, evaluation of the realizability of deferred tax assets and establishment of valuation allowances. we assessed the historical accuracy of management’s forecasted canadian taxable income and compared the forecasts to historical trends and current industry and economic trends. additionally, we performed sensitivity analyses around the assessment. we involved tax professionals to evaluate the application of jurisdictional tax laws and regulations used in the company’s assumptions and calculations. /s/ grant thornton llp 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 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—sales incentive program rebates and discounts description of the matter the company sells its products to original equipment manufacturers, distributors and retailers (collectively, “customers”). as explained in note 1 to the consolidated financial statements, the company reduces revenue for estimated future reductions to the final selling prices for shipped products including sales incentive programs, such as price protection and volume incentives. auditing management’s estimates of future reductions to the final selling prices is complex as it requires management to make subjective assumptions including the amount of price adjustments on products as well as the timing of its channel sales of products through to end customers.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the completeness of sales incentive programs, the accuracy and completeness of the underlying data used in the calculations and management’s assumptions of the amount of future reductions to the final selling prices as well as the timing of its channel sales of products through to end customers. 93table of contents to test the estimated sales incentive programs, our audit procedures included, among others, testing the completeness of sales incentive programs as well as the accuracy and completeness of the underlying data used in the calculations and evaluating the significant assumptions used by management to estimate its reserves related to remaining channel inventory. to test the completeness of the sales incentive programs, we inspected significant new sales contracts and agreements that include the contractual rights to discounts and rebates to validate they are being properly considered in the incentives reserve calculations and examined credit memos issued after year end. we also directly confirmed terms and conditions of agreements with a sample of the company’s customers as well as inquired of sales representatives and other members of management to assess whether all contractual terms were provided to the finance department. to test the underlying data used in the sales incentive program reserve calculations, we confirmed ending on hand inventory at a sample of distributors and retailers. to test management’s assumptions of the amount of future reductions to the final selling prices as well as the timing of its distributors’ sales of products through to end customers we inquired with operations management and compared estimates with industry and analysts’ forecasts. in addition, we performed a retrospective review comparing prior period assumptions to the actual results in subsequent periods and performed sensitivity analyses to evaluate the potential effect of changes in the company's significant assumptions. realizability of deferred income taxes description of the matter at july 3, 2020, the company had gross deferred tax assets of $1,566 million, partially offset by a valuation allowance of $438 million. as discussed in note 5 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 realizability of the deferred tax assets was complex as the assessment process includes forecasting future sources of taxable income and scheduling the use of the applicable deferred tax assets which includes subjective management assumptions, and the amounts involved are material to the financial statements as a whole.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls that address the risks of material misstatement relating to the realizability of deferred tax assets. this included controls over management’s determination of sources and amount of future taxable income including income from operations and scheduling of the future reversal of existing taxable temporary differences.among other audit procedures performed, we evaluated the assumptions used by the company to develop projections of future taxable income by jurisdiction and tested the completeness and accuracy of the underlying data used in its projections. for example, we compared the projections of future taxable income with the actual results of prior periods, as well as management’s consideration of current industry and economic trends. we also assessed the historical accuracy of management’s projections and compared the projections of future taxable income with other forecasted financial information prepared by the company. in addition, we tested the company’s scheduling of the reversal of existing temporary taxable differences. accrual for product warranties description of the matter at july 3, 2020, the company’s accrual for product warranties was $151 million. as disclosed in note 12 to the consolidated financial statements, the company issues various types of product warranties under which the performance of products delivered is generally guaranteed for a specified contractual period. auditing the company’s product warranty accrual was complex as the calculation of the accrual for product warranties is based on estimates of product failure rates and changes in the estimates can materially affect the accrual recorded in the consolidated financial statements.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 process for recording product warranties, including controls over management’s review of the estimated failure rates, estimated return rates, and completeness and accuracy of the underlying data used in the calculation. 94table of contents to test the company’s accrual for product warranties, our audit procedures included, among other procedures, evaluating the reasonableness of the estimated failure rate and estimated return rates and testing the accuracy and completeness of the underlying data used in the calculations. we also performed retrospective reviews of the actual rates to the estimated product failure rates used by the company and performed sensitivity analyses to evaluate the impact of changes to the warranty accrual based on changes in product failure rates. this included testing, on a sample basis, the historical product return and current period shipments data used in the warranty accrual calculation, and benchmarking to peer company data. /s/ ernst & young llp we have served as the company’s auditor since 1980.	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 contingent consideration liability as described in notes 2 and 4 to the consolidated financial statements, the company initially recorded a contingent consideration liability related to future potential payments resulting from the acquisition of confluence based upon the achievement of certain development, regulatory and commercial milestones, as well as future projected sales performance, at its estimated fair value on the date of acquisition. management evaluates fair value estimates of contingent consideration liabilities on a quarterly basis. management estimates the fair value of the contingent consideration liability associated with sales milestones and royalties by estimating future sales levels, assigning an achievement probability and 82table of contentsdiscounting the associated cash payment to its present value using a risk-adjusted rate of return. management estimates the fair value of the contingent consideration liability for regulatory milestones by assigning an achievement probability to each potential milestone and discounting the associated cash payments to their present values using a credit-risk-adjusted interest rate. 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 success of both achieving regulatory milestones and commencing commercialization, which are based upon an asset’s current stage of development. as of and for the year ended december 31, 2020, management recorded a contingent consideration liability of $4.1 million and expense of $2.4 million. the principal considerations for our determination that performing procedures relating to the fair value of the contingent consideration liability is a critical audit matter are the significant judgment by management when developing the fair value estimate, which in turn led to a high degree of auditor judgment, subjectivity and effort in evaluating the significant assumptions related to the probability of success of both achieving regulatory milestones and commencing commercialization. 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, among others, testing management’s process for developing the fair value of the contingent consideration liability and evaluating the reasonableness of the valuation model and assumptions related to the probability of success of both achieving regulatory milestones and commencing commercialization. evaluating management’s assumptions related to the probability of success of both achieving regulatory milestones and commencing commercialization involved assessing whether the assumptions used by management were reasonable considering the agreements associated with the transaction and the consistency with industry studies and the stage of product development. professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of management’s valuation model. /s/ pricewaterhouse coopers llp philadelphia, pennsylvania february 25, 2021 we have served as the company’s auditor since 2015.	1
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 separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. asbestos liabilities and related insurance receivables as described in note 1 and 19 to the corporation’s consolidated financial statements, the corporation has accrued asbestos liabilities of $180.3 million ($23.0 million current and $157.3 million long term) and recorded asbestos-related insurance receivables of $121.3 million ($16.0 million current and $105.3 million noncurrent) as of december 31, 2021. these liabilities and insurance receivables relate to claims that have been asserted alleging personal injury from exposure to asbestos-containing components historically used in certain products manufactured by predecessors of the corporation’s air & liquid systems corporation. the corporation utilizes third-party experts to assist in developing (i) an estimate of the asbestos liability for the probable pending and future claims over the period that the corporation believes it can reasonably estimate such claims and (ii) an estimate of the insurance receivable for the insurance proceeds expected to be received under existing policies associated with the asbestos liabilities. we identified the valuation of asbestos liabilities and insurance receivables as a critical audit matter. the principal considerations for our determination are: (i) the subjectivity of estimating projected claims including the period for which the corporation can reasonably estimate the asbestos liabilities, (ii) the estimation process for projected settlement values of reported and unreported claims including 62 the number of claims expected to be filed and adjudicated, the disease type, and the settlement and defense costs to estimate the asbestos liabilities, and (iii) the complexity of determining the associated insurance receivables including the estimated settlement costs for the asbestos liabilities and the associated defense costs, the continued financial solvency of the insurers, and legal interpretation of rights for recovery under the insurance policies and the related settlement agreements. auditing these elements 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: •assessing the qualifications, experience, and objectivity of the corporation’s third-party experts; •testing the underlying historical data that served as a basis for the valuation of the asbestos liabilities for completeness and accuracy through the examination of relevant source documents; •testing the insurance policies for existence and coverage amounts including independent confirmation of a selection of policies and the related settlement agreements directly with insurance carriers; •evaluating the ongoing financial solvency of insurance providers utilizing publicly available financial information; and •utilizing personnel with specialized knowledge and skill in actuarial science to assist in: (i) evaluating the valuation methodology utilized by the corporation to estimate the asbestos liabilities, (ii) testing the computation of the asbestos liability estimate performed by the corporation’s third-party experts, (iii) evaluating the period utilized by the corporation to project probable pending and future claims, and (iv) evaluating the reasonableness of certain assumptions utilized to develop the estimates for the asbestos liabilities and insurance receivables such as the estimated settlement or indemnity costs for the asbestos liabilities and the associated defense costs. /s/ bdo usa, llp we have served as the corporation’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 separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.asbestos-related liabilities and accrued liabilities - refer to note 20 to the financial statements the company has been sued in product liability lawsuits alleging damages for personal injury arising from exposure to asbestos from component parts of certain products sold or distributed by various defendants, including certain itt subsidiaries. the company engages a third-party consulting firm with extensive experience in assessing asbestos related liabilities to assist management in their estimate of the potential undiscounted liability for pending and future asbestos related claims. the company then records an estimated liability related to pending claims and claims estimated to be filed for which they believe it is probable and for which they can reasonably estimate. this estimate requires management to make significant estimates and assumptions related to the number of claims to be compensated based on epidemiological and historical data and recent claims experience settling and dismissing claims, disease type, settlement values, external factors, and the period to which the company can reasonably estimate the liability. the company has disclosed they extended their projection to include pending claims and claims expected to be filed through 2052, reflecting the full time period over which they expect asbestos-related claims to be filed against them. previous estimates included pending claims and claims expected to be filed over the next 10 years. the current and non-current liability as of december 31, 2020 was $91.4 million and $840.6 million, 51respectively. we identified the liability of future asbestos related claims as a critical audit matter given the key assumptions involve subjectivity which requires a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial specialists, when performing audit procedures to evaluate whether the asbestos related liabilities were appropriately recorded as of december 31, 2020.our audit procedures related to the asbestos liability included the following, among others: ◦we tested the effectiveness of controls over the liability estimate, including the assumptions selected for use in the company’s third-party consulting firm’s model utilized to estimate the undiscounted cost of pending and future asbestos related claims. ◦we assessed the qualifications, experience, and objectivity of management’s third-party consultant. ◦we tested the underlying historical data that served as the basis for the actuarial analysis, for accuracy and completeness of disease type, actual settlement values, and case status. ◦we evaluated the period management used to project the future liability for pending and future asbestos claims by analyzing the stability of company specific historical claims filed, compensability rates, and average settlement values. we also evaluated the changes in the overall liability from recent annual re-measurements, the trend of claim types, and other factors such as changes to the insurance portfolio.◦we evaluated the selection of the epidemiological curve used by the company to project the liability by comparing company specific claims experience to the expected claims experience per published industry data. ◦with the assistance of our actuarial specialists that have experience in the area of asbestos-related reserves, we assessed the reasonableness of the valuation methodology, significant assumptions, and the computation of the liability estimate by the third-party consulting firm.asbestos-related assets and other current assets - refer to note 20 to the financial statements the company has a number of primary and excess insurance policies from several insurers which were in place during the timeframe that the alleged asbestos exposure occurred. the company has negotiated with certain of its excess insurers to reimburse the company for a portion of its settlement and/or defense costs as incurred, frequently referred to as "coverage-in-place" agreements. under coverage-in-place agreements, an insurer’s policies remain in force and the insurer undertakes to provide coverage for the company’s present and future asbestos claims on specified terms and conditions that address, among other things, the share of asbestos claims costs to be paid by the insurer, payment terms, claims handling procedures and the expiration of the insurer’s obligations. the company has entered into policy buyout agreements with certain insurers confirming the aggregate amount of available coverage under the subject policies and setting forth a schedule for future payments to a qualified settlement fund, to be disbursed for future asbestos costs. the company retains an insurance consulting firm to assist management in estimating probable recoveries for pending asbestos claims and for claims estimated to be filed in the future based on the analysis of policy terms, the likelihood of recovery provided by external legal counsel, and incorporating risk mitigation judgments where policy terms or other factors are not certain. the current and non-current asset as of december 31, 2020 was $91.0 million and $353.7 million, respectively. as of december 31, 2020, the company has entered into coverage-in-place agreements and policy buyout agreements representing approximately 76% of the recorded asset. the remaining part of the company’s insurance receivable is estimated by insurance carrier or policy based on the following significant assumptions 1) expected levels of future cost recovery, 2) the financial viability of the insurance companies, 3) the method by which losses will be allocated to the various insurance policies and the years covered by those policies, 4) the extent to which settlement and defense costs will be reimbursed by the insurance policies, and 5) interpretation of the various policy and contract terms and limits and their interrelationships.we identified the asbestos-related insurance recoveries from insurance policies that do not have coverage-in-place or buyout agreements as a critical audit matter given the significant assumptions to determine the recoveries require a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial specialists, when performing audit procedures to evaluate whether the asbestos related assets were appropriately recorded as of december 31, 2020. our audit procedures related to the assumptions used to estimate insurance recoveries related to asbestos liabilities included the following, among others: •we tested the effectiveness of controls, including those over the assumptions selected for use in the company’s 52third-party consultant’s model for estimated recoveries. •we assessed the qualifications, experience, and objectivity of management’s third-party consultant. •we tested the insurance policies for existence and coverage amounts.•we evaluated the financial viability of insurance companies by reviewing available public external credit ratings.•with the assistance of our actuarial specialists that have experience in the area of asbestos-related assets, we evaluated the reasonableness of management’s selected recovery percentage based upon existing insurance policies by (1) reading the underlying insurance policies (2) considering the impact of recent legal precedents (3) evaluating changes in assumptions or other factors from the prior year and (4) recalculating the allocation of the asbestos losses to estimate the insurance recoveries.•we obtained correspondence from and made inquiries of the company’s external legal counsel regarding their assessment of each insurance policy and the range of expected recovery.•we obtained insurance settlements the company entered into during 2020 and evaluated the appropriateness of management’s judgments as to the application of funds available to cover certain claims.•we compared cash collections in 2020 to the company’s prior year estimated recoveries. /s/ deloitte & touche llp stamford, connecticut february 19, 2021we 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 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 intangibles (including goodwill) arising from business combinations critical audit matter description as described in note 5 to the consolidated financial statements, the company completed the acquisitions of liberty compassion, inc., dharma pharmaceuticals, llc, and mobley pain management and wellness center, llc and can well processing, llc, green star herbals inc., mdhwc management corp., and leaf line industries, llc during the year ended december 31, 2021. the aggregate consideration for the acquisitions was approximately $540 million. in addition, during the year ended december 31, 2021, the company finalized the purchase price allocation related to the acquisition of southern ct wellness & healing, which was acquired during the year ended december 31, 2020. the aggregate consideration for the acquisition was approximately $14 million. each acquisition was accounted for as a business combination. the company measured the assets acquired and liabilities assumed at fair value, which resulted in the recognition of intangible assets totaling approximately $590 million (of which approximately $17 million related to southern ct wellness & healing). the company has recorded identifiable license intangible assets of approximately $321 million and goodwill of approximately $269 million (of which approximately $9 million and $8 million related to a license intangible asset and goodwill, respectively, of southern ct wellness & healing) as a result of these acquisitions. the valuation of the intangible assets is complex and judgmental due to the use of subjective assumptions in the valuation models used by management when determining the estimated fair values of the intangible assets acquired consideration paid. the determination of the fair values of the intangible assets and consideration paid requires management to make significant estimates and assumptions related to forecasts of future revenues, expenses, discount rates, risk-free rates, weighted-average cost of capital, equity risk premium, and the probability of occurrence of certain transactions.auditing management’s valuation of the acquired intangible assets is complex due to the judgments required to evaluate management’s previously noted estimates and assumptions. how we addressed the matter in our audit the primary procedures we performed to address this critical audit matter included: •we tested internal controls relating to the evaluation of the assumptions used to estimate the fair value of the intangible assets acquired including: o management’s identification of assets acquired and liabilities incurred.o management’s evaluation of the completeness, accuracy and reasonableness of prospective financial information used to determine the fair values of intangible assets acquired.o management’s evaluation of the completeness and accuracy of key assumptions and inputs used by third-party valuation specialists, including the discount rate, risk-free rate, weighted-average cost of capital, equity risk premium, and probabilities assigned to contingent consideration used to determine fair values.o management’s evaluation of the clerical accuracy of the model used to determine the fair values of intangible assets acquired. •substantively tested, with the assistance of firm personnel with experience in the application of fair value and valuation methodologies, the appropriateness of the judgments and assumptions used in management's estimation process for determining the fair value of the intangible assets acquired, including: o tested the consideration paid for the acquisitions.o tested the mathematical accuracy of the calculations performed along with assessing the completeness and accuracy of the information used in the calculations. o evaluated the appropriateness of the valuation methodologies used, as well as the key assumptions and inputs used, including discount rate, risk-free rate, weighted-average cost of capital, and equity risk premium.o performed sensitivity analyses to evaluate the changes in the fair value of the intangible assets that would result from changes in certain assumptions.o compared significant assumptions used by management to current industry and competitor data, comparable company owned operations, and other areas of the audit. goodwill impairment evaluation critical audit matter description as described in note 1 to the consolidated financial statements, the company tests goodwill for impairment annually, or more frequently if events have occurred or circumstances exist that indicate the carrying amount of goodwill may not be recoverable. the company performed the optional qualitative assessment to determine whether it was more likely than not (that is a likelihood of more than 50 percent) that the fair value of the reporting units were less than their carrying amounts, including goodwill. while the impairment test did not result in the recording of any impairment loss, the impairment analysis requires management to make significant judgments in performing its assessment including the evaluation of macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, other entity-specific events, events affecting the reporting units, and trends in the company’s share price. auditing management’s impairment analysis is complex due to the judgments required to evaluate management’s assessment of those factors identified above. how we addressed the matter in our audit the primary procedures we performed to address this critical audit matter included:•we tested internal controls over the company’s annual goodwill impairment analysis, including assumptions used by management in conducting its impairment analysis, including controls addressing:o management’s assessment of potential triggering events indicating potential impairmento management’s identification of reporting units evaluated for potential impairment.o management’s assessment of qualitative factors that may indicate potential impairment.•substantively tested the appropriateness of the judgments and assumptions used by management in conducting its impairment analysis, including: o confirmed the appropriateness of the reporting units evaluated in performing management’s impairment analysis. o evaluated the factors management considered in its qualitative assessment to determine that goodwill was not impaired, including the evaluation of macroeconomic conditions, industry and market conditions, cost factors, the past financial performance of the reporting units, the projected financial performance of the reporting units, other entity-specific events, events affecting the reporting units, and trends in the company’s share price. contingent consideration critical audit matter description as described in note 2 to the consolidated financial statements, contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. contingent consideration that is classified as an asset or a liability is remeasured at fair value at subsequent reporting dates in accordance with asc 450, contingencies, as appropriate, with the corresponding gain or loss being recognized in profit or loss. the classification and valuation of contingent consideration is complex and judgmental due to the use of subjective assumptions in the valuation models used by management when determining the estimated fair values and the judgment involved to determine whether to classify contingent consideration as a liability or equity. the determination of the fair values of contingent consideration requires management to make significant estimates and assumptions related to forecasts of future revenues, expenses, discount rates, risk-free rates, weighted-average cost of capital, equity risk premium, and the probability of occurrence of certain transactions. as described in note 2, during 2021, the company reclassified approximately $27 million of contingent consideration from a liability to equity as it determined that the consideration met the qualifications to be classified within equity upon the number of shares to be issued under the arrangement being fixed in 2019. additionally, the company recorded contingent consideration of approximately $99 million for business combinations completed during the year ended december 31, 2021. the fair value of contingent consideration liabilities as of december 31, 2021 was approximately $84 million. auditing management’s classification and valuation of contingent consideration is complex due to the judgments required to evaluate management’s previously noted estimates and assumptions. how we addressed the matter in our audit the primary procedures we performed to address this critical audit matter included: •we substantively tested the appropriateness of the judgments and assumptions used by management in conducting its analysis, including confirming the appropriate classification of contingent consideration as either liabilities or equity. •substantively tested, with the assistance of firm personnel with experience in the application of fair value and valuation methodologies, the appropriateness of the judgments and assumptions used in management's estimation process for determining the fair value of the contingent consideration upon acquisition and at each reporting date, as applicable, including: o tested the mathematical accuracy of the calculations performed along with assessing the completeness and accuracy of the information used in the calculations. o evaluated the appropriateness of the valuation methodologies used, as well as the key assumptions and inputs used, including the risk-neutral probabilities assigned, equity risk premium, volatility, and projected cash flows related to the contingent consideration.o performed sensitivity analyses to evaluate the changes in the fair value of the contingent consideration that would result from changes in certain assumptionso compared significant assumptions used by management to current industry and competitor data, comparable company owned operations, and other areas of the audit as described the "opinions on the financial statements and internal control over financial reporting" section of our audit report, we have identified a material weakness specific to this matter. /s/ baker tilly us, llp we have served as the company's auditor since 2021.	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) 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.variable consideration and estimated costs at completion as discussed in notes 1 and 6 to the consolidated financial statements, the company recognizes a portion of its revenues over time using a cost based input measure of progress. the company estimates variable consideration of these contracts and includes such amounts in the transaction price when it is probable that a significant reversal of cumulative revenue recognized will not occur. the company measures progress toward completion using the cost-to-cost method, which measures progress as the ratio of (1) actual contract costs incurred to date to (2) the company’s estimated costs at completion (eac). in estimating the transaction price, judgments are required to determine the amounts expected to be recovered from claims against customers. in estimating the measure of progress, judgments are required to determine the estimated amount of costs to complete contracts in progress, including costs for labor and subcontractor commitments, as well as probable recoveries from claims against suppliers and subcontractors.we identified the evaluation of variable consideration and ea cs for revenues recognized using a cost-based input measure of progress as a critical audit matter. evaluating the estimated amounts expected to be recovered from claims against customers required auditor judgment because the amounts are in dispute and the ultimate resolution of claims 61is uncertain. evaluating the eac for contracts in progress involves auditor judgment given the variability and uncertainty associated with (1) estimating costs, including labor and subcontractor commitments, to be incurred over a long-term contract period and (2) amounts expected to be recovered from the resolution of disputes related to claims against suppliers and subcontractors.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 process for estimating variable consideration and estimated costs at completion. this included controls over revenues recognized using a cost-based input measure of progress that related to (1) costs to complete for contracts in progress, including costs for labor and subcontractor commitments, as well as probable recoveries from claims against suppliers and subcontractors and (2) amounts expected to be recovered from claims against certain customers. we evaluated the company’s ability to estimate these amounts by comparing the company’s previous estimates to actual results. we assessed the company’s determination of entitlement to and probability of recovery of certain claims against customers, suppliers, and subcontractors by inspecting correspondence obtained from the company’s external legal counsel. we involved professionals with specialized skills and knowledge who assisted in evaluating the company’s estimated probable recovery for certain claims against customers, suppliers, and subcontractors by comparing the company’s estimate against our independently developed range of probable recoveries. we evaluated the eac for certain contracts by (1) obtaining and inspecting contractual documents with customers and subcontractors, (2) interviewing project personnel to gain an understanding of the status of project activities, and (3) obtaining and analyzing underlying documentation for a selection of costs in the eac, including labor costs and subcontractor commitments.valuation of goodwill within a reporting unit in the energy solutions business segment as discussed in notes 1 and 9 to the consolidated financial statements, the company’s goodwill balance at december 31, 2020 was $1,761 million, which included goodwill related to certain reporting units within the energy solutions business segment. the company performs goodwill impairment testing on an annual basis and whenever indicators of potential impairment exist. the estimated fair values of reporting units are determined based on internal forecasts of revenues and gross profit margins for each reporting unit over a specified period. during 2020, the company performed goodwill impairment tests as a result of a reorganization, significant adverse economic and market conditions, and a decision to discontinue pursuing certain projects within the energy solutions business segment. as a result, impairment losses were recognized in the energy solutions business segment in the first and second quarter in the amount of $62 million and $37 million, respectively. we identified the valuation of goodwill within a reporting unit in the energy solutions business segment as a critical audit matter. a high degree of auditor judgment was required to evaluate forecasted revenue and gross profit margins as the reporting unit fair values are sensitive to changes in these assumptions.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 testing process. this included controls related to the development of forecasted revenue and gross profit margins. in addition, we compared the forecasted revenue growth and gross profit margins to historic results, considering forecasted business initiatives. we performed sensitivity analyses over forecasted revenue and gross profit margins to assess their impact on the company’s determination of the fair value of the reporting units. to assess the company’s ability to estimate reporting unit revenues and gross profit margins, we compared the company’s historical forecasts to actual results. we tested the reconciliation of the fair value of the company’s reporting units to the market capitalization of the company. fair value of acquired customer relationships as discussed in note 4 to the consolidated financial statements, on october 1, 2020 the company acquired centauri platform holdings, llc (centauri) and accounted for the transaction as a business combination. as a result of the transaction, the company recorded $198 million for customer relationships intangible assets. the estimated fair value of this identifiable intangible asset was determined using a discounted cash flow model.we identified the evaluation of the fair value of acquired customer relationships as a critical audit matter. there was a high degree of subjectivity in evaluating the discounted future cash flows used to determine the fair value of the customer relationships. specifically, there was a high degree of auditor judgment required to evaluate the forecasted revenue attributable to customer relationships and the weighted-average cost of capital (wacc).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 62process. this included controls related to the determination of the fair value of the customer relationships, the forecasted revenue attributable to customer relationships, and the wacc. we evaluated the forecasted revenue attributable to customer relationships by comparing it to the acquired entity’s actual historical results. to assess the company’s ability to estimate the acquired entity’s revenues, we compared the company’s historical revenue forecasts to actual results for previous acquisitions. we performed sensitivity analyses over forecasted revenue attributable to customer relationships to assess its impact on the company’s determination of the fair value of the customer relationships. in addition, we involved valuation professionals with specialized skills and knowledge who assisted in:–evaluating the wacc by developing an independent range of wac cs using publicly available market data and comparing the result to the company’s wacc–reconciling the wacc to the weighted average return on assets and the internal rate of return./s/ kpmg llp we have served as the company’s auditor since 2005.	3
critical audit matters thecritical audit matters communicated below are matters arising from the current period audit of the consolidated financial statementsthat were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures thatare 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, takenas a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical auditmatter or on the accounts or disclosures to which it relates. critical audit matter description secured promissory note receivable (“the note”) realization the note, as amended and restated, was entered into with a company (the borrower) pursuant to which pro phase loaned $3.0 million whilealso entering into a consulting agreement with the borrower, as disclosed in notes 12 and 16. in january 2021, the consultingagreement was terminated and the note was amended. the january 2021 amendment required repayments to be based, in part, on a percentageof certain diagnostic test revenue, as defined, performed by the borrower. the ultimate realization of the note requires managementto make significant assumptions and subjective judgments about the ability to receive repayment from a percentage of the borrower’sdiagnostic test revenue, as well as from the borrower’s creditworthiness and viability. given the subjectivity of theseestimates, performing audit procedures to evaluate whether the note receivable was appropriately recorded at december 31, 2020required a high degree of auditor judgment and an increased extent of effort. how we addressed the matter in our audit addressing this matter involvedprocedures to test whether the underlying data used in management’s projections, including diagnostic test volume andrevenue the borrower achieved prior to this amendment, as well as the payments remitted to date. our procedures also includedreviewing the borrowers diagnostic test volume reported through the financial statement issuance date but not yet beenremitted to the company. we further evaluated how this information and other assumptions were used to forecast the futurerepayment stream based on the borrower’s expected diagnostic testing. further, we made direct inquires and reviewedmanagement’s assessment of the borrowers current financial condition regarding their creditworthiness andviability. critical audit matter description diagnostic service variable consideration and receivable allowances asdescribed in note 2 to the consolidated financial statements, the company’s diagnostic revenue is derived from third partyinsurers and government agencies. management estimates the amount of consideration it expects to receive for providing the diagnosticservices based on reimbursement allowances from insurance providers (including payer denials) and uninsured patient reimbursementallowances from government agency programs. net revenues and accounts receivable recognized are billed based on standard testrates, net of allowances for expected reimbursements. given the nature of these estimates and the variables, performing auditprocedures to evaluate appropriate revenue recognition required a high degree of auditor judgment and an increased extent of effort. how we addressed the matter in our audit addressing thematter involved performing procedures which included gaining an understanding of the internal controls relating to the diagnostic services’billing and collection process and testing the completeness and accuracy of the company’s billing system. these procedures alsoincluded, among other things, performing transaction testing on a sample of diagnostic tests performed which included assessing payermix and reimbursements to date for each respective payer. we also compared management’s estimated allowances at year-end to actualreimbursements received through the financial statement issuance date, weighted by payer mix. /s/friedman llp wehave served as the company’s auditor since 2020.	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 assessment for the presque isle indefinite-lived gaming rights intangible asset as described in notes 2, 7, and 8 to the consolidated financial statements, the company’s indefinite-lived gaming rights intangible assets balance was $288.2 million as of december 31, 2020, of which $62.6 million relates to the presque isle indefinite-lived gaming rights intangible asset. management performs an annual review for impairment as of april 1 of each fiscal year for its indefinite-lived intangible assets, or more frequently if events or circumstances indicate that it is more likely than not the relevant asset may be impaired. during the quarter ended march 31, 2020, management concluded it was more likely than not that the presque isle gaming rights intangible asset may be impaired due to the impact and uncertainty of the covid-19 pandemic. management performed an impairment assessment and recognized an impairment of $15.0 million for the presque isle indefinite-lived gaming rights intangible asset. the fair value of the presque isle indefinite-lived gaming rights intangible asset was determined by management using the greenfield method, which is an income approach methodology that calculates the present value based on a projected cash flow stream. the primary inputs used by management in the estimation of the fair value of the presque isle indefinite-lived gaming rights intangible asset included estimated future revenue, operating expenses, start-up costs, and discount rate. the principal considerations for our determination that performing procedures relating to the impairment assessment for the presque isle indefinite-lived gaming rights intangible asset is a critical audit matter are (i) the high degree of auditor judgment and subjectivity in performing procedures relating to the fair value measurement of the gaming rights indefinite-lived intangible asset due to the significant judgment by management when developing the fair value estimate; (ii) significant audit effort in evaluating the significant assumptions related to estimated future revenue, operating expenses, start-up 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 intangible asset impairment assessment, including controls over management’s valuation of the presque isle indefinite-lived gaming rights intangible asset. these procedures also included, among others, testing management’s process for developing the fair value of the presque isle indefinite-lived gaming rights intangible asset; evaluating the appropriateness of the greenfield method; testing the completeness and accuracy of underlying data used in the greenfield method; and evaluating the reasonableness of significant assumptions used by management related to estimated future revenue, operating expenses, start-up costs, and discount rate. evaluating management’s assumptions related to estimated future revenue, operating expenses, and start-up costs involved evaluating whether the assumptions used were reasonable considering the current and past performance of presque isle and relevant third-party economic and industry data. professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the greenfield method and evaluating the reasonableness of the discount rate assumption./s/ pricewaterhouse coopers llp louisville, kentucky february 24, 2021 we have served as the company’s auditor since 1990.	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 a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.contingencies — refer to note 16 to the financial statements critical audit matter description the company is involved in several property sites where the company may be exposed to liabilities for the remediation of environmental contamination. environmental loss contingencies are evaluated based on the likelihood of the company incurring a liability and whether a loss or range of losses is reasonably estimable. the likelihood and amount of a loss or range of losses are estimated based on currently available information and assumptions related to the nature and extent of contamination and the methods and resulting costs of remediation. past estimates for environmental liabilities are subject to adjustment as new facts emerge during the investigatory and remediation processes. given the subjectivity of estimating the likelihood of a loss, the range of potential loss, and the amount of liability to recognize, performing audit procedures to evaluate whether environmental loss contingencies were appropriately recorded and disclosed as of december 31, 2021, required especially challenging, subjective and complex auditor judgment and an increased extent of effort.44how the critical audit matter was addressed in the audit our audit procedures related to the environmental loss contingencies included the following, among others:•we tested the effectiveness of internal controls related to the company’s development of the estimated environmental loss contingencies, including the assumptions related to the nature and extent of contamination and the methods and resulting costs of remediation.•we inquired of company legal counsel and external legal counsel to understand developments in environmental matters.•we evaluated written responses received from external legal counsel as it relates to the environmental loss contingencies.•we inquired of the company’s third-party environmental specialists to understand developments in environmental matters.•we searched data on the u.s. environmental protection agency website to identify any additional information relevant to the specific property sites.•we read board of directors meeting minutes to identify any additional information relevant to the specific property sites.•we evaluated whether the assumptions related to the nature and extent of contamination and the methods and resulting costs of remediation used by the company to determine the estimated losses or ranges of losses were reasonable by comparing those assumptions to decisions rendered by state and federal environmental regulatory agencies, information provided by feasibility studies and remedial action plans developed. •if the company’s reasonable estimate of loss for a remediation site is a range, we evaluated whether the amount of the liability recognized by the company within that range was reasonable based on the facts and circumstances specific to the remediation site. •we evaluated the company’s environmental contingencies disclosures for consistency with our knowledge of the company’s environmental matters.acquisitions — refer to note 20 to the financial statements critical audit matter description the company completed the acquisition of arteva specialties b.v., inv performance, llc, invista textiles (u.k.) limited, inv management services, llc, and invista equities, llc (collectively, “invista”) to acquire invista’s aromatic polyester polyol business and associated assets. the acquisition has been accounted for under the acquisition method of accounting for business combinations. the net purchase price was comprised of the $165.0 million cash purchase price paid to the seller and $21.6 million of working capital measured at its fair value as of the acquisition date. accordingly, the purchase price was allocated to the polyester polyol operations of the business using a discounted cash flow model. following, the operations allocation, the purchase price was then allocated to the assets acquired and liabilities assumed compromising the polyester polyol operations business based on their respective fair values, including $64.8 million in goodwill and $46.0 million in intangibles. the operations allocation required management to make significant estimates and assumptions related to forecasts of future revenues and earnings before interest, taxes, depreciation, and amortization (ebitda) and discount rates. given the operations allocation required management to make significant estimates and assumptions related to the forecasts of future costs, revenues, and ebitda (the “forecasts”), as well as the selection of the discount rates, and considering the sensitivity of business assumptions used in the valuation, performing audit procedures to evaluate the reasonableness of the forecasts and selected discount rates required a high degree of auditor judgement and an increased extent of effort, including the need to involve fair value specialists. how the critical audit matter was addressed in the audit our audit procedures related to the acquisition included the following, among others:•we tested the operating effectiveness of internal controls related to the company’s review of the stock and asset purchase agreement, review of opening balances, purchase price allocation specific to property and intangible assets, and cash flow forecast determination. •we read and evaluated the purchase agreement and supporting schedules•we evaluated the identification of tangible and intangible assets and liabilities for completeness45•we tested the classification of identifiable assets acquired and liabilities assumed in a business combination, including performing a sensitivity analysis on the intangible assets.•for the tangible assets subject to valuation, internal fair value specialists were engaged to assist with (1) evaluating the reasonableness of the valuation methodology and valuation assumptions with generally accepted valuation practices (2) evaluating whether multiple valuation techniques are appropriate in the circumstances and for which sufficient data is available, and (3) evaluating whether the valuation techniques are appropriate in relation to the business, industry, and environment. •with the assistance of our fair value specialists, we evaluated the reasonableness of the discount rates by (1) testing the source information underlying the determination of the discount rates and testing the mathematical accuracy of the calculation, (2) developing a range of independent estimates and comparing those to the discount rates selected by management, and (3) evaluating whether management’s forecasts were consistent with the evidence obtained in other areas of the audit. •we evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) internal communications to management and the board of directors, and (3) forecasted information included in industry reports and other economic indicators. •we evaluated whether management’s forecasts were consistent with evidence obtained in other areas of the audit. /s/ deloitte & touche llpdeloitte & touche llp chicago, illinois february 25, 2022 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.real estate acquisitions description of the matter as more fully disclosed in notes 1, 2, 3, and 6 to the consolidated financial statements, during 2020, the company completed the acquisition of 42 properties for a total purchase price of $1.8 billion, which included mergers with steadfast income reit, inc., and steadfast apartment reit iii, inc. in connection with these acquisitions the company also assumed $791.0 million of notes payable. these transactions were determined to be and accounted for as asset acquisitions, and the purchase prices were allocated based on the relative fair values of the acquired tangible assets, consisting of land, buildings and improvements, and acquired intangible assets and liabilities, consisting of the value of in-place leases and assumed notes payable. the company capitalizes transaction costs and allocated the purchase price using a relative fair value method allocating all accumulated costs.f-2table of contents auditing property acquisitions and acquisitions of a business in a business combination are complex and highly judgmental due to the significant judgement required in determining whether the acquisitions should be accounted for as asset acquisitions or business combinations. auditing the company’s estimate of the acquisition-date fair value of the consideration transferred, acquired tangible, and intangible assets and liabilities involves significant estimation uncertainty due to the judgment used by management in selecting key assumptions based on recent comparable transactions or market information, and the sensitivity of the fair values to changes in assumptions. the determination of whether the acquisitions should be accounted for as asset acquisitions or business combinations could have an effect on the company’s net income as transaction costs are capitalized in asset acquisitions and expensed in business combinations. the allocation of purchase price to the components of properties could have an effect on the company’s net income due to the differing depreciable and amortizable lives of each component and the classification of related depreciation, amortization, and interest expense in the company’s consolidated statement of operations.how we addressed the matter in our audit we obtained an understanding and evaluated the design effectiveness of controls over the company’s process for determining whether the acquisitions should be accounted for as asset acquisitions or business combinations and selecting and reviewing the key inputs and assumptions used in estimating the fair value of consideration transferred, acquired assets and liabilities assumed and allocating fair value to the various components.we tested the company’s conclusion that these transactions should be accounted for as asset acquisitions or business combinations by corroborating the market and transaction information to support the conclusion. to test the allocation of the acquisition-date fair values, we evaluated the appropriateness of the valuation methods used to allocate the purchase price. we performed procedures to assess key data inputs and assumptions used by management, including the completeness and accuracy of the underlying information. we also used our specialists to assist us in evaluating the valuation methods used by management and whether the assumptions utilizedwere supported by observable market data.internalization of management description of the matter as described more fully in note 2 and note 3 to the consolidated financial statements, effective september 1, 2020 the company became internally advised and managed by acquiring all assets necessary for the operation of the company’s business from steadfast reit investments, llc and its affiliates, including the company’s external advisor, steadfast apartment advisor, llc, for total purchase price of $125.0 million, consisting of cash and class b operating partnership units. the internalization transaction was accounted for as a business combination.auditing the company’s accounting for the internalization transaction was complex due to the significant estimation required by management to determine the fair value of consideration transferred and goodwill acquired of $125.2 million as of september 1, 2020. the significant estimation was primarily due to the judgment used by management in selecting key assumptions and developing prospective financial information based on recent comparable transactions or market information, and the sensitivity of the respective fair values to the significant underlying assumptions. these significant assumptions are forward looking and could be affected by futureeconomic and market conditions.how we addressed the matter in our audit we obtained an understanding and evaluated the design effectiveness of controls over the company’s process over the recognition and measurement of consideration transferred and related intangible assets, including the underlying assumptions used to develop such estimates.f-3table of contents we performed audit procedures to test the internalization which included, among others, evaluating the completeness and accuracy of the underlying data supporting the significant assumptions, estimates, and prospective financial information. for example, we performed sensitivity analyses to test the reasonableness of the underlying inputs and verified that the consideration transferred by the company was measured at fair value. we verified that the amounts recorded as goodwill represented the amount of consideration that exceeds the fair value of the net assets acquired. we involved our valuation specialists to assist with our evaluation of the methodology used by the company and the significant assumptions included in the fair value estimates. additionally, we involved our valuation specialists to evaluate fair value of equity instruments issued as a part of the consideration transferred against a range of market supported values.impairment of long-lived assets description of the matter at december 31, 2020, the company’s real estate held for investment, net and real estate held for development was $2.8 billion and $39.9 million, respectively. as described more fully in note 2 and note 3 to the consolidated financial statements, management continually monitors events and changes in circumstances that could indicate that the carrying amounts of the company’s real estateand related intangible assets may not be recoverable. the judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, legal and environmental concerns, the company’s intent and ability to hold the related asset, as well as any significant cost overruns on development properties. the company assesses the recoverability of the assets by estimating whether the company will recover the carrying value of the asset through its undiscounted future cash flows and its eventual disposition. based on this analysis, if the company does not believe that it will be able to recover the carrying value of the real estate and related intangible assets and liabilities, the company records an impairment loss to the extent that the carrying value exceeds the estimated fair value of the real estate and related intangible assets and liabilities.auditing the company's process to evaluate long-lived assets for impairment was complex due to a high degree of subjectivity in determining whether indicators of impairment were present, and in determining the future undiscounted cash flows and estimated fair values, if necessary, of long-lived assets where impairment indicators were determined to be present. in particular, these estimates were sensitive to significant assumptions, including the estimation of future rental revenues, management’s hold period, operating expenses and capitalization rates, which are affected by expectations about future market or economic conditions.how we addressed the matter in our audit we obtained an understanding and evaluated the design effectiveness of controls over the company’s long-lived asset impairment assessment process, including controls over management’s determination and review of the significant assumptions used in the analyses as described above.to test the company’s evaluation of long-lived assets for impairment, we performed audit procedures that included, among others, evaluating the indicators of impairment identified by management and testing the significant assumptions and completeness and accuracy of operating data used by the company in its analyses including management’s probable hold period analysis and the related cash flows that support those hold periods. we compared the significant assumptions used by management to current market data according to management’s plans and performed sensitivity analyses of certain significant assumptions as discussed above. we alsoinvolved our valuation specialist to assist in evaluating certain assumptions used, including future rental revenues and operating expenses, and capitalization rates./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 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 separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.revenue recognition as described in notes 2 and 3 to the consolidated financial statements, the company recognizes revenue in a manner that best depicts the transfer of promised goods or services to the customer, when control of the product or service is transferred to a customer. the company's contracts with customers include enzyme supply, licensing, and collaborative research and development agreements. contracts with customers may contain multiple performance obligations and may contain up-front or annual license fees, fees for full time employee research and development services, contingent milestone payments upon achievement of contractual criteria, and royalty fees based on the licensees' product revenue or usage. the company makes significant judgments in determining revenue recognition for customer contracts. we identified management’s significant judgments and estimates related to revenue recognition for contracts with customers as a critical audit matter. auditing the evaluation of distinct performance obligations, determination and estimation of material 80rights, determination of standalone selling prices, determination of the pattern of transfer of control for each distinct performance obligation and estimation of variable consideration required significant audit effort and subjective judgments in evaluating management's estimates. the primary procedures we performed to address this critical audit matter included: •testing the design and operating effectiveness of internal controls relating to the identification of distinct performance obligations and material rights, the determination of the timing of revenue recognition, the estimation of standalone selling prices, and the estimation of variable consideration. •examining a sample of revenue contracts and other source documents to test management's identification of significant terms for completeness, including the identification of distinct performance obligations, material rights and variable consideration including sending confirmations to a sample of customers to confirm our understanding of the parties’ rights and obligations.•assessing the reasonableness of management's estimates and assumptions used in determining stand-alone selling prices for new products and services and those products and services that are not sold separately. •evaluating the reasonableness of management’s judgments and estimates used to assess the stand-alone selling prices for new functional licenses when granted to customers as part of contracts containing multiple performance obligations.•evaluating the reasonableness and accuracy of management’s judgments and estimates used in accounting for identified material rights, including transactions accounted for under the alternative approach to estimating the standalone selling price of a material right. this includes testing management’s estimates of the expected consideration from the customer’s exercise of options.•assessing the reasonableness of management’s judgments and estimates to calculate variable consideration, and the timing of recognizing the related revenue subject to any constraints. •evaluating the appropriateness of management’s determination of whether identified performance obligations meet the criteria for over-time revenue recognition, including whether certain products and services have alternative use. /s/ bdo usa, llp we have served as the company's auditor since 2013.	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.insurance reserves as described in note 1 to the consolidated financial statements, the company’s consolidated insurance reserves balance was $60.1 million as of january 1, 2022. the company maintains insurance retention programs under its general liability, auto liability and workers’ compensation insurance programs. management accrues for insurance reserves on an undiscounted basis based on known claims and estimated incurred but not reported claims not otherwise covered by insurance. the estimates are developed utilizing standard actuarial methods and are based on historical claims experience and actuarial assumptions, including loss development factors and expected ultimate loss selections.the principal considerations for our determination that performing procedures relating to insurance reserves is a critical audit matter are (i) the significant judgment by management when developing the estimated insurance reserves; (ii) a high degree of auditor judgment and effort in performing procedures and evaluating audit evidence related to the standard actuarial methods and significant assumptions related to the loss development factors and expected ultimate loss selections; 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 estimate of insurance reserves, including controls over the standard actuarial methods and significant assumptions related to the loss development factors and expected ultimate loss selections and the completeness and accuracy of data related to historical claims experience. these procedures also included, among others, (i) testing management’s process for developing the estimated insurance reserves; (ii) evaluating the appropriateness of management’s standard actuarial methods; (iii) testing the completeness and accuracy of data related to historical claims experience; and (iv) evaluating the reasonableness of the significant assumptions used by management related to the loss development factors and expected ultimate loss selections. professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of management’s standard actuarial methods and (ii) the reasonableness of the loss development factor and expected ultimate loss selection significant assumptions. /s/pricewaterhouse coopers llp tampa, florida march 2, 2022we have served as the company’s auditor since 2007.	3
critical audit matter. basis for opinion these financial statements are the responsibility of the company’s management. our responsibility is to express an opinion on the company’s financial statements based on our audits. we are a public accounting firm registered with the pcaob and are required to be independent with respect to the company in accordance with the u.s. federal securities laws and the applicable rules and regulations of the securities and exchange commission and the pcaob.we conducted our audits in accordance with the standards of the pcaob. those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. we believe that our audits provide a reasonable basis for our opinion. 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.determination of the incremental borrowing rate in accordance with asc 842, leases f-1 description of the matter as discussed above and in note 1 to the consolidated financial statements, the company adopted accounting standards update, leases (asc 842) on january 2, 2019 and has disclosed the impact of this adoption in note 1. on the adoption date, the company recorded $377.0 million in operating lease assets and $473.8 million in current and long-term operating lease liabilities on its consolidated balance sheet for existing operating leases. the calculation of the company’s operating lease assets and operating lease liabilities included an estimate of the present value of the future lease payments to be made over the remaining lease term. management determined the discount rate used to calculate the present value by estimating the company’s incremental borrowing rate. the incremental borrowing rate is the rate of interest that the lessee would have to pay to borrow on a collateralized basis over a similar term and amount equal to the lease obligation in a similar economic environment. the company’s operating lease asset and operating lease liability were sensitive to changes in the incremental borrowing rate at the date of adoption.auditing management’s assessment of its incremental borrowing rate in connection with the adoption of asc 842 was subjective and involved complex judgments as the company is not a party to debt financing or other instruments that would have comparable collateral or similar terms as its underlying restaurant, office and equipment leases. the key estimates included evaluating the credit rating of the company and applying a collateralization adjustment to senior debt rates to arrive at the incremental borrowing rate. how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over the review of the methodology, inputs, and assumptions used to determine the incremental borrowing rate. to test the company’s incremental borrowing rate, we obtained and reviewed the work performed by management. our substantive audit procedures included, among others, involving our specialists to assist in evaluating management’s methodology and assumptions used to determine the company’s incremental borrowing rate at the date of adoption of asc 842. together with our specialists, we evaluated the company’s significant assumptions used to develop the incremental borrowing rate, which included: (1) estimating the synthetic credit rating by comparing the credit quality of the company to that of other similarly rated companies, (2) estimating the unsecured yield curves to develop a benchmark, (3) estimating adjustments to the benchmark yield curves to reflect comparable collateral positions, and (4) the selection of the risk-free rates. in addition, we evaluated the company’s lease disclosures included in note 1 in relation to these matters.workers’ compensation and general liability reserve description of the matter at december 31, 2019, the workers’ compensation and general liability reserve was $21.7m. as discussed in note 1 to the consolidated financial statements, the company retains large deductibles or self-insured retentions for a portion of its’ workers’ compensation and general liability insurance. the company estimates the liability based upon information provided by a third-party actuary. auditing the workers’ compensation and general liability reserve is complex and required the involvement of a third-party actuary due to the judgmental nature of the actuarial assumptions (e.g., severity of claims, claim development history, case jurisdiction, related legislation, the company's settlement practice, claims incurred but not yet reported, ultimate costs to settle known claims) used in the measurement process. these assumptions have a significant effect on the final workers’ compensation and general liability reserve estimated by the company.how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls that address the measurement and valuation of the workers’ compensation and general liability reserve. for example, we tested controls over the claims process, the significant actuarial assumptions, management’s estimate of claims incurred but not yet reported and management’s review and approval of the third-party actuarial report obtained on a quarterly basis. to test the workers’ compensation and general liability reserve, our audit procedures included, among others, evaluating the methodology used, assessing the significant actuarial assumptions discussed above, and testing the completeness and accuracy of the underlying data provided to the third-party actuary. additionally, we engaged our specialists to review the assumptions and methodology used by the third-party actuary and to calculate an independent estimate of the workers compensation and general liability reserve as of december 31, 2019. we compared this independent estimate to the range provided by the third-party actuary in order to conclude whether the recorded workers compensation and general liability reserve was appropriate. in addition, we evaluated the company’s workers compensation and general liability reserve disclosures included in note 1 in relation to these matters. /s/ ernst & young llp we have served as the company’s auditor since 2001.	4
critical audit matters thecritical audit matters communicated below are matters arising from the current period audit of the consolidated financial statementsthat were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures thatare material to the consolidated 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 consolidated financial statements, takenas a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical auditmatters or on the accounts or disclosures to which they relate. f-1 business combinations critical audit matter description asdescribed in notes 2 and 3 to the consolidated financial statements, the company accounts for its business combination using theacquisition method of accounting. under the acquisition method, the assets acquired, and the liabilities assumed, and the considerationtransferred are recorded at the date of acquisition at their respective values. finite-lived intangible assets are amortized overthe expected life of the asset. any excess of the purchase price over the estimated fair values of the net assets acquired isrecorded as goodwill. the company purchased uis agency llc for a total purchase price of $883,334 in 2020, which resulted in $161,100of finite-lived intangible assets and $716,462 of goodwill. the company utilized a valuation consultant to calculate the purchaseprice allocation. the process for estimating fair values of identifiable intangible assets and certain tangible assets of the uis agency llc acquisition requires management to make significant estimates and assumptions, including estimating future cashflows, selection of different valuation methods, volatility factors and discount rates. weidentified the estimation of the identifiable intangible assets and purchase price allocation as a critical audit matter. auditingmanagement’s judgments regarding the selection of valuation methods, significant estimates related to assumptions includingthe selection of the discount rates, volatility factors and future cash flows, required a high degree subjectivity and an increasedextent of effort, including the need to involve a firm employed valuation specialists. howthe critical matter was addressed in the audit theprimary audit procedures we performed to address this critical audit matter included: -obtaining an understanding over the company’s business combinations process, including management’s review of the significant assumptions and determination of fair value methods utilized. -utilizing a firm employed valuation specialist with the skills and knowledge to assist in: (i) evaluating the reasonableness of the purchase price allocation methodology used by management to determine the fair value of the consideration transferred and the tangible assets acquired, (ii) evaluating management’s significant assumptions including comparing to third party market data, (iii) performing recalculations of the methods utilized by management. -testing the completeness and accuracy of the underlying data utilized by management. impairment assessment of goodwill and finite-lived intangible assets critical audit matter description asdescribed in notes 2 and 7 to the consolidated financial statements, the company’s goodwill at december 31, 2020 was $9,265,070,which arose as a result of the purchase price of business acquisitions exceeding the estimated fair value of identified tangibleand finite-lived intangible assets acquired. the company’s finite-lived intangible assets at december 31, 2020, were $5,685,560which principally consist of trademarks, customer relationships and non-competition agreements. goodwilland intangible assets are tested for impairment as follows: -goodwill is tested for impairment at least annually at the reporting unit level or more frequently when events occur, or circumstances change. the evaluation requires a comparison of the estimated fair value of the asset to the carrying value of the asset. the fair value is estimated based upon discounted future cash flow projections. if the carrying value of the asset exceeds its fair value, an impairment charge is recorded. f-2 -finite-lived intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. if impairment indicators exist, the undiscounted future cash flows associated with the expected service potential of the asset are compared to the carrying value of the asset. if the projection of undiscounted cash flows is less than the carrying value of a finite-lived intangible asset, an impairment charge would be recorded. the company utilized a valuation consultant to perform an impairment test on both goodwill and finite-lived intangible assets. therewas no impairment loss identified during 2020 as a result of the test. the determination of the future cash flows of the goodwilland intangible assets requires management to make significant estimates and assumptions related to forecasts of future revenues,operating margins and discount rates. as disclosed by management, changes in these assumptions could have a significant impacton either the future cash flows and therefore, on the amount of any impairment charge. the determination of an impairment indicatoron goodwill and finite-lived intangible assets requires management judgments and involves significant assumptions. weidentified the impairment assessment of goodwill and intangible assets as a critical audit matter. auditing management’sjudgments regarding the evaluation of impairment indicators, forecasts of future revenue and operating margin, and the discountrate to be applied involve a high degree of subjectivity. howthe critical matter was addressed in the audit theprimary audit procedures we performed to address this critical audit matter included: -reviewing management’s evaluation of relevant events and circumstances to determine whether it is more likely than not that the fair value of the company is less than its carrying value, and then corroborate that analysis with external information and evidence obtained in other areas of the audit. -utilizing a firm employed valuation specialist with the skills and knowledge to assist in: (i) evaluating the appropriateness of the valuation techniques used in management’s discounted cash flow model, (ii) evaluating the significant assumptions used by management including comparing with third party market data, (iii) performing a retrospective review of forecasts to historical operating results and evaluating whether the assumptions used were reasonable considering current information as well as future expectations as well as using additional evidence obtained in other areas of the audit, (iv) performing recalculations of the methods utilized by management. -testing completeness and accuracy of the data used in the impairment analysis. /s/ mazars usa llp wehave served as the company’s auditor since 2020.	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 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.70accounting for the loyalty program description of the matter the company recognized $346 million of revenues during the year ended december 31, 2021 and had deferred revenues of $535 million and a liability for guest loyalty program of $2,364 million as of december 31, 2021 associated with the hilton honors guest loyalty and marketing program (the “loyalty program”). as discussed in note 4 to the consolidated financial statements, the company has a performance obligation to provide or arrange for the provision of goods or services, for free or at a discount, to hilton honors members in exchange for the redemption of points earned through participation in the loyalty program. the consideration for the loyalty program is received from hotel properties or other program partners at the time points are earned by hilton honors members. such amounts are recognized as revenue when the related point obligation is satisfied based upon the estimated standalone selling price per point in excess of the related cost per point.auditing loyalty program results is complex due to: (1) the complexity of models and high volume of data used to monitor and account for the loyalty program results, and (2) the complexity of estimating the standalone selling price per loyalty program point, including the estimated breakage rate of loyalty program points. such estimates are complex given the significant estimation associated with expected future redemption activity. 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 process of accounting for the loyalty program during the year. for example, we tested controls over management’s review of the assumptions and data inputs utilized by third-party actuaries to assist the company in determining the fair value of the future award redemption obligation and breakage rate of loyalty program points and management’s review of activity and data inputs to their accounting model.to test the recognition of revenues and costs associated with the loyalty program, we involved specialists on our team and performed audit procedures that included, among others, testing the clerical accuracy and consistency with u.s. gaap of the accounting model developed by the company to recognize revenue and costs associated with the loyalty program. we tested significant inputs into the accounting model, including the estimated standalone selling price and recognition of points earned and redeemed during the period. we involved our actuarial professionals to assist in our testing procedures with respect to the estimate of the breakage of loyalty program points and the ultimate estimated redemption cost. we evaluated management’s methodology for estimating the breakage of loyalty program points, as well as tested underlying data and assumptions used in estimating the breakage rate. accounting for income taxes description of the matter the company recognized income tax expense of $153 million during the year ended december 31, 2021, and unrecognized tax benefits of $375 million as of december 31, 2021. as discussed in note 13 to the consolidated financial statements, changes to the company’s unrecognized tax benefits relate to, among others, uncertainty regarding prior year tax returns in jurisdictions where the company operates, changes in reserves related to hilton honors, and reductions and settlements related to the conclusion of certain audits.auditing the accounting for income taxes is complex as a result of: (1) operations in multiple foreign tax jurisdictions and international restructuring transactions, (2) the judgment and estimation associated with both the identification and measurement of the company's unrecognized tax benefits, including its evaluation of the technical merits related to matters for which no reserves or partial reserves have been recorded, and (3) the significant estimation associated with the measurement of unrecognized tax benefits outstanding as of the balance sheet date.71how 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 process of accounting for income taxes, including unrecognized tax benefits, during the year. for example, we tested management’s controls over the review of tax positions taken by the company to determine whether they met the threshold for recognition within the consolidated financial statements.to test the recognition of the company’s unrecognized tax benefits and measurement of unrecognized tax benefits, we involved tax professionals with specialized skills and knowledge to assess the technical merits of the company’s tax positions and performed audit procedures that included, among others, evaluation of communications with relevant taxing authorities, evaluation of whether management appropriately considered new information that could significantly change the recognition, measurement or disclosure of the unrecognized tax benefits, and testing the assumptions used by management in estimating the valuation of any associated liability.accounting for other expenses from managed and franchised properties and general and administrative expenses description of the matter the company recognized other expenses from managed and franchised properties of $3,454 million and general and administrative expenses of $405 million during the year ended december 31, 2021. as discussed in note 2 to the consolidated financial statements, the company incurs certain direct and indirect expenses that are for the benefit of, and contractually reimbursable from, hotel owners. such amounts (“cost reimbursements”) are recorded in the period in which the expense is incurred as other expenses from managed and franchised properties and the accounting for indirect cost reimbursements includes judgment with respect to the allocation of certain costs between reimbursable and non-reimbursable. auditing the classification of indirect reimbursements recognized within other expenses from managed and franchised properties and general and administrative expenses is complex as a result of: (1) judgment associated with testing management’s conclusions regarding the allocation of costs between reimbursable and non-reimbursable expenses, presented as other expenses from managed and franchised properties and general and administrative expenses, respectively, (2) the complexity associated with allocating indirect expenses due to the high volume of data utilized by management in establishing and maintaining allocations for indirect expenses, and (3) incentives for management to limit the growth in general and administrative expenses due to the impact on publicly disclosed earnings metrics. 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 process of accounting for cost reimbursements, general and administrative expenses, and the process for allocating indirect reimbursement expenses during the year. for example, we tested management’s controls over the review of the allocation of certain indirect costs to determine if they were appropriately classified.to test the recognition of cost reimbursements for appropriate classification, we performed audit procedures that included, among others: testing a sample of transactions that were classified within other expenses from managed and franchised properties in order to evaluate the appropriate accounting treatment and reasonableness of classification; comparing budgeted amounts and initial allocations to actual activity and evaluating the reasonableness of any resulting material changes to allocations of indirect expenses; performing analytic procedures over other expenses from managed and franchised properties and general and administrative expenses in order to identify indicators of material errors in the classification of expenses based on established trends and expectations; and testing material manual journal entries made to other expenses from managed and franchised properties and general and administrative expenses./s/ ernst & young llp we have served as the company's auditor since 2002.	4
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.acquisition of devcool inc- valuationof the u.s. customer relationships intangible asset description of matter as described in note 8 to the consolidatedfinancial statements, on december 10, 2021, the company acquired devcool for total consideration of $7,700,000 consisting of cashcomponent of $4,500,000 equity component of $700,000 and earnout of $ 2,500,000. the acquisition resulted in $6 million of customerrelationships intangible assets being recorded, a significant portion of which is allocated to the u.s. customer relationshipsintangible asset. the fair values of the customer relationships intangible assets acquired were estimated using discounted cash flowanalyses. significant inputs and assumptions used in the customer relationship intangible asset valuations include projectedrevenues, contributory asset charges, tax savings due to amortization, income tax rates, customer attrition rates and discountrates. theprincipal considerations for our determination that performing procedures relating to the valuation of the acquired u.s. customer relationshipsintangible asset from the acquisition of devcool is a critical audit matter are (i) the significant judgment by management when determiningthe fair value of the acquired u.s. customer relationships intangible asset; (ii) a high degree of auditor judgment, subjectivity, andeffort in performing procedures and evaluating management’s significant assumptions related to projected revenues, contributoryasset charges, the tax savings due to amortization, the income tax rate, the customer attrition rate, and the discount rate; and (iii)the audit effort involved the use of professionals with specialized skill and knowledge.how we addressed the matter in our audit addressingthe matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidatedfinancial statements. these procedures included testing the effectiveness of controls relating to the acquisition accounting, includingcontrols over management’s valuation of the u.s. customer relationships intangible asset. these procedures also included, amongothers (i) reading the purchase agreement; (ii) testing management’s process for determining the fair value of the u.s. customerrelationships intangible asset; (iii) evaluating the appropriateness of the discounted cash flow analysis; (iv) testing the completenessand accuracy of the underlying data used in the discounted cash flow analysis; and (v) evaluating the reasonableness of the significantassumptions used by management related to projected revenues, contributory asset charges, the tax savings due to amortization, the incometax rate, the customer attrition rate, and the discount rate. evaluating management’s significant assumptions related to projectedrevenues and the income tax rate involved evaluating whether the significant assumptions used by management were reasonable considering(i) the current and past performance of devcool; (ii) the consistency with external market and industry data; and (iii) whether thesesignificant assumptions were consistent with evidence obtained in other areas of the audit. revenuerecognition descriptionof the matter the company recorded gross revenue of $35.3 million for the year ended december 31, 2021. as disclosed in note 2, the company records revenuewhen they transfer control of deliverables (services, solutions, and platform) to their clients in an amount reflecting the considerationto which they expect to be entitled. the company enters into contractual obligations with the customers to perform (i) strategic advisoryservices, implementation services and development services which are distinct performance obligation and is recognized on time-and-materialor fixed-price project basis. revenue from managed services and support are recognized based on ssp (standalone selling price), ratablyon a straight-line basis over the period in which the services are rendered. the revenue from platform services are recognized on a fixed-pricesolutions delivery model.weidentified the evaluation of the company’s analysis of terms and conditions in contracts with customers and their effect on revenuerecognition as a critical audit matter. complex auditor judgment was required to assess the company’s determination of the performanceobligations in such contracts and recognition of such items as over time or point-in-time.how we addressed the matter in our audit theprimary procedures we performed to address this critical audit matter included:•obtaining an understanding of the company’s revenue recognition policy and evaluated for appropriateness.•evaluating the design and implementation of certain internal controls related to the company’s revenue recognition process, including controls related to the company’s analysis of terms and conditions review of contracts with customers and their effect on revenue recognition.•inquiring of personnel outside of the accounting function to corroborate our understanding of certain terms and conditions for a selection of revenue transactions.•testing a sample of revenue transactions by inspecting the underlying customer agreements and invoices, and evaluating the company’s recognition in accordance with revenue recognition policies.•tested a sample of revenue contracts to ensure appropriate identification of performance obligations and recognition of either point-in-time or over-time. /s/ ram associates ram associates we have served as the company’s auditor since 2020	2
critical audit matters the critical audit matter communicated below isa matter arising from the current period audit of the financial statements that was communicated or required to be communicated to theaudit committee and that: (1) relate 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 separate opinionson the critical audit matter or on the accounts or disclosures to which it relates. f-1 derivative liability as discussed in note 7, the company borrows fundsthrough the use of convertible notes payable that contain a conversion price that fluctuates with the stock price. due to the fluctuationof the conversion price, the embedded conversion feature requires bifurcation from the host contract and is recorded as a liability subjectto market adjustments as of each reporting period. significant judgment is exercised by the company in determining derivative liabilityvalues for these convertible note agreements, including the use of a specialist engaged by management. we evaluated management’s conclusions regardingtheir derivative liability and reviewed support for the significant inputs used in the valuation model, as well as assessing the modelfor reasonableness. /s/ m&k cpas, pllc houston, tx april 12, 2022 f-2 report of independent registered public accounting firm to the shareholders and board of directors of fourth wave energy, inc opinion on the financial statements we have audited the accompanying balance sheet of fourth wave energy,inc (the “company”) as of december 31, 2020 and the related statements of operations, stockholders’ deficit, and cashflows for the year then ended, and the related notes (collectively referred to as the “financial statements”). in our opinion,the financial statements present fairly, in all material respects, the financial position of the company as of december 31, 2020, andthe results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally acceptedin the united states of america. basis for opinion these financial statements are the responsibility of the company’smanagement. our responsibility is to express an opinion on the company’s financial statements based on our audit. we are a publicaccounting firm registered with the public company accounting oversight board (united states) ("pcaob") and are required tobe independent with respect to the company in accordance with the u.s. federal securities laws and the applicable rules and regulationsof the securities and exchange commission and the pcaob. we conducted our audit in accordance with the standards of the pcaob.those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are freeof material misstatement, whether due to error or fraud. the company is not required to have, nor were we engaged to perform, an auditof its internal control over financial reporting. as part of our audit we are required to obtain an understanding of internal controlover financial reporting but not for the purpose of expressing an opinion on the effectiveness of the company's internal control overfinancial reporting. accordingly, we express no such opinion. our audit included performing procedures to assess the risks of materialmisstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. such proceduresincluded examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. our audit also includedevaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentationof the financial statements. we believe that our audit provides a reasonable basis for our opinion. /s/ malone bailey, ll pwww.malonebailey.com we have served as the company's auditor from 2019 to 2021.houston, texas march 31, 2021 f-3 fourth wave energy, inc.balance sheets december 31, 2021	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.real estate recoverability assessment — refer to note 2 to the financial statements critical audit matter description the company’s wholly owned properties are individually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. an impairment exists when the carrying amount of an asset exceeds the aggregate projected future cash flows over the anticipated holding period on an undiscounted basis. the recoverability assessment is determined based on projected future cash flows that utilize capitalization rates and available market information. the company’s undiscounted cash flows requires management to make significant estimates and assumptions related to future market rental rates and capitalization rates. we identified the recoverability assessment of wholly owned properties as a critical audit matter because of the significant estimates and assumptions related to future market rental rates and capitalization rates. performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, where applicable.61how the critical audit matter was addressed in the audit our audit procedures related to the recoverability assessment of wholly owned properties included the following, among other things:•we tested the effectiveness of controls over management’s evaluation of recoverability of its wholly owned properties, including those over future market rental rates and capitalization rates used in the assessment.•we evaluated the reasonableness of future market rental rates and capitalization rates used by management with independent market data, focusing on geographical location and property. in addition, we developed ranges of independent estimates of future market rental rates and capitalization rates and compared those to the amounts used by management.•we involved our fair value specialists in providing comparable market transaction details to further support the future market rental rate and capitalization rate assumptions, as applicable.•we evaluated the reasonableness of management’s projected future cash flows by comparing management’s projections to the company’s historical results.•we evaluated whether the assumptions were consistent with evidence obtained in other areas of the audit./s/ deloitte & touche llp new york, new york february 14, 2022we have served as the company’s auditor since 1976.	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 (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.104table of contents allowance for loan losses:as discussed in note 1 and note 5 to the consolidated financial statements, the company’s allowance for loan losses balance was $30,616,000 as of december 31, 2019 and consists of three primary components: (1) the specific allowance, which results from the analysis of identified credits that meet management’s criteria of loans to be reviewed individually to determine the amount of impairment ($941,000); (2) the formula allowance, which is based on the company’s historical loss experience across its major loan categories ($17,529,000); and (3) the environmental factor allowance, which is intended to absorb losses that may not be provided for by the other components ($12,146,000). the company’s allowance for loan losses is a material and complex estimate requiring significant management judgment in the evaluation of the credit quality and the estimation of incurred losses inherent within the loan portfolio as of the balance sheet date. in estimating the allowance for loan losses, the company considers relevant credit quality indicators for each loan segment, stratifies loans by risk rating, and estimates losses for each loan type based upon their nature and risk profile. this process requires significant management judgment in the review of the loan portfolio and assignment of risk ratings based upon the characteristics of loans. in addition, estimation of incurred losses inherent within the portfolio requires significant management judgment, particularly as it relates to the determination of the historical loss periods used, the loss recognition periods used by loan type, and the environmental factors used to estimate losses related to factors that are not captured in the historical loss rates. auditing these complex judgments and assumptions involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters.the primary procedures we performed to address this critical audit matter included:•testing the design, implementation and operating effectiveness of controls relating to management’s calculation of the allowance for loan losses, including controls over the review of loans and assignment of risk ratings, and evaluation of the environmental factors used to estimate losses related to factors that are not captured in historical loss rates.•evaluating the appropriateness of the company’s loan rating policy and testing the consistency of its application.•testing the completeness and accuracy of the loan data used in the determination of the formula allowance. •evaluating the reasonableness and appropriateness of assumptions and sources of data used by management in forming the qualitative loss factors by analyzing historical data used in developing the assumptions, including assessment of whether there were additional qualitative considerations relevant to the portfolio, performing a retrospective review of historic loan loss experience, and performing a sensitivity analysis to evaluate the assumptions most significant to the estimate.•testing the mathematical accuracy and computation of the allowance for loan losses by re-performing or independently calculating significant elements of the allowance based on relevant source documents./s/ moss adams llp sacramento, california march 2, 2020 we have served as the company’s auditor since 2018.	2
critical audit matters the critical audit matterscommunicated 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 arematerial 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 financialstatements, 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 notes 1 and 3 to the consolidated financial statements, the companys consolidated goodwill balance was $2.2 billion as of december 31, 2020. management tests goodwill for impairment at the beginning 69 table of contentsof the fourth quarter of a given fiscal year, and whenever events or changes in circumstances indicate that the carrying value of a reporting unit may exceed its fair value. upon performing thequantitative impairment test, if the fair value of the reporting unit is less than its carrying amount, goodwill is impaired and the excess of the reporting units carrying value over the fair value is recognized as an impairment loss.management performed a quantitative impairment test as of october 1, 2020 for its reporting units, and determined that its goodwill is not impaired. management utilizes a combination of income and market approaches to estimate the fair value ofits reporting units. the income approach utilizes estimates of discounted cash flows of the reporting units, which requires assumptions for the reporting units revenue growth rates, operating margins, terminal growth rates, and discount rates,all of which require significant management judgment. the market approach applies market multiples derived from the historical earnings data of selected guideline publicly-traded companies to the reporting units businesses to yield a value ofeach reporting unit, which requires significant management judgment. the principal considerations for our determination that performingprocedures relating to the goodwill impairment assessment is a critical audit matter are (i) the significant judgment by management when determining the fair value estimates of the reporting units; (ii) the high degree of auditor judgment,subjectivity, and effort in performing procedures and evaluating managements significant assumptions related to revenue growth rates, operating margins, terminal growth rates, discount rates, and market multiples; and (iii) the auditeffort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating auditevidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included, among others, (i) testing managements process for determining the fair value estimates of the reporting units;(ii) evaluating the appropriateness of the income and market approaches, and the combination of the approaches; (iii) testing the completeness and accuracy of the underlying data used in the fair value estimates; and (iv) evaluatingthe reasonableness of the significant assumptions used by management related to revenue growth rates, operating margins, terminal growth rates, discount rates, and market multiples. evaluating managements assumptions related to revenue growthrates and operating margins involved evaluating whether the assumptions were reasonable considering (i) the current and past performance of the reporting units; (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 and marketapproaches, and the combination of the approaches and (ii) the reasonableness of the significant assumptions related to the terminal growth rates, discount rates, and market multiples. indefinite-lived intangible assets impairment assessment as described in notes 1 and 3 to the consolidated financial statements, the companys consolidated indefinite-lived intangible assets net carryingvalue was $900 million as of december 31, 2020. intangible assets with indefinite useful lives are not amortized but tested annually, at the beginning of the fourth quarter, for impairment or more often if events occur or circumstanceschange that would create a triggering event. management performed a quantitative impairment test as of october 1, 2020, and determined that its indefinite-lived intangible assets are not impaired. management tests its indefinite-livedintangible assets for impairment using a relief from royalty method by comparing the estimated fair values of the indefinite-lived intangible assets with the carrying values. the estimates used in the determination of fair value are subjective innature and involve the use of significant assumptions. these estimates and assumptions include revenue growth rates, terminal growth rates, discount rates, and royalty rates, all of which require significant management judgment. the principal considerations for our determination that performing procedures relating to the indefinite-lived intangible assets impairment assessment is acritical audit matter are (i) the significant judgment by management when determining the fair value estimates of the indefinite-lived intangible assets; (ii) the high degree of auditor judgment, subjectivity, and effort in performingprocedures and evaluating managements significant 70 table of contentsassumptions related to revenue growth rates, terminal growth rates, discount rates, and royalty rates; and (iii) the audit effort involved the use of professionals with specialized skill andknowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on theconsolidated financial statements. these procedures included, among others, (i) testing managements process for determining the fair value estimates; (ii) evaluating the appropriateness of the relief from royalty method;(iii) testing the completeness and accuracy of the underlying data used in the fair value estimates; and (iv) evaluating the reasonableness of the significant assumptions used by management related to revenue growth rates, terminal growthrates, discount rates, and royalty rates. evaluating managements assumption related to revenue growth rates involved evaluating whether the assumption was reasonable considering (i) the current and past performance of the underlyingassets; (ii) the consistency with external market and industry data; and (iii) whether this assumption was consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used toassist in evaluating (i) the appropriateness of the relief from royalty method and (ii) the reasonableness of the significant assumptions related to the terminal growth rates, discount rates, and royalty rates. /s/ pricewaterhouse coopers llp irvine, california march 16, 2021 we have served as the companysauditor since 2003.	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.revenue – long term contracts — refer to note 2 to the financial statements critical audit matter description the company recognizes revenue on long-term contracts with u.s. government customers over time as the work progresses, either as products are produced or as services are rendered, because transfer of control to the customer is continuous. ordinarily the company’s contracts represent a single distinct performance obligation due to the highly interdependent and interrelated nature of the underlying goods, services, or both. the use of the cost-to-cost method to measure performance progress over time is supported by clauses in the related contracts that allow the customer to unilaterally terminate the contract for convenience, pay the company for costs incurred plus a reasonable profit, and take control of any work in process. the accounting for these contracts involves judgment, 56table of contentsparticularly as it relates to the process of estimating total material costs, labor costs, and profit for the performance obligation. cost of sales is recognized as incurred, and revenues are determined by adding a proportionate amount of the estimated profit to the amount reported as cost of sales. for the year ended december 31, 2019, revenue was $8.9 billion, most of which was derived from long-term contracts.given the judgments necessary to estimate total material costs, labor costs, and profit in order to recognize revenue for certain long-term contracts, auditing such estimates required extensive audit effort due to the complexity of long-term contracts and a high degree of auditor judgment, especially given the limited historical data for certain contracts, 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 management’s estimates of total material costs, labor costs, and profit in order to recognize revenue for certain long-term contracts included the following, among others: •we tested the effectiveness of controls over long-term contract revenue, including management’s controls over the estimates of total material costs, labor costs, and profit for performance obligations. •we developed independent estimates of revenue based on historical profit margins and current year recorded costs. we compared those estimates to revenue recognized by the company.•we obtained the population of active contracts during 2019 and assessed the financial and performance risk of the contracts based on our knowledge gained through prior year audits of the company, industry experience, and ongoing conversations with members of program management regarding the contract performance to identify contracts that we believe were riskier. for those contracts selected, we performed further audit procedures that were tailored to address the specific characteristics of audit interest identified. procedures performed, among others, included:◦read the relevant portions of contracts to understand contract terms, including incentives, fee arrangement, scope of work, and other unusual contract terms.◦compared the transaction prices to the consideration expected to be received based on current rights and obligations under the contracts and any modifications that were agreed upon with the customers. ◦tested management’s identification of distinct performance obligations by evaluating whether the underlying goods, services, or both were highly interdependent and interrelated.◦tested the accuracy and completeness of the costs incurred to date for the performance obligation. ◦evaluated the estimates of total materials costs, labor costs, and profit for the performance obligation by: ▪evaluating management’s ability to achieve the estimates of total material costs, labor costs and profit by 1) performing inquiries with the business managers and corroborating the information gained from these inquiries with other parties who have detailed knowledge of the contract’s progress, issues being encountered, and overall production status, 2) considering management’s historical performance against estimates, 3) detail testing the appropriateness of the timing of changes in estimates, and 4) considering any contradictory information. ▪comparing materials cost estimates to purchase orders, supplier contracts, or other source documents.▪comparing management’s estimates for the selected contracts to costs and profits of similar performance obligations, when applicable. /s/ deloitte & touche llp richmond, virginia february 13, 2020we have served as the company’s auditor since 20115	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.indefinite-lived intangible asset impairment assessment – trade name as described in notes 1 and 5 to the consolidated financial statements, the carrying amount of the company’s trademarks and tradenames was $1,096 million as of december 31, 2021, a portion of which related to one trade name. management tests indefinite-lived intangible assets for impairment as of october 1st each year, or more frequently should circumstances change or events occur that would more likely than not reduce the fair value below its carrying amount. management uses the royalty relief approach to determine whether it is more likely than not that the fair value of these assets is less than its carrying amount. when applying the royalty relief approach, management performs a discounted cash flow analysis based on the value derived from owning the trade name and being relieved from paying royalty to third parties. significant assumptions used include the discrete-period revenue growth rate, royalty rate, discount rate, and terminal value. the principal considerations for our determination that performing procedures relating to the indefinite-lived intangible asset impairment assessment for the trade name is a critical audit matter are (i) the significant judgment by management when developing the fair value measurement of the trade name; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to the discrete-period revenue growth rate, royalty rate, 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 management’s indefinite-lived intangible asset impairment assessment, including controls over the review of significant assumptions used in the valuation of the trade name. these procedures also included, among others (i) testing management’s process for developing the fair value measurement of the trade name; (ii) evaluating the appropriateness of the royalty relief approach; (iii) testing the completeness and accuracy of underlying data used in the approach; and (iv) evaluating the reasonableness of the significant assumptions used by management related to the discrete period revenue growth rate, royalty rate, and discount rate. evaluating management’s assumptions related to the discrete-period revenue growth rate, royalty rate, and discount rate used in estimating the fair value of the trade name involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the business associated with the trade name; (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 discount rate and royalty rate. /s/ pricewaterhouse coopers llp toledo, ohio february 16, 2022we 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 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.accounting for rate regulation as described in notes 1 and 8 to the consolidated financial statements, the company applies the authoritative guidance for accounting for certain types of regulation, which requires the company to record regulatory assets and regulatory liabilities. regulatory assets represent costs which are deferred due to the probable future recovery from customers through regulated rates while regulatory liabilities represent the excess recovery of costs or accrued credits which were deferred because management believes it is probable such amounts will be returned to customers through future regulated rates. as disclosed by management, management continually assesses whether the regulatory assets and liabilities meet the criteria for probability of future recovery or deferral. this assessment considers factors such as changes in the regulatory environment, recent rate orders to other regulated entities under the same jurisdiction, and the status of any pending or potential deregulation legislation. regulatory assets and liabilities are amortized in the consolidated statements of income consistent with the recovery or refund included in customer rates. as of december 31, 2021, there was $109.0 million of deferred costs in regulatory assets and $163.7 million of accrued credits within regulatory liabilities. the principal considerations for our determination that performing procedures relating to the company’s accounting for the effects of rate regulation is a critical audit matter are the significant judgment by management in estimating the probability of future recovery of regulatory assets and refunds of regulatory liabilities; this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to the recoverability of regulatory assets and the refund of regulatory liabilities. 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 assessment of the probability of recoverability of regulatory assets and refunds of regulatory liabilities. these procedures also included, among others, evaluating (i) management’s assessment of correspondence with regulators, (ii) the reasonableness of management’s judgments regarding the probability of recovery of regulatory assets and refund of regulatory liabilities, and (iii) the application of the impacts of changes to new or existing commission orders. /s/ pricewaterhouse coopers llp chicago, illinois february 23, 2022 we have served as the company's auditor since 1993.	3
critical audit matter 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 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 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.64revenue recognition – measuring variable consideration description of the matter as per the company's consolidated statements of operations, the net revenues recognized during the fiscal year of 2020 amounted to a sum of $494.4 million, which included variable consideration estimates. as described in note 2 to the consolidated financial statements, the transaction price is determined based on the consideration to which the company will be entitled in exchange for providing optune solution. the company provides certain patients with implicit price concessions, which results in variable consideration. according to historical records, the company expects to receive, in aggregate for a given portfolio, less than the gross revenue net of explicit discounts. auditing the company's measurement of variable consideration involved challenging judgment because the calculation involves uncertainty and subjective management assumptions about estimates of expected price concessions. the implicit discount includes both an estimate of claims that will pay at an amount less than billed and an estimate of claims that will not pay within a given time horizon. the implicit discount adjustments to the transaction price are due to concessions, not collectability concerns driven by payer credit risk.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 process to calculate variable consideration, including the underlying assumptions about estimates of expected price concessions.our audit procedures included, among others, evaluating the methodology used, analyzing the significant assumptions discussed above, and testing the accuracy and completeness of the underlying data used in management's calculation. this included testing inputs of the calculation by reconciliation of the data between the various information systems performing independent recalculation of the company's estimate and evaluating the historical accuracy of management's estimates by comparing such estimates to subsequent actual results.65accounting for the issuance of convertible senior notes description of the matter as explained in note 10 to the consolidated financial statements, in november 2020, the company issued $575 million of 0% coupon rate convertible senior notes due november 2025 (the "notes"). in accounting for the issuance of the notes, management allocated the total proceeds into liability and equity components. the carrying amount of the liability component was calculated by estimating the fair value of the notes if there were no associated convertible features. the carrying amount of the equity component, representing the conversion option was determined by deducting the fair value of the liability component from the principal amount of the notes. the valuation model used in determining the fair value of the liability component for the notes includes assumptions subject to management's judgement, including the synthetic credit rating. auditing management’s evaluation of the transaction was complex and required a high degree of auditor judgement and audit effort due to the inherent complexity in assessing the accounting for the notes. this required an assessment of the valuation of the fair value of the liability component of the notes, which included evaluation of assumptions subject to management's judgement in determining the borrowing rate.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls in respect of the company’s notes transaction, including controls over the initial recognition and measurement of the notes and recording of the associated liability and equity components. to test the initial accounting for the notes transaction, our procedures included, among others, inspection of the underlying agreements and testing management’s evaluation and application of the relevant accounting guidance. we also involved our valuation specialists to evaluate the company’s determination of the fair value of the liability component of the notes. we tested the appropriateness of the methodology, evaluated the reasonableness of the underlying assumptions used to determine the borrowing rate, such as the company’s synthetic credit rating, and performed an independent calculation of the carrying amounts attributable to the liability and equity components. additionally, we tested the source information underlying the valuation assumptions and inputs used to determine the fair value and the mathematical accuracy of the calculation. we also evaluated the company’s disclosures regarding the issuance of the notes transaction included in note 10.kost forer gabbay & kasierera member of ernst & young global we have served as the company‘s auditor since 2003.	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. f-2 revenue recognition related to the cost-based input method and variable consideration description of the matter as described in notes 2 and 3 to the consolidated financial statements, the company generally recognizes revenue over time as services are provided, as most of its contracts involve a continuous transfer of control to the customer. for certain of these contracts, revenue is recognized under a cost-based input method that requires an estimate of total costs at completion of the performance obligation, and certain contracts include variable consideration (e.g., award or incentive fees) that require estimates of the amounts that are probable estimates of costs at completion and variable consideration are highly subjective to develop and can change over the contract performance period for a variety of reasons and, if significant, these changes could have a material effect on the company’s results of operations. auditing revenue recognition based on the cost-based input method involved subjective auditor judgment because the company’s estimates include costs at completion. the estimates of costs at completion are based on management’s assessment of the stage of completion of the performance obligations and the time and materials necessary to fulfill its performance obligations under the contracts. auditing variable consideration involved subjective auditor judgement because the company’s estimates include an expectation of award and incentive fees. the estimates of variable consideration for a contract are based on, among other things, the company’s historical experience earning award or incentive fees on that contract or other similar contracts. how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over revenue recognition under the cost-based input method and for variable consideration. for example, we tested controls over the determination of significant assumptions regarding the estimation of costs to be incurred for the performance obligations, controls evaluating the appropriateness of changes in estimated future costs, and controls over estimating the portion of award or incentive fees probable to be earned. to test the recognition of revenue under the cost-based input method, our audit procedures included among others, reviewing management’s projected costs for consistency with contract terms, obtaining an understanding of the stage of completion through review of customer correspondence, evidence of stage of completion including discussion with program teams, and comparing actual results to prior management estimates. to test the estimates of the portion of award or incentive fees probable to be earned, our audit procedures included among others, agreeing data from the company’s calculation to contract documentation supporting fees previously awarded for a contract or other similar contracts, and inspection of customer correspondence and considered the sensitivity of the estimates based on the range of historical experience earning award or incentive fees. government contracting matters - provision for claimed indirect costs description of the matter as discussed in note 22 to the consolidated financial statements, in the ordinary course of business, agencies of the u.s. government, including the defense contract audit agency (dcaa), routinely audit the company’s indirect costs and business practices for compliance with the cost accounting standards and the federal acquisition regulation. such audits may result in, and have historically resulted in, the company’s inability to retain certain claimed indirect costs, including executive and employee compensation, due to differing views of the allowability and reasonableness of such costs. as of march 31, 2020, years subsequent to the company’s fiscal year 2011 remained subject to audit and final resolution. the company recognized a liability of $224.6 million for estimated adjustments to claimed indirect costs based on its historical dcaa audit results, including the final resolution of such audits with the defense contract management agency (dcma) (the provision for claimed indirect costs). auditing the provision for claimed indirect costs was complex due to the inherently judgmental nature of management’s estimate of adjustments to claimed indirect costs based on the number of years that remain open to audit and expected final resolution by agencies of the u.s. government. significant changes in management’s estimate could have a material effect on the company’s results of operations.f-3how 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 determination of its provision for claimed indirect costs. for example, we tested controls over the application of the available historical information from resolution of audits and communications from agencies of the u.s. government utilized in the determination of the estimate. we also tested management’s controls over the completeness and accuracy of the data used.to test the provision for claimed indirect costs, we performed audit procedures that included, among others, testing the clerical accuracy of the estimates and the completeness and accuracy of the data utilized in determining the provision. we inspected communications with the dcaa or dcma including prior audit reports and final resolutions. we also engaged our government contracting specialists to assist in identifying trends and recent experience in dcaa audits to evaluate the data the company used to estimate the provision for claimed indirect costs. unrecognized tax benefits description of the matter as discussed in notes 2 and 14 to the consolidated financial statements, the company is subject to federal, state and foreign taxation in various jurisdictions. the company reserves for uncertain tax positions related to unrecognized income tax benefits where it is not more likely than not that the company’s tax position will be sustained. during the year ended march 31, 2020, the company has recorded additional unrecognized tax benefits of $34.0 million for tax positions related to prior years and $11.0 million related to tax positions in the current year. these reserves involve considerable judgment and estimation and are evaluated by management based on available information. auditing the unrecognized tax benefits was complex due to the significant judgment in applying the tax law and inherent uncertainty involved in predicting the ultimate resolution of the matter with the taxing authority.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 uncertain tax positions. for example, we tested controls over management’s review of the application of the tax law and the analysis performed to determine the unrecognized tax benefits. we also tested management’s controls over the completeness and accuracy of the data used in the calculation of the liabilities recorded. to test the unrecognized tax benefits, we performed audit procedures that included, among others, understanding the application of the tax law and rationale used by management and evaluating whether the uncertain tax position met the “more likely than not” recognition threshold. for example, we verified our understanding of the relevant facts by reading the company's analysis of the application of the tax law. we involved our tax subject matter resources in the assessment of the technical merits of the company’s tax positions, considering the applicable tax laws, and the methodology applied. we assessed the mathematical accuracy of management’s calculations, reviewed contracts and other source documents and performed sensitivity analyses related to management’s estimate. /s/ ernst & young llp we have served as the company's auditor since 2006t	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 requiredto 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 ofcritical 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 theaccounts or disclosures to which they relate. deferred revenue as described further in note 1 to the financial statements, under the capacitypurchase agreement between the company and united airlines, the company is paid a fixed amount per aircraft per day for each month during the term of the agreement. the company recognizes revenue related to the fixed payment on a proportional basistaking into account the number of flights actually completed in that period relative to the number of flights expected to be completed in subsequent periods during the remaining term of the agreement. due to the material decrease in completedflights for the year ended december 31, 2020 from historical levels and anticipated future levels in periods within the remaining contract term, air wisconsin determined that the amount of the fixed payment it received was disproportionatelyhigh relative to anticipated fixed revenue for future periods due to fewer flights completed. accordingly, air wisconsin deferred recognizing revenue in the amount of $43.2 million in the year ended december 31, 2020. we identified thedetermination of the deferred revenue as a critical audit matter. the principalconsiderations for our determination that the deferred revenue is a critical audit matter are that auditing the deferred revenue calculation required extensive audit effort due to the estimation uncertainty of the forecasted flights over the term ofthe contract resulting from the covid-19 pandemic. our audit procedures related to the deferred revenue included the following, among others: we obtained an understandingof and evaluated the design of controls over the companys calculation of deferred revenue we assessed the methodology and assumptions used by the company in the deferred revenuecalculation; we testedthe forecasted departures and validating the completeness and accuracy of the of the underlying data; we compared managements forecasted departures to the historical activity, existing flightschedules with united airlines and industry trends. we evaluated managements ability to accurately forecast flight activity by performing hindsight analysis comparing actual historical flights to past flights, including forecast developedduring the covid-19 pandemic; and we recalculated the deferred revenue balance as of december 31,2020. 53 table of contents series c convertible redeemable preferred stock as described further in note 12 to the financial statements, in january 2020, the company completed an acquisition of three crj-200 regional jets, each having two general electric (ge) engines, plus five additional ge engines, in exchange for the issuance of 4,000,000 shares of the companys series c convertible redeemable preferred stock with an aggregate value of $13.2 million. the company accounts for its series c convertible preferred in accordance with the guidance in accounting standards codification topic 480,distinguishing liabilities from equity based on the applicable accounting guidance, preferred stock that is conditionally redeemable is classified as temporary or mezzanine equity. accordingly, the series c preferred,which is subject to conditional redemption and conversion rights, is presented at redemption value as mezzanine equity outside of the stockholders equity section of the consolidated balance sheets. we identified the accounting for the series c convertible preferred stock as a critical audit matter. the principalconsiderations for our determination that the accounting for the series c convertible preferred stock is a critical audit matter included the significant complexity of the relevant accounting guidance, as well as the extent of management judgmentsinvolved in the application of that guidance. our audit procedures related to the series c convertible preferred stock transaction included the following, among others. we obtained an understanding of and evaluated the design of controls over the companysapplication of accounting treatment for complex and non-routine transactions. we obtained and read the investors rights agreement and the purchase agreement and comparedthe relevant terms to managements assessment memo of the accounting for the series c convertible stock transaction. in consultation with national office resources, we evaluated the reasonableness ofmanagements accounting treatment of the series c convertible stock transaction, specifically, its classification in mezzanine equity; and we utilized our valuation specialists to test the fair value assessment of the three crj-200 regional jets, each having two general electric (ge) engines, plus five additional ge engines by using the market approach method. /s/ grant thornton llp we have served as the companys auditor since 2020.	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.39table of contents gibbsboro environmental-related accrual description of the matter as described in note 8 to the consolidated financial statements, the company had short-term and long-term accruals for environmental-related activities of $51.0 million and $321.8 million, respectively, at december 31, 2019. the company’s largest and most complex site is the gibbsboro, new jersey site (“gibbsboro”) and the substantial majority of the environmental-related accrual relates to this site. gibbsboro consists of six operable units which contain a combination of soil, waterbodies and groundwater contamination, and are in various phases of investigation and remediation with the environmental protection agency (“epa”). the company’s estimated environmental-related accrual for gibbsboro is based on industry standards and professional judgment, and the most significant assumptions underlying the estimated cost of remediation efforts reserved for gibbsboro are the types and extent of contamination.auditing the company’s environmental-related accrual at the gibbsboro site required complex judgment due to the inherent challenges in identifying the type and extent of future remedies and the costs of implementing those remedies in determining the probable and reasonably estimable loss for which the company will be responsible. 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 processes to estimate the gibbsboro environmental-related accrual. for example, we tested controls over management’s review of the environmental loss calculations and the key assumptions affecting those calculations as described above. to test the gibbsboro environmental-related accrual, our audit procedures included, among others, a review of correspondence with the epa supporting the company’s assessment of the type and extent of contamination at the gibbsboro site for which the company is responsible. we involved our environmental specialists to confirm our understanding of the remediation plans for the most significant operable unit within the gibbsboro site and to evaluate the company's methodology and assumptions to estimate the unit cost and extent of contamination in accordance with industry practice, applicable laws and regulations. we recalculated the remediation cost estimate based on unit cost and estimated extent of remediation required. we reconciled types and extent of contamination identified in communications between the company and the epa to the company’s remediation cost estimates recorded for gibbsboro and confirmed a sample of underlying cost estimates with third-parties. we also conducted a search for publicly available information that might indicate facts contrary to the types and extent of contamination currently identified in the company’s remediation cost estimates recorded for gibbsboro. 40table of contents impairment of recently acquired industrial product trademarks in north america and the asia pacific region description of the matter as discussed in note 6 of the consolidated financial statements, the net carrying amount of recently acquired indefinite-lived trademarks utilized in sale of industrial products in north america and the asia pacific region was reduced by impairment charges of $75.3 million and $25.7 million, respectively, as the result of strategic decisions made regarding north american branding of industrial products and performance of industrial products in the asia pacific region. these assets are assessed for impairment on at least an annual basis, and because the annual assessment reflected fair value less than the carrying amount, impairment losses were recorded to reduce these assets to their fair value.auditing the impairment calculation of the recently acquired industrial product trademarks in north america and the asia pacific region was complex due to the significant assumptions used in the determination of their fair value and application of the royalty savings method. the significant assumptions included projected revenue associated with each trademark and discount rates, each of which are forward-looking and based on a combination of company-specific and market factors. 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 measurement of fair value in its test for impairment for its recently acquired industrial product trademarks in north america and the asia pacific region. the company’s test for impairment included, for example, controls over the application of the valuation technique, projected financial information and the significant assumptions used. to test the estimated fair value of these trademarks, our audit procedures included, among others, evaluating the company's valuation model using the royalty savings method, and testing the significant assumptions used in the model. for example, when evaluating the revenue projections, we evaluated those projections for consistency with management’s strategic branding initiatives and considered the reasonableness of those projections to marketplace and economic trends, third party industry projections and historical results. in addition, we involved our valuation specialist to assist in our evaluation of the methodology used by the company and to assist with our assessment of discount rates with consideration given to both internal and external factors. we also performed a sensitivity analysis of the significant assumptions to evaluate the change in the fair value of the trademarks that would result from changes in the significant assumptions.we have served as the company's auditor since 1908.	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.impairment of long-lived assets – refer to notes 1 and 4 to the financial statements.critical audit matter description 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. if the carrying value of a drilling rig is not recoverable, it would be impaired to fair value using a discounted probability-weighted cash flow analysis. these analyses utilize certain assumptions for each drilling rig under evaluation and consider 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 $4.1 billion as of december 31, 2020, and impairment expense of $842.0 million was recorded for the year ended december 31, 2020. 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 and measure fair value. 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 and discounted probability-weighted cash flow analyses. 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 and discounted probability-weighted cash flow analysis for those drilling rigs with factors that indicated potential impairment included the following, among others: •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. 54 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 and discounted 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 and discounted 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 probability-weighted cash flow analyses to the assumptions used in the current probability-weighted cash flow analyses to assess for management bias. income taxes – refer to notes 1 and 15 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 $28.3 million as of december 31, 2020 and income tax benefit recorded in 2020 was $21.2 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. •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. 55 •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 10, 2021 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 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 loan losses as described in notes 1 and 6 to the consolidated financial statements, the company’s allowance for loan losses is management’s estimate of losses inherent in the loan portfolio as of the date of the statement of condition and it is recorded as a reduction to loans. the allowance for loan losses was $12.8 million at december 31, 2020, which consists of three components (i) specific reserves based on probable losses on specific loans (“specific reserves”), and (ii) a general allowance based on historical loan loss experience, general economic conditions and other qualitative risk factors both internal and external to the company (“general reserves”). the specific reserve component relates to loans that are classified as impaired and is established when the collateral value or discounted cash flows of the impaired loan are lower than the carrying value of the loan. the general reserve component of the allowance for loan losses covers pools of loans, by loan class, and is based on a variety of risk considerations, both quantitative and qualitative. quantitative factors include the company’s historical loss experience, delinquency and charge-off trends, known information about individual loans and other factors. qualitative factors include various considerations regarding the general economic environment in the company’s market area. the qualitative adjustment for the general reserve includes management’s consideration of changes in national and local economic trends, the rate of growth in the portfolio, trends of delinquencies and nonaccrual balances, changes in loan policy, and changes in lending management experience and related staffing. - 67 - the qualitative adjustment contributes significantly to the general reserve component of the allowance for loan losses. management’s identification and analysis of these considerations and related adjustments requires significant judgment and could have a significant effect on the allowance for loan losses. we identified the estimate of the qualitative adjustments of the general reserve for the allowance for loan losses as a critical audit matter as they represent a significant portion of the total general reserve and because management’s estimate relies on a qualitative analysis to determine a quantitative adjustment which required especially subjective auditor judgment.the primary procedures we performed to address this critical audit matter included performing substantive testing, including evaluating management’s judgments and assumptions for developing the general reserve qualitative adjustments for the allowance for loan losses, which consisted of the following: •assessing management’s methodology and considering whether relevant risks were reflected in the modeled provision and whether adjustments to modeled calculations were appropriate •evaluating the completeness and accuracy of data inputs used as a basis for the adjustments relating to qualitative general reserve factors and considering whether the sources of data and factors that management used in forming the assumptions are relevant, reliable, and sufficient for the purpose based on the information gathered. •evaluating the reasonableness of management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of the general reserve qualitative adjustments for consistency with each other, the supporting data, relevant historical data, and industry data. •assessing whether historical data is comparable and consistent with data of the current year and considering whether the data is sufficiently reliable. among other procedures, our evaluation considered evidence from internal and external sources, loan portfolio performance and whether such assumptions were applied consistently period to period. •analytically evaluating the qualitative adjustment in the current year compared to prior years for directional consistency and reasonableness. •evaluated whether management’s judgments and assumptions adequately contemplated the impact of covid-19 on management’s quantitative and qualitative assessment •testing the calculations used by management to translate the assumptions and key factors into the allowance estimated amount.loans as described in notes 1 and 5 to the consolidated financial statements, the company grants loans to customers with the intent and ability to hold for the foreseeable future or until maturity or pay-off. the company’s primary lending portfolio consists of originating commercial real estate, commercial loans, and one-to-four family residential real-estate loans, but also consists of municipal loans, home equity loans, and consumer loans. the balance of loans, net of the allowance for loan losses and deferred origination costs, was $812.7 million at december 31, 2020. the company recognizes revenue from loans through interest income, which is determined based on the underlying interest rate on the loans. the company offers both fixed and adjustable rate loans based on the type of loan and borrower specific risk characteristics. during 2020 the company recognized $35.1 million in interest income associated with loans.auditing loans resulted in complexities due to the material weaknesses in the company’s internal control over financial reporting relating to the insufficient documentation supporting loan transactions occurring during the year. we obtained an understanding of management’s processes and evaluated the design and operating effectiveness of certain controls over the company’s accounting for loans. we tested controls over management’s review of new and existing loans, as well as controls over the presentation of loans in the consolidated financial statements.to test the presentation of loans and recognition of interest income during the year, we performed audit procedures that included, among others, third-party confirmations, independent loan reviews, testing the clerical accuracy of interest income recorded on individual loans, and testing the completeness and accuracy of all loan and related party disclosures. because of the material weakness, we expanded our sample sizes selected for substantive testing and modified our testing approach for certain procedures to encompass a highly statistical method of sampling in order to provide greater assurance over the fair presentation of the consolidated financial statement amounts. we performed additional testing over the completeness and accuracy of loan data, and evaluated whether management’s accounting, presentation, and disclosure of loans in the consolidated financial statements followed us generally accepted accounting principles. we have served as the company’s auditor since 2011.	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.76prepaid and accrued contract research and development expenses description of the matter the company’s total accrued expenses were $12.4 million as of december 31, 2021, which included the obligation for contract research and development expenses incurred as of december 31, 2021 but not paid as of that date. in addition, the company’s total prepaid expenses were $7.0 million as of december 31, 2021, which included amounts that were paid in advance of services provided in connection with its contract research and development.as discussed in note 2 of the consolidated financial statements, the company contracts with service providers to conduct research and development on its behalf, and the amount of expense recorded in the consolidated financial statements is based in part on third-party information which includes the services provided and efforts expended under these arrangements. given the nature and significance of contract research and development expenses, subjective auditor judgement was required to evaluate the evidence obtained to support the amounts accrued and prepaid for costs associated with the services provided.how we addressed the matter in our audit to evaluate the evidence obtained to support the amounts accrued and prepaid for costs associated with services provided for contract research and development as of december 31, 2021, our audit procedures included, among others, testing the accuracy and completeness of the data used to derive the recorded amounts. we also inquired of the company’s research and development personnel overseeing the contract research and development regarding the progress of clinical trials and evaluated the completeness and valuation of the prepaid and accrued contract research and development expenses. we compared invoices received by the company subsequent to december 31, 2021 to the total costs recognized by the company as of that date, and we inspected significant contracts, including any pending change orders, between the company and service providers conducting research and development on its behalf.accounting for 2021 sale of common and preferred stock, warrants and royalty interest description of the matter as described in note 14 to the consolidated financial statements, in november 2021, the company entered into the 2021 sale of common and preferred stock, warrants and royalty interest (the “2021 financing”), which was a structured financing consisting of a securities purchase agreement, warrant agreements and a royalty purchase agreement. pursuant to the 2021 financing, the company received aggregate gross proceeds of $65 million in exchange for the sale of 13,997 shares of series x1 preferred stock, 2,253,000 shares of common stock, warrants to purchase up to 16,250 shares of series x1 preferred stock and a portion of the company’s right to receive certain potential future royalties.auditing the company’s accounting for the 2021 financing was complex due to the judgment that was required in determining the balance sheet classification of the elements of the 2021 financing. additionally, a detailed analysis of the terms of the 2021 financing 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 to test the initial accounting for the 2021 financing, our audit procedures included, among others, inspection of the agreements underlying the 2021 financing and testing management's application of the relevant accounting guidance, including the determination of the balance sheet classification of each element of the 2021 financing 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 elements of the 2021 financing, including conclusions reached with respect to the balance sheet classification of each of the elements as well as the identification of embedded features or derivatives that require separate accounting. /s/ ernst & young llp we have served as the company’s auditor since 2007.	5
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.70allowance for loan losses as described in notes 1 and 3 to the consolidated financial statements, the company’s allowance for loan losses balance was $15.7 million at december 31, 2021. the allowance for loan losses is maintained to provide for specific losses on impaired loans and probable losses inherent in the loan portfolio. it is based upon the company’s analysis of the factors underlying the quality of the loan portfolio. these factors include, among others, charge-off history, current economic conditions, borrowers’ ability to repay, the regulatory environment, competition, geographic and loan type concentrations, policy underwriting standards, nature and volume of the loan portfolio, management’s experience level, loan review and loan grading, and the value of underlying collateral. we identified management’s risk ratings of loans and the estimation of qualitative factors, both of which are used in the overall allowance for loan losses calculation, as a critical audit matter. the company uses credit quality indicators, including internally determined risk ratings, to classify loans into pools and to estimate inherent loss rates for each of the loan pools, which are used in the calculation of the allowance for loan losses. determination of the risk ratings is inherently subjective and involves significant management judgement. the qualitative factors are used to estimate probable losses that are not captured in the historical loss rates and are based on management’s evaluation of available internal and external data and involves significant management judgement. auditing management’s judgments regarding the determination of risk ratings and qualitative factors applied to the allowance for loan losses involved a high degree of subjectivity.the primary procedures we performed to address this critical audit matter included:•obtained an understanding of the design and implementation of internal controls over the accuracy of risk ratings of loans and the determination of the qualitative factors used in the allowance for loan loss calculation.•tested a risk-based, targeted selection of loans to gain substantive evidence that the company is appropriately risk rating these loans in accordance with its policies, and that the risk ratings for the loans are reasonable based on the current facts and circumstances.•obtained management’s analysis and supporting documentation related to the qualitative factors and testing whether the qualitative factors used in the calculation of the allowance for loan losses are supported by the supporting documentation provided by management.•tested the appropriateness of the methodology and assumptions used in the calculation of the allowance for loan losses, evaluating the completeness and accuracy of the data used in the calculation, application of the risk ratings determined by management and used in the calculation, application of the qualitative factors determined by management and used in the calculation, and recalculation of the allowance for loan losses balance./s/ moss adams llp everett, washington march 11, 2022we have served as the company’s auditor since 2009.	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 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. product liability claims description of the matter at december 31, 2019, the company had an accrual of $57.0 million related to product liability claims associated with the company’s products. as discussed in note 13 to the consolidated financial statements, the company is subject to product liability claims in the normal course of business. the company records product liability reserves for losses that are probable and reasonably estimable, using methods which include analysis of current and historical claims experience, actuarial analysis and management’s judgment.auditing management’s accounting for product liability claims was especially challenging due to the significant judgment and estimation required in evaluating the probability and amount of loss, as well as the actuarial methods applied. 41table of contents how we addressed the matter in our audit we identified and tested controls over the identification and evaluation of product liability claims, including the company’s assessment and measurement of the best estimate of the probable liability. we tested controls over management's review of the methods, significant assumptions, and the completeness and accuracy of the underlying data used by management’s actuarial specialist to assist management in estimating the product liability reserve.to test management’s assessment of the probability of occurrence of a loss and whether the loss was reasonably estimable, we inquired of internal counsel and other members of management to discuss the facts and circumstances, including possible outcomes and potential losses. in addition, we received internal and external legal counsel inquiry letters and obtained a representation letter from the company. to test the measurement of the product liability claims, we evaluated the method of measuring the contingency and tested the accuracy and completeness of the data used to determine a range of loss. in addition, we involved internal actuarial specialists to assist with our procedures related to the measurement of the product liability reserve. to evaluate the historical accuracy of management’s estimates, we performed a retrospective analysis of resolved claims to management’s previous estimates. valuation of goodwill and indefinite lived intangible assets of the aftermarket and boats reporting units description of the matter at december 31, 2019, goodwill for the aftermarket and boats reporting units was $270.4 million and $227.1 million, respectively. indefinite lived intangible assets (primarily brand/trade names) of the aftermarket and boats reporting units were $194.9 million and $210.7 million, respectively. as discussed in notes 1 and 7 of the consolidated financial statements, these assets are tested at least annually for impairment or when events or changes in circumstances indicate that the asset might be impaired. goodwill is tested for impairment at the reporting unit level.auditing the annual goodwill and indefinite lived intangible asset impairment tests of the aftermarket and boats reporting units was complex and highly judgmental due to the significant estimation required in determining the fair value of the aftermarket and boats reporting units and the related indefinite lived intangible assets. for goodwill, the estimate of fair value for the aftermarket and boats reporting units was sensitive to significant assumptions, such as the discount rates, forecasted revenues and earnings before interest, taxes, depreciation and amortization (ebitda) margins. for aftermarket and boats indefinite lived intangible assets, the estimated fair values were sensitive to significant assumptions such as the discount rates, projected revenues and royalty rates. 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 and indefinite lived intangible asset impairment testing process, including controls over management’s budgeting and forecasting process used to develop the projected revenues and ebitda margins used in the fair value estimates, as well as controls over management’s review of the significant assumptions described above. to test the estimated fair value of the aftermarket and boats reporting units and the related indefinite lived intangible assets, we performed audit procedures that included, among others, assessing the valuation methodologies used by management and testing the significant assumptions discussed above. we compared the significant assumptions used by management to current market and economic information, as well as other relevant factors. we assessed the reasonableness of forecasted future revenues and ebitda margins by comparing the forecasts to historical results. we involved our internal valuation specialists to assist in our evaluation of the valuation models, methodologies and significant assumptions used by the company, specifically the discount rates and royalty rates. we also performed sensitivity analyses of significant assumptions to evaluate the significance of changes in the fair value that would result from changes in assumptions. /s/ ernst & young llp we have served as the company’s auditor since 2002.	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.interim goodwill impairment assessment – performance materials and technical nonwovens reporting units as described in note 6, goodwill and other intangible assets, to the consolidated financial statements, the company’s consolidated goodwill balance was $87.6 million as of december 31, 2020, and the goodwill associated with the performance materials and technical nonwovens reporting units was $32.0 million and $55.6 million, respectively. management performs an assessment of goodwill for impairment at least annually, generally during the fourth quarter, or whenever there is a significant change in events or circumstances that indicate that the fair value of the reporting unit is more likely than not less than the carrying amount of the reporting unit. if the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired. to the extent that the carrying value of the reporting unit exceeds its estimated fair value, a goodwill impairment charge will be recognized for the amount by which the carrying value of the reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. during the three-month period ended march 31, 2020, the company experienced disruptions in certain operations from lower customer demand directly attributable to the covid-19 pandemic and the resulting impact on revenue and profitability. management performed an interim assessment of goodwill by performing a quantitative assessment for both the performance materials and technical nonwovens reporting units. management weighted equally both an income approach and a market approach to determine the fair values of the reporting units. management’s significant assumptions in the discounted cash flow model included, but were not limited to, future cash flow projections, the weighted average cost of capital, the terminal growth rate, and the tax rate. under the market approach, fair values are estimated using published market multiples for comparable companies. the carrying value of the performance materials reporting unit exceeded its respective fair value by $48.7 million, resulting in an impairment charge. the fair value of the technical nonwovens reporting unit exceeded the respective carrying value and there was no impairment charge for the technical nonwovens reporting unit.the principal considerations for our determination that performing procedures relating to the interim goodwill impairment assessment of the performance materials and technical nonwovens reporting units is a critical audit matter are (i) the significant judgment by management when determining 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 revenue growth rates, projected operating income, weighted average cost of capital, terminal growth rate, and tax rate for the performance materials reporting unit, and revenue growth rates and weighted average cost of capital for the technical nonwovens reporting unit; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.59addressing 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 performance materials and technical nonwovens reporting units. these procedures also included, among others (i) testing management’s process for determining the fair value estimates of the performance materials and technical nonwovens reporting units; (ii) evaluating the appropriateness of the income approach model (discounted cash flow model) and a market approach model and the equal weighting of the models; (iii) testing the completeness and accuracy of the underlying data used in the models; and (iv) evaluating the reasonableness of significant assumptions used by management related to the revenue growth rates, projected operating income, weighted average cost of capital, terminal growth rate, and tax rate for the performance materials reporting unit, and the revenue growth rates and weighted average cost of capital for the technical nonwovens reporting unit. evaluating management’s assumptions related to the revenue growth rates, projected operating income, and tax rate for the performance materials reporting unit, and the revenue growth rates for the technical nonwovens reporting unit involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting units; (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 approach model (discounted cash flow model) and market approach model and the equal weighting of the models and (ii) the reasonableness of the weighted average cost of capital and terminal growth rate assumptions for the performance materials reporting unit, and the weighted average cost of capital assumption for the technical nonwovens reporting unit. /s/ pricewaterhouse coopers llp pricewaterhouse coopers llp hartford, connecticut february 23, 2021we have served as the company’s auditor since 1987.	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.license revenue- substantive termination penalties as described in notes 2 and 9 to the consolidated financial statements, at the inception of each license agreement, management determines the contract term for purposes of applying the requirements of generally accepted accounting policies relevant to revenue recognition. licenses are generally terminable at the option of the licensee with advance notice to the company. for each license granted, including licenses granted upon the exercise of license options, management evaluates these termination rights to determine whether a substantive termination penalty would be incurred by the licensee upon termination. if the licensee incurs a substantive termination penalty upon termination, the contract term for revenue recognition purposes is generally equal to the stated term of the license, which is the life of the underlying licensed patents. alternatively, if the licensee does not incur a substantive termination penalty upon termination, the contract term for revenue recognition purposes may be shorter than the stated term of the license, in which case the termination rights may be accounted for as contract renewal options. the determination of whether a substantive termination penalty is associated with the termination rights requires significant judgment. in making this determination, management considers, among other things, the nature of the intellectual property rights that would be returned to the company upon termination, including the exclusivity of the licensed rights and the stage of development of the licensed products, the payment terms, including the amount and timing of nonrefundable or guaranteed payments, and the business purpose of the termination rights granted to the licensee. generally, the most significant judgment in determining whether a substantive termination penalty exists is related to the amount of any up-front or guaranteed non-refundable payments relative to the amount of annual payments that may be avoided by the licensee upon termination of the license. management considers all of the facts and circumstances relevant to each license when making this determination. the company’s consolidated license and royalty revenue was $35.2 million for the year ended december 31, 2019, of which license revenue makes up a significant portion. the principal considerations for our determination that performing procedures relating to license revenue, specifically substantive termination penalties, is a critical audit matter are there was significant judgment by management in determining whether each license granted, including licenses granted upon the exercise of license options, had substantive termination penalties used to determine the contract term for revenue recognition. this in turn led to significant auditor, judgment, subjectivity and effort in performing procedures to evaluate the audit evidence obtained relating to management’s determination of the existence of a substantive termination penalty in license revenue agreements.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 determination of the existence of a substantive termination penalty in license revenue agreements. these procedures also included, among others, evaluating and testing, for a sample of license revenue contracts, management’s process for determining whether a licensee incurs a substantive termination penalty upon termination, which included evaluating (i) the nature of the license, (ii) the payment terms, (iii) the business purpose of contract terms that include termination rights, and (iv) the impact of contract cancellation on other performance obligations, if any, in the contract./s/ pricewaterhouse coopers llp mc lean, virginia february 26, 2020we have served as the company’s auditor since 2015.	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. 44table of contents revenue recognition using percentage of completion method description of the matter as disclosed in note 2 to the consolidated financial statements for fixed price agreements, the company uses the percentage of completion (poc) method of accounting under which contract revenue recognizable at any time during the life of a contract is determined by multiplying expected total contract revenue by the percentage of contract costs incurred at any time to total estimated contract costs. these estimates are subject to considerable judgment and could be impacted by changes in labor, materials/equipment, and subcontractor costs. auditing management’s estimates of total contract costs was challenging due to significant judgments made by management with respect to labor, materials/equipment and subcontractor costs as future results may vary significantly from past estimates due to changes in facts and circumstances as the project progresses to completion. how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the contract estimated cost at completion process. for example, we tested controls over management’s review of cost estimates for significant inputs such as labor, materials/equipment and subcontractor costs. to test the company’s contract cost estimates, our audit procedures included, among others, for a sample of contracts, reviewing the contracts, conducting interviews with and reviewing questionnaires completed by project personnel; assessing blended labor rates included in actual costs to date as compared to blended labor rates used in the estimate to complete the project, agreeing estimated labor, materials/equipment and subcontractor costs to supporting documentation, sending independent confirmations to customers; and performing lookback analyses comparing gross margin over the life of the project to assess management’s ability to estimate. accounting for acquisition of walker tx holding company, llc description of the matter as disclosed in note 4 to the consolidated financial statements, on april 1, 2019, the company completed its acquisition of walker tx holding company, llc and each of its wholly-owned subsidiaries (walker) for consideration of $235.4 million. the transaction was accounted for as a business combination. auditing the company's accounting for its acquisition of walker was complex due to the significant estimation uncertainty in determining the fair value of intangible assets and liabilities which principally consisted of contingent consideration, customer relationships and trademarks of $19.5 million, $53.0 million and $32.6 million, respectively. the significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to the underlying assumptions about the future performance of walker. the significant assumptions used to estimate the fair value of the acquired intangible assets included discount rates and certain assumptions that form the basis of the forecasted results (e.g. revenue growth rates and operating margins). the significant assumptions used to estimate the fair value of contingent consideration included the discount rate, volatility and forecasted results (e.g. revenue growth rates and ebitda margins). these significant assumptions are forward-looking and could be affected by future economic conditions. how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the purchase accounting process. for example, we tested the company's controls over the recognition and measurement of consideration transferred (including contingent consideration) and intangible assets, including the valuation models and significant assumptions used to develop such estimates. to test the fair value of contingent consideration and intangible assets, our audit procedures included, among others, evaluating the company’s valuation methodologies, involving our valuation specialists to assist in testing the significant assumptions described above used to develop the prospective financial information and assessing the application of the valuation methodologies, and testing the completeness and accuracy of the underlying data. for example, we compared the significant 45table of contentsassumptions to current economic trends, historical results of the company’s business and other relevant factors. we also performed a sensitivity analysis of the significant assumptions to evaluate the change in the fair value of the contingent consideration and intangible assets resulting from changes in the assumptions. /s/ ernst & young llp we have served as the company’s auditor since 2002.	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. impairment of long-lived tangible and right of use assets description of the matter as described in notes 2 and 6 to the consolidated financial statements, the company evaluates if there are indicators of impairment for long-lived tangible and right of use assets in accordance with asc 360, property, plant, and equipment. the company’s first step is to determine whether indicators of impairment exist in its long-lived assets (property and equipment and leasehold improvements and operating lease right-of-use assets) at the individual retail store level, which is the lowest level at which cash flows can be identified. if indicators of impairment are identified for any retail stores, the company evaluates if the projected undiscounted cash flows derived from continued retail operations by those stores are less than their carrying amounts. when this is the case, the company compares the calculated fair value of the respective retail store to its carrying value. if fair value is less than the carrying value, an impairment loss is recorded. for the year ended january 30, 2021, the company recorded impairment charges of $41,948 thousand and $19,569 thousand related to operating retail stores and closed stores, respectively, as the company experienced lower than projected revenues for certain stores due to the covid-19 pandemic. significant assumptions used in the company’s projected undiscounted cash flow analyses included estimates of future revenue growth rates and operating expenses. additionally, significant assumptions utilized in the fair value analyses included the aforementioned assumptions, as well as market-based assumptions such as a discount rate and market rents. this led to a high degree of auditor judgment and subjectivity in performing procedures and in assessing the assumptions utilized to project the undiscounted cash flows generated by retail stores with indicators of impairment, for purposes of determining if such cash flows were less than the carrying amount as well as in evaluating the assumptions utilized to estimate the fair value of those retail stores to calculate the impairment all of which can be affected by expectations about future market or economic conditions including outcomes resulting from the covid-19 pandemic. 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 processes over the identification of indicators of impairment, the assessment of the projected undiscounted cash flows to be generated by retail stores with indicators of impairment, the determination of the fair value of the retail stores and the measurement of any resulting impairment. these controls include, among others, management’s evaluation of indicators of impairment, management’s review of the assumptions utilized to develop the projected undiscounted cash flows and the related fair value estimates, and management’s testing of the completeness and accuracy of the underlying data utilized to project future operating results for the retail stores.our testing of the company’s impairment analyses included, among other procedures, testing the completeness of retail stores evaluated for impairments, management’s process for developing the undiscounted cash flows, evaluating the models used and evaluating significant assumptions discussed above used to project the undiscounted cash flows and the incremental assumptions discussed above used to estimate fair value. for example, we compared the significant assumptions used by management to historical results and current industry and economic trends. we performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the individual retail stores that would result from changes in the 48table of contentsunderlying assumptions. we involved our valuation specialists to assist in our evaluation of the fair value estimate specific to evaluating the discount rate and market rents. loyalty program description of the matter the company maintains a loyalty program, ultamate rewards, which offers members the ability to earn and redeem points on purchases of products and services. as described in notes 2 and 5 to the consolidated financial statements, revenue from the loyalty program is recognized when the members redeem points or points expire. the company estimates the amount of revenue to defer using the standalone selling price of the points earned and the expected redemption percentage. the company evaluates its estimated standalone selling price quarterly based on the value of products or services purchased using points. the expected redemption percentage is based on historical redemption patterns in conjunction with current information and trends. auditing the company’s estimate of loyalty deferred revenue was complex because the calculation involves subjective management assumptions for the standalone selling price and expected redemption rate. in particular, the estimate is sensitive to these significant assumptions, which are affected by expectations about future customer behavior. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of the company’s estimation process and controls supporting the measurement and recognition of the amount of loyalty revenue deferred. this included testing controls over management’s review of the assumptions and other inputs used in the estimation, the completeness and accuracy of issuance and redemption data used in the calculation and controls over the assignment of membership levels based on customer spending patterns. our audit procedures included, among others, evaluating the methodology used, analyzing the significant assumptions discussed above, and testing the accuracy and completeness of the underlying data used in management’s calculation. to audit the standalone selling price per point, we validated that the price per point for each membership level was appropriate based on products or services purchased by loyalty members. to audit the redemption rate, we tested redemption activity and compared the results of that testing to the redemption rate used by management in its estimate. we also considered recent trends in redemption activity and the impact on the redemption rate. in addition, we performed sensitivity analyses of significant assumptions to evaluate the change in the deferral amounts. /s/ ernst & young llp we 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 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. servicing rights – residential (carried at fair value) - refer to notes 3 and 9 to the financial statements critical audit matter description the company accounts for residential mortgage servicing rights (“ms rs”) totaling $76.8 million at fair value and classifies its ms rs as “level 3” fair value assets. for these assets, the company uses an independent third-party valuation expert to assist management in estimating the fair value. the third-party valuation expert uses a discounted cash flow approach which consists of projecting servicing cash flows discounted at a rate that management believes market participants would use in their determinations of fair value. the key assumptions used in the estimation of the fair value of ms rs include prepayment rates, discount rates, and cost of servicing. a change in the discount rate, prepayment rate or cost of servicing can have a significant effect on the fair value of ms rs which is recorded in net unrealized gain (loss) on financial instruments. we identified the valuation of ms rs as a critical audit matter because of the significant judgments made by management in determining the discount rate, prepayment rate, and cost of servicing assumptions. this 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 estimate and assumptions related to selection of the discount rate, prepayment rate and cost of servicing. 108table of contents how the critical audit matter was addressed in the audit our audit procedures related to the discount rate, prepayment rate, and cost of servicing assumptions included the following, among others: ●we tested the operating effectiveness of internal controls over determining the fair value, including those over the determination of the discount rate, prepayment rate and cost of servicing assumptions.●we tested the operating effectiveness of internal controls over the third-party valuation expert by evaluating management’s process for monitoring the competence, capabilities, and objectivity of the valuation expert as well as evaluating the relevance, completeness, and accuracy of the source data used by the valuation expert.●we evaluated management’s process for obtaining an understanding of the work of the valuation expert, including consideration of the relevance and reasonableness of the assumptions, methods, and models used by the valuation expert.●we evaluated the reasonableness of management’s discount rate, prepayment rate and cost of service assumptions of the underlying mortgage loans, by comparing historical assumptions to current assumptions and testing the source data used by the valuation expert.●with the assistance of our fair value specialists, we evaluated the reasonableness of management’s discount rate, prepayment rate and cost of servicing assumptions by comparing them to independent market information. we also tested the mathematical accuracy of the calculation. allowance for loan losses - refer to notes 3 and 6 to the financial statements critical audit matter description the general allowance for loan losses is intended to provide for credit losses of loans that are not impaired within the loans held-for-investment portfolio and is reviewed quarterly for adequacy considering credit quality indicators, including probable and historical losses, collateral values, loan-to-value ratio and macroeconomic conditions. the allowance for loan losses is increased through provisions for loan losses charged to earnings and reduced by charge-offs, net of recoveries. significant inputs to the company’s forecasting methods include (i) key loan-specific inputs such as ltv, vintage year, loan-term, underlying property type, occupancy, geographic location, and others, and (ii) a macro-economic forecast, including unemployment rates, interest rates, commercial real estate prices, and others. significant judgments are required in determining the allowance, including making assumptions regarding the macroeconomic forecasts, default rate, loss severity rate, and collateral value. given the judgment necessary to estimate internal and external factors that may affect collectability of the loan portfolio, including macroeconomic conditions, default rates, loss severity rates, and the fair value of collateral, auditing the estimated allowance for loan losses involved especially complex and subjective judgment, including the need to involve our specialists. how the critical audit matter was addressed in the audit our audit procedures related to the macroeconomic conditions, default rates, loss severity rates, and fair value of collateral included the following, among others: ●we tested the operating effectiveness of internal controls over the allowance for loan losses, including those over determining macroeconomic conditions, default rates, loss severity rates, and underlying collateral values. ●with the assistance of our fair value specialists, we evaluated the reasonableness of the macroeconomic conditions, default rates, loss severity rates, and underlying collateral values, for consistency with external data from other sources. ●we tested the macroeconomic conditions, default rate, loss severity data, and underlying collateral values, which were used to develop the allowance, to determine that the information used in the analysis was relevant, accurate and complete. we also tested the mathematical accuracy of the calculation. /s/ deloitte & touche llp new york, new york march 15, 2021 we have served as the company's auditor since 2012.	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. intangible asset impairment assessment - u.s. cellular licenses as described in notes 1 and 7 to the consolidated financial statements, the company’s consolidated licenses balance was $2,471 million as of december 31, 2019. management performs its annual impairment assessment of licenses as of november 1 of each year or more frequently if there are events or circumstances that cause management to believe it is more likely than not that the carrying value of licenses exceeds fair value. for purposes of its impairment testing of licenses, management separated its fcc licenses into eight units of accounting, which consisted of one unit of accounting for developed operating market wireless spectrum licenses (built wireless spectrum licenses) and seven geographic non-operating market wireless spectrum licenses (unbuilt wireless spectrum licenses). as disclosed by management, a market approach was used to estimate the fair value of each pool of wireless spectrum licenses. the key assumption utilized in estimating the fair value of each pool of wireless spectrum licenses was the pricing multiples, which are units of value expressed in relation to the bandwidth and population covered by a wireless spectrum license.the principal considerations for our determination that performing procedures relating to the intangible asset impairment assessment for the u.s. cellular licenses is a critical audit matter are there was significant judgment by management when developing the estimate of fair value for each pool of licenses. this in turn led to a high degree of auditor judgment, effort and subjectivity in performing procedures and evaluating audit evidence related to management’s significant assumption relating to the pricing multiples for the wireless spectrum license portfolio used in the fair value estimate. 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 annual intangible asset impairment assessment, including controls over the valuation of the company’s pool of licenses. these procedures also included, among others, testing management’s process for developing the fair value estimate, evaluating the appropriateness of the market approach, testing the completeness, accuracy, and relevance of underlying data used in the market approach and evaluating the significant assumption used by management relating to the pricing multiples for the wireless spectrum license portfolio. evaluating management’s assumption related to the pricing multiples involved evaluating whether the assumption used by management was reasonable by considering (i) the current and past performance of each pool of licenses, (ii) consistency with external market and industry data, and (iii) whether the assumption was 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 market approach./s/ pricewaterhouse coopers llp chicago, illinois february 25, 2020we have served as the company’s auditor since 2002.	1
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. goodwill impairment assessment - wound 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 carryingvalue. management performs an impairment assessment annually as of march 31, or whenever events or changes in circumstances indicatethat the fair value of a reporting unit may be below its carrying value. the company’s two reporting units are the surgical and wound reporting units. to determine the estimated fair values of the company’s reporting units, management considers both the marketand income approaches, which are dependent on significant management judgement, including estimation of cash flows, estimation of thelong-term rate of revenue growth, and determination of the weighted average cost of capital for the reporting units. the company’s consolidated goodwill balance as of june 30, 2021 was $108.2 million, of which $106.5 million was allocated to the woundreporting unit. weidentified goodwill for the wound reporting unit as a critical audit matter because of the significant estimates and assumptions managementmakes to estimate the fair value of the wound reporting unit and the sensitivity of the wound reporting unit’s operations to changesin demand. this required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fairvalue specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions relatedto forecasts of future revenues. howthe critical audit matter was addressed in the audit ouraudit procedures related to the forecasts of future revenues used by management to estimate the fair value of the wound reporting unitincluded the following, among others: ●with the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology, including testing the mathematical accuracy of the calculation.●we evaluated management’s ability to accurately forecast future revenue by comparing actual results to management’s historical forecasts.●we evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) internal communications to management and the board of directors, (2) external communications made by management to analysts and investors, (3) holding discussions with reporting unit leaders, and (4) comparing the forecasts to industry reports containing analyses of the company’s and its peer group’s products. /s/deloitte & touche, llp jericho,new york september2, 2021wehave 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.allowance for loan losses as described in notes 1, 6 and 7 to the financial statements, at december 31, 2020 first guaranty’s total loans were $1.8 billion and the associated allowance for loan losses balance was $24.5 million. the allowance for loan losses is management’s best estimate of probable losses inherent in its loan portfolio and is based on historical loss experience by loan segment and class with adjustments for current events and conditions. these factors include, among others, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions, specific credit risks, industry concentrations, and unidentified losses inherent in the current loan portfolio.we identified management’s asset quality ratings of loans and determination of qualitative factors, which is based on general economic conditions and other qualitative risk factors both internal and external to first guaranty, both of which are used in the allowance for loan losses calculation, as a critical audit matter. first guaranty uses asset quality risk ratings to monitor portfolio performance and trends and to adjust historical loss percentages for classified loans. first guaranty stratifies loans into pools based on collateral and type of loan, based on regulatory guidelines, and estimates inherent loss rates for each of the loan pools, which are used in the calculation of the allowance for loan losses. the general valuation allowance portion of the allowance for loan losses is used to estimate losses and is based on management’s evaluation of various factors that are not captured in the historical credit loss factors or on the specific impairment component. auditing management’s judgments regarding the determination of the quantitative and qualitative portion of the allowance for loan losses involved a high degree of subjectivity.the primary procedures we performed to address the critical audit matters included:•testing the design, implementation, and operating effectiveness of controls relating to management’s calculation of the allowance for loan losses, including controls over the accuracy of asset quality ratings of loans, the loan pools based on collateral type, and the determination of the qualitative and quantitative factors of the allowance for loan losses.•testing a risk-based targeted selection of loans to gain substantive evidence that first guaranty is appropriately rating these loans in accordance with its policies, and that the asset quality ratings for the loans are reasonable.•obtaining management’s analysis and supporting documentation related to the qualitative factors and testing whether the qualitative risk factors both internal and external to first guaranty used in the calculation of the allowance for loan losses are supported by the analysis provided by management.•testing of loans excluded from the qualitative general reserve calculations.•testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for loan losses, and testing the calculation itself, including completeness and accuracy of the data used in the calculation, application of the qualitative factors determined by management and used in the calculation, and recalculation of the allowance for loan losses balance./s/ castaing, hussey & lolan, llc we have served as first guaranty's auditor since 2001.	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: (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 separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.valuation of inventory the company’s accounting policy for the recognition of inventory and cost of sales is described in note 2 to the consolidated financial statements. the company has recorded an inventory balance of approximately $38.1 million and cost of sales of approximately $35.7 million as of and for the year ended december 31, 2021. additionally, note 3 to the consolidated financial statements provides further detail of the components of the year-end inventory balance. the company’s merchandise inventories are stated at the lower of cost or net realizable value using a first-in first-out costing principle. finished goods inventory costs include the cost of merchandise purchases, the costs to bring the merchandise to the company’s distribution center, warehousing and handling expenditures, and distributing and delivering merchandise to the company’s stores. manufacturing inventory, raw materials and work-in-process are also valued on a first‑in, first-out basis using full absorption accounting which includes material, labor, and other applicable manufacturing overhead. the determination of amounts that are required to be capitalized to inventory resulting from manufacturing labor and overhead costs, warehouse and handling expenditures and transportation costs (together “overhead costs”) are subjective and are generally based on an allocation ratio calculated by the company using the previous year’s actual overhead costs and the value of inventory handled during that year, subject to adjustment for current economic or market conditions. additionally, to determine if the value of their inventory should be written down, the company considers many factors, including condition of the product (excessive scars, discoloring or damage from uv light), current and anticipated demand that may cause the product to become slow moving and age of the merchandise to ensure that the product line is considered fresh. if a write-down is warranted, the carrying value of the merchandise is reduced from its original cost to the lower of its cost or net realizable value.management estimates the value of inventory by estimating the capitalizable overhead costs and adjusts the inventory to lower of cost or net realizable value. our audit procedures to evaluate these items involved a higher degree of auditor judgment and the involvement of more senior members of the engagement team in executing, supervising, and reviewing the results of the procedures.how the critical audit matter was addressed in the audit our audit procedures related to the valuation of inventories included the following, among others:•we obtained an understanding of the controls over the valuation of inventory.•we tested the inventory costs incurred by the company by reviewing supplier invoices and ensuring that appropriate application of the first-in first-out principle was followed.•we evaluated the appropriateness and consistency of management’s methodology and assumptions used in calculating the capitalizable overhead costs allocation ratio.•we evaluated the appropriateness of the capitalized overhead costs by analyzing them against actual overhead costs incurred during the year.•we tested the mathematical accuracy of the company’s inventory obsolescence reserve calculation.•we evaluated the appropriateness and consistency of management’s methodology and assumptions used in developing its estimate of the inventory obsolescence reserve.•we performed analytical procedures on the current year reserve rates (by product category) by comparing them to prior year rates and then obtaining corroborating evidence for any significant fluctuations.•we tested on a sample basis, sales subsequent to yearend of the written-down items to ensure that the net realizable value was not lower than the previously written down value./s/ weaver and tidwell, l.l.p.we have served as the company’s auditor since 2003.	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 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. valuation of goodwill description of the matter as discussed in note 1 to the consolidated financial statements, goodwill is tested for impairment annually, or more frequently if impairment indicators arise, at the operating segment level. during the year ended january 30, 2021, the company recorded a $319.7 million goodwill impairment charge. auditing management's goodwill impairment test was complex and highly judgmental due to the significant estimation required to determine the fair value of the operating segment. in particular, the fair value estimate was sensitive to significant assumptions, such as changes in the revenue growth rate, discount rate, operating margins and capital expenditures, many of which are affected by expectations about future market or economic conditions. f-2table of contents 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 review process, including controls over management’s review of the significant assumptions described above. to test the estimated fair value of the company’s operating segment, 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 involved a valuation specialist to assist in our evaluation of the company’s model, valuation methodology and significant assumptions. we compared the significant assumptions used by management to current industry trends and evaluated whether changes to the company’s business model and other factors 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 operating segment that would result from changes in the assumptions. in addition, we tested management’s reconciliation of the fair value of the operating segment to the market capitalization of the company. /s/ ernst & young llp we have served as the company’s auditor since 2013.	1
critical audit matter description thecritical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicatedor required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financialstatements and (2) involved especially challenging, subjective, or complex judgments. the communication of critical audit matters doesnot alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the criticalaudit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. f-2 asdiscussed in note 5 to the consolidated financial statements, the company issues equity awards to certain officers, employees and consultantsas compensation (the “equity awards”). the fair values of these equity awards were determined as of the grant date usinga black-scholes option-pricing model (the “black-scholes model”). the selection of the valuation methodology and assumptionsutilized in the black-scholes model are based, in part, upon assumptions for which management is required to use judgment, particularlythe risk-free interest rate, volatility, and dividend yield. weidentified the valuation of the equity awards as a critical audit matter because of the significant judgments made by management to determinethe grant date fair values. this required a high degree of auditor judgment and an increased expenditure of effort when performing auditprocedures to evaluate the reasonableness of management’s valuation methodology and related assumptions, including the risk-freeinterest rate, volatility, and dividend yield. ouraudit procedures related to the determination of the fair values of the equity awards, including the valuation methodology and relatedassumptions such as the risk-free interest rate, volatility, and dividend yield, consisted of the following, among others: ●weobtained an understanding of management’s process over the valuation of the equity awards, including those over the determinationof the valuation methodology and related assumptions, including the risk-free interest rate, volatility, and dividend yield.●weobtained and read the equity award agreements and management’s valuation analyses, including supporting schedules and related narrativeinformation.●weevaluated management’s valuation methodology, including the selection of the model to determine the fair values of the equity awards.●weevaluated the reasonableness of management’s valuation assumptions and the underlying source information of significant valuationassumptions, including the risk-free interest rate, volatility, and dividend yield.●weassessed whether management’s calculations of the fair values were applied in accordance with the selected methodology, includingtesting the mathematical accuracy of the valuation analyses.●wedeveloped independent estimates for the fair values of the equity awards based on assumptions utilized by the company in its calculations. wehave served as the company’s auditor since 2008.	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. 59 table of contents accounting for and valuation of asset acquisition critical audit matter description on december 10, 2021, the company completed the acquisition of all the issued and outstanding common shares of aquila resources inc. the company determined that the acquisition should be accounted for as an asset acquisition. refer to notes 1, 2, 6, 10, and 12 of the consolidated financial statements. we identified the asset acquisition as a critical audit matter due to the significant judgment and estimation required in management’s determination of the accounting and the related valuation for the gold and silver stream agreements and value ascribed to the acquired land. additionally, there is significant judgement required from management related to the tax basis of the acquired assets and the related valuation of the deferred tax liability. how the critical audit matter was addressed in the audit our audit procedures performed to address this critical audit matter included the following, among others:●we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the acquisition ●we evaluated the company’s analysis of the accounting for the gold and silver stream agreements●we evaluated the company’s use of valuation methodologies and compared significant assumptions to other sources of evidence●we involved our valuation specialists to assist in evaluating the appropriateness of the valuation methodology and testing the significant assumptions used to value the gold and silver stream agreements●we involved our real estate valuation specialist to assist in testing the significant assumptions used to value the acquired land●we performed sensitivity analysis around the significant assumptions used in the valuation of the gold and silver stream agreements to evaluate the potential change in value ascribed to the gold and silver stream agreements ●we involved our tax specialists to assist in auditing the historical tax basis of the properties acquired as well as testing the key assumptions used in the valuation of the deferred tax liability /s/ plante & moran, pllc we have served as the company’s auditor since 2016.	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.acquisition of your cause holdings, llc - valuation of acquired technology and customer relationships as described in notes 2 and 3 to the consolidated financial statements, on january 2, 2019, the company acquired your cause holdings, llc for an aggregate purchase price of $157.7 million, which resulted in $47.8 million of acquired technology and $25.9 million of customer relationships being recorded. management estimated the fair value of acquired technology using the relief-from-royalty method and estimated the fair value of customer relationships using the multi-period excess earnings method. critical estimates in management's valuation of intangible assets include, but are not limited to, estimates about expected future cash flows from customers, including revenue and operating expenses; royalty and customer attrition rates; proprietary technology obsolescence curve; the acquired company's brand awareness and market position, the market awareness of the acquired company's branded technology solutions and services; assumptions about the period of time the brand will continue to be valuable; as well as expected costs to develop any in-process research and development into commercially viable solutions and estimated cash flows from the projects when completed, and discount rates. the principal considerations for our determination that performing procedures relating to the valuation of intangible assets from the acquisition of your cause holdings, llc is a critical audit matter are (i) there was significant auditor judgment and subjectivity in applying procedures relating to the fair value measurement of the acquired technology and customer relationships due to the significant amount of judgment by management when developing these estimates, (ii) significant audit effort was required in assessing the significant assumptions, including future revenue and operating expenses, royalty and customer attrition rates, proprietary technology obsolescence curves, and the discount rate, and (iii) 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 the acquisition accounting, including controls over management’s valuation of the acquired technology and customer relationships, as well as controls over development of significant assumptions related to the valuation of these intangible assets, including future revenue and operating expenses, royalty and customer attrition rates, proprietary technology obsolescence curves, and the discount rate. these procedures also included, among others, (i) reading the purchase agreement; (ii) testing management’s process for estimating the fair value of the acquired technology and customer relationships, and (iii) testing management’s cash flow projections used to estimate the fair value of the intangible assets. testing management’s process included evaluating the appropriateness of the valuation methods and the reasonableness of significant assumptions, including future revenue and operating expenses, royalty and customer attrition rates, proprietary technology obsolescence curves, and discount rate. evaluating the reasonableness of the future revenue and operating expenses and the customer attrition rate involved considering past performance of the acquired business, as well as economic and industry forecasts. evaluating the reasonableness of the proprietary technology obsolescence curves and 542019 form 10-kroyalty rates involved evaluating the consistency of these assumptions to external market and industry data. evaluating the discount rate involved assessing the cost of capital of comparable benchmark rates and other industry factors. professionals with specialized skill and knowledge were used to assist in evaluating significant assumptions, including the royalty and customer attrition rates, proprietary technology obsolescence curves and the discount rate.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, 2019, the company’s total revenue was $900.4 million. the principal considerations for our determination that performing procedures relating to revenue recognition, specifically contracts with multiple performance obligations, is a critical audit matter are there was 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 to evaluate 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. this 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/ pricewaterhousecoopers llp raleigh, north carolina february 20, 2020we have served as the company's auditor since 2000.	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. revenue recognition description of the matter for the year ended december 31, 2020, the company recognized revenue of $551.5 million. as explained in note 2 to the consolidated financial statements, the company recognizes revenue in accordance with accounting standard codification topic 606, revenue from contracts with customers, upon transfer of control of promised services to customers in an amount that reflects the consideration the company expects to receive in exchange for those services. management’s recognition of revenue was challenging because of the higher extent of audit effort and because the amounts are material to the consolidated financial statements and related disclosures. during our risk assessment process, we identified a higher inherent risk related to revenue primarily due to the size of the account and the volume of activity, as well as the focus on revenue from readers of the financial statements. 59how 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 revenue recognition process, including controls designed to mitigate the risk of override of controls. this included testing controls over management’s review of manual journal entries and revenue related account reconciliations. we substantively tested the company’s revenue recognized for the year ended december 31, 2020, through a combination of data analytics and tests of details. our audit procedures included, among others, performing a correlation analysis between the related accounts (i.e., revenue, deferred revenue, account receivables, and cash) and testing the existence of cash receipts tied to revenue recognition. additionally, we reconciled revenue recognized to the company’s general ledger to test completeness and performed substantive test of details over significant customers deemed to be key items and a representative sample of the remaining transactions. realizability of deferred tax assets description of the matter as explained in note 13 to the consolidated financial statements, the company had gross deferred tax assets of $48.0 million, gross deferred tax liabilities of $28.4 million, and a valuation allowance of $0.2 million, resulting in net deferred tax assets of $19.5 million as of december 31, 2020. as of december 31, 2020, the company has significant deferred tax assets, including those generated as a result of excess tax deductions related to stock-based compensation awards. deferred tax assets are reduced by a valuation allowance if, based upon 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. based upon the level of historical u.s. earnings and future projections over the period in which the net deferred tax assets are deductible, at this time, management believes it is more likely than not that the company will realize $47.9 million of the benefits of these deductible differences. auditing management’s assessment of the realizability of its deferred tax assets (including the recognition, measurement, and disclosure of deferred tax assets) involved challenging auditor judgment because the assessment process is complex, involves judgment and includes assumptions about the company’s ability to generate sufficient taxable income in future periods to realize these benefits. the company’s ability to generate taxable income may be impacted by various economic and industry conditions.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 income tax process, including the company’s assessment of the realizability of deferred tax assets. this included testing controls over management’s review of the deferred tax rollforward and valuation allowance position. we tested management’s assessment of the realizability of deferred tax assets, including future taxable income exclusive of reversing temporary differences and carryforwards. audit procedures performed, among others, included evaluating the assumptions used by the company to determine the projections of future taxable income by jurisdiction and testing the completeness and accuracy of the underlying data used in its projections. for example, we tested the company’s scheduling of the reversal of existing temporary taxable differences and compared the projections of future taxable income with the actual results of prior periods as well as management’s consideration of current industry and economic trends. in addition, we also assessed the historical accuracy of management’s projections and reconciled the projections of future taxable income with other forecasted consolidated financial information prepared by the company. this analysis is especially challenging because of the company’s limited history and limited opportunity to implement tax planning strategies at this point in the life cycle of the company. in addition, we involved our tax professionals to evaluate the application of tax law in the company’s projections of future taxable income. 60 business combinations – valuation of acquired intangible assets description of the matter as described in note 4 to the consolidated financial statements, the company completed its acquisition of auto list, inc. (“autolist”) during fiscal year 2020 for net consideration of $21.1 million. the transaction was accounted for as a business combination whereby the total purchase price was allocated to assets acquired and liabilities assumed based on the respective fair values. auditing the company's accounting for its acquisition of autolist was complex due to the significant estimation uncertainty in the company’s determination of the fair value of identified intangible assets of $7.6 million, which consisted of brand name, developed technology, and customer relationships. the significant estimation uncertainty was primarily due to the complexity of the valuation models prepared by management to measure the fair value of the intangible assets and the sensitivity of the respective fair values to the significant underlying assumptions. the significant assumptions used to estimate the fair value of the intangible assets included the discount rates and revenue growth rates. these significant assumptions are especially challenging to audit as they are 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 controls over the company’s valuation of acquired intangible assets. this included testing controls over the company’s estimation process supporting the recognition and measurement of intangible assets, as well as controls over management’s judgments and evaluation of underlying assumptions regarding the valuation. our audit procedures to test the estimated fair value of the acquired intangible assets included, among others, evaluating the company’s valuation methodology used to estimate the fair value of the brand name, developed technology, and customer relationship intangible assets. we involved our valuation professionals to assist with our evaluation of the methodology used by the company and certain assumptions included in the fair value estimates. for example, our valuation professionals performed independent comparative calculations to estimate the acquired entities’ discount rate. additionally, we evaluated the significant assumptions used by the company, primarily consisting of projected financial information of the acquired entity (e.g., revenue growth rates), and evaluated the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. specifically, when evaluating the assumptions related to the revenue growth rates and changes in the business that would drive these forecasted growth rates, we compared the assumptions to historical results of the acquired entity and current industry and economic trends. /s/ ernst & young llp we have served as the company’s auditor since 2016.	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.revenue recognition – estimating costs at completion – refer to note 1 and note 3 to the financial statements.critical audit matter description the company generally recognizes contract revenues and related costs over time for individual performance obligations based on a cost-to-cost method in accordance with financial accounting standards board topic revenue from contracts with customers. the company recognizes estimated contract revenue and resulting income based on the measurement of the extent of progress toward completion as a percentage of the total project. the company reviews contract price and cost estimates periodically as the work progresses and reflect adjustments proportionate to the percentage-of-completion in income in the period in which those estimates are revised. the accounting for these contracts involves judgment, particularly as it relates to the process of estimating total costs at completion for the performance obligation.given the significance of revenue and the level of judgment involved in estimating total costs at completion for the performance obligations used to recognize revenue for long-term contracts, auditing such estimates involved especially subjective judgment.44table of contents how the critical audit matter was addressed in the audit our audit procedures related to management's estimates of contract costs to complete for its performance obligations included the following, among others:•we tested the effectiveness of controls over revenue recognized over time, including those over cost estimates at completion for performance obligations.•we performed a retrospective review on prior percentage-of-completion estimates to assess management's ability to estimate costs.•we tested the recorded revenue using analytical procedures, regression analysis, and detailed contract testing.•for a selection of contracts with customers recognized over time, our detail testing performed included the following:◦read the contract to understand the contract terms and evaluated the appropriateness of the accounting treatment in accordance with generally accepted accounting principles.◦compared the transaction price to the consideration expected to be received based on current rights and obligations under the contract and any modifications that were agreed upon with the customer.◦tested management's identification of distinct performance obligations.◦tested the mathematical accuracy of management’s calculation of the percent complete, the profit margin and the revenue recognized over time.◦evaluated the estimates of total costs for the performance obligation as follows:▪tested the accuracy and completeness of the costs incurred to date used in the calculation of the total cost estimates for the performance obligation by agreeing the tested amounts to the actual costs incurred to date recorded in the general ledger.▪compared costs incurred to date to the costs management estimated to be incurred to date.▪evaluated management's ability to achieve the estimates of total cost by performing corroborating inquiries with the company's project managers and engineers, comparing the estimates to management's work plans, engineering specifications and supplier contracts, and when considered necessary, observation of the work site to evaluate project status.▪compared management's estimates for the selected contract to costs of similar performance obligations, when applicable.▪tested key inputs of the estimates (e.g., material cost estimates are compared to purchase orders, supplier contracts or other source documents)./s/ deloitte & touche llp charlotte, north carolina february 24, 2020we have served as the company's auditor since 2009.	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 board of directors 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. f-1 depreciation,depletion and amortization (“dd&a”) of proved oil and gas properties at february 28, 2022, the net carrying value of the company’s oil and gas properties was $176,553 and depreciation, depletion andamortization (“dd&a”) expense was $41,109 for the year then ended. as described in note 1 to the financial statements,the company follows the full cost method of accounting for its oil and gas properties. under the full cost method, all costs incurredin connection with the acquisition, exploration for and development of petroleum and natural gas reserves are capitalized. such costsinclude lease acquisition, geological and geophysical activities, rentals on non-producing leases, drilling, completing, and equippingof oil wells and administrative costs directly attributable to those activities and asset retirement costs. dd&a of the cost of provedoil and gas properties is calculated using the unit-of-production method based on proved oil and gas reserves, as estimated by the company’sindependent reserve engineering firm. significant judgment is required in evaluating geoscience and engineering data when estimatingproved oil and gas reserves. estimating reserves also requires the use of inputs, including oil and gas prices and operating and capitalcosts assumptions, among others. because of the complexity involved in estimating oil and gas reserves, management used an independentreserve engineering firm to estimate proved oil and gas reserves as of february 28, 2022. auditingthe company’s dd&a calculation is especially complex and judgmental because of our use of the work of the company’s independentreserve engineering firm and the evaluation of management’s determination of the inputs described above used by the independentreserve engineering firm in estimating proved oil and gas reserves. weobtained an understanding of the company’s controls over its process to calculate dd&a, including management’s controlsover the completeness and accuracy of the financial data provided to the engineers for use in estimating oil and gas reserves. ouraudit procedures included, among others, evaluating the professional qualifications and objectivity of the independent reserve engineersprimarily responsible for the preparation of the reserve estimates for select properties. in addition, in assessing whether we can usethe work of the engineers, we evaluated the completeness and accuracy of the financial data and inputs described above used by the engineersin estimating oil and gas reserves by agreeing them to source documentation, and we identified and evaluated corroborative and contraryevidence. we also tested the mathematical accuracy of the dd&a calculation, including comparing the oil and gas reserve amounts usedin the calculation to the company’s reserve reports. /s/horne llp wehave served as the company’s auditor since 2021.	5
critical audit matters thecritical audit matters communicated below are matters arising from the current period audit of the financial statements that werecommunicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are materialto the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication ofcritical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, bycommunicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts ordisclosures to which they relate. inventory valuation at december 31, 2020, the company’s inventory balance was $174,171. as described in note 2 to the financial statements, inventories,consisting solely of finished goods, are stated at the lower of cost (first-in, first-out method) or net realizable value. ifnecessary, the company provides allowances to adjust the carrying value of its inventories to net realizable value when the netrealizable value is below cost. at december 31, 2020, there were no such adjustments to inventory. ouraudit procedures included testing the reasonableness of management’s key assumptions and judgments used to determine theinventory valuation. for instance, we confirmed the units held at an independent warehouse, for selected purchases we vouched theunit costs to supplier invoices, we compared the quantities and carrying value of on-hand inventories to related unit sales, andwe reviewed historic inventory turnover. stock issued for services duringthe year ended december 31, 2020, the company recognized $177,322 in expenses related to stock issued for services. as discussedin notes 3 and 4, the company has issued stock to management under an employment agreement and periodically issued other sharesfor services. shares issued for services are recorded at their fair value on their measurement dates based upon prices on ot cmarkets. ouraudit procedures to evaluate the appropriateness and accuracy of the accounting and fair value determined by management includedreviewing the agreements and selected documentation supporting the issuances as well as recomputing the valuations made by managementby examining the prices from third party sources. /s/ boyle cpa, llc 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 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 fair value of level 3 assets and liabilities measured on a recurring basis as described in notes 1, 24 and 25 to the consolidated financial statements, the company’s assets and liabilities recorded at fair value on a recurring basis were $918.1 billion and $308.8. billion, respectively at december 31, 2020. the company estimated the fair value of level 3 assets and liabilities measured on a recurring basis ($16.1 billion and $36.0 billion, respectively at december 31, 2020) utilizing various valuation techniques with one or more significant inputs or significant value drivers being unobservable including, but not limited to, complex internal valuation models, alternative pricing procedures or comparables analysis and discounted cash flows.we identified the assessment of the measurement of fair value for level 3 assets and liabilities recorded at fair value on a recurring basis as a critical audit matter. a high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the level 3 fair values due to measurement uncertainty. specifically, the assessment encompassed the evaluation of the fair value methodology, including methods, models and significant assumptions and inputs used to estimate fair value. significant assumptions and inputs include interest rate, price, yield, credit spread, volatilities, correlations and forward prices. the assessment also included an evaluation of the conceptual soundness and performance of the valuation models.the following are the primary procedures we performed to address this critical audit matter. we involved valuation professionals with specialized skills and knowledge who assisted in evaluating the design and testing the operating effectiveness of certain internal controls related to the company’s level 3 fair value measurements including controls over:•valuation methodologies, including significant inputs and assumptions•independent price verification•evaluating that significant model assumptions and inputs reflected those which a market participant would use to determine an exit price in the current market environment •the valuation models used were mathematically accurate and appropriate to value the financial instruments•relevant information used within the company’s models that was reasonably available was considered in the fair value determination.we evaluated the company’s methodology for compliance with u.s. generally accepted accounting principles. we involved valuation professionals with specialized skills and knowledge who assisted in developing an independent fair value estimate for a selection of certain level 3 assets and liabilities recorded at fair value on a recurring basis based on independently developed valuation models and assumptions, as applicable, using market data sources we determined to be relevant and reliable and compared our independent expectation to the company’s fair value measurements.assessment of the allowance for credit losses collectively evaluated for impairment as discussed in note 1 to the consolidated financial statements, the company adopted asu no. 2016-13, financial instruments – credit losses (asc 326) as of january 1, 2020. as discussed in notes 1 and 15 to the consolidated financial statements, the company’s allowance for credit losses related to loans and unfunded lending commitments collectively evaluated for impairment (the collective acll) was $27.6 billion as of december 31, 2020. the expected credit losses for the quantitative component of the collective acll is the product of multiplying the probability of default (pd), loss given default (lgd), and exposure at default (ead) for consumer and corporate loans. for consumer credit cards, the company uses the payment rate approach over the life of the loan, which leverages payment rate curves, to determine the payments that should be applied to liquidate the end-of-period balance in the estimation of ead. for unconditionally cancelable accounts, reserves are based on the expected life of the balance as of the evaluation date and do not include any undrawn commitments that are unconditionally cancelable. the company’s models utilize a single forward-looking macroeconomic forecast and macroeconomic assumptions over reasonable and supportable forecast periods. reasonable and supportable forecast periods vary by product. for consumer loan models, the company uses a 13-quarter reasonable and supportable period and reverts to historical loss experience thereafter. for corporate loan models, the company uses a nine-quarter reasonable and supportable period followed by a three-quarter transition to historical loss experience. additionally, for consumer loans, these models consider leading credit indicators including loan delinquencies, as well as economic factors. for corporate loans, these models consider the credit quality as measured by risk ratings and economic factors. the qualitative component considers idiosyncratic events and the uncertainty of forward-looking economic scenarios.133we identified the assessment of the collective acll as a critical audit matter. the assessment involved significant measurement uncertainty requiring complex auditor judgment, and specialized skills and knowledge as well as experience in the industry. this assessment encompassed the evaluation of the various components of the collective acll methodology, including the methods and models used to estimate the pd, lgd, and ead and certain key assumptions and inputs for the company’s quantitative and qualitative components. key assumptions and inputs for consumer loans included loan delinquencies, certain credit indicators, reasonable and supportable forecast periods, expected life as well as economic factors, including unemployment rates, gross domestic product (gdp), and housing prices which are considered in the model. for corporate loans, key assumptions and inputs included risk ratings, reasonable and supportable forecasts, credit conversion factor for unfunded lending commitments, and economic factors, including gdp and unemployment rates considered in the model. key assumptions and inputs for the qualitative component included the likelihood and severity of a downside scenario and consideration of uncertainties due to idiosyncratic events as a result of the covid-19 pandemic. the assessment also included an evaluation of the conceptual soundness and performance of the pd, lgd, and ead models. in addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.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 measurement of the collective acll estimate, including controls over the:•approval of the collective acll methodologies •determination of the key assumptions and inputs used to estimate the quantitative and qualitative components of the collective acll•performance monitoring of the pd, lgd, and ead models.we evaluated the company’s process to develop the collective acll estimate by testing certain sources of data, factors and assumptions that the company used and considered the relevance and reliability of such data, factors, and assumptions. in addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in:•reviewing the company’s collective acll methodologies and key assumptions for compliance with u.s. generally accepted accounting principles•evaluating judgments made by the company relative to the development and performance monitoring testing of the pd, lgd, and ead models by comparing them to relevant company-specific metrics•assessing the conceptual soundness and performance testing of the pd, lgd, and ead models by inspecting the model documentation to determine whether the models are suitable for their intended use•assessing the economic forecast scenarios through comparison to publicly available forecasts•evaluating the methodology used to develop certain economic forecast scenarios by comparing it to relevant industry practices•testing corporate loan risk ratings for a selection of borrowers by evaluating the financial performance of the borrower, sources of repayment, and any relevant guarantees or underlying collateral•evaluating the methodology used in determining the qualitative components and the effect of that component on the collective acll compared with relevant credit risk factors and consistency with credit trends.we also assessed the sufficiency of the audit evidence obtained related to the collective acll by evaluating the:•cumulative results of the audit procedures•qualitative aspects of the company’s accounting practices•potential bias in the accounting estimates.assessment of the realizability of deferred tax assets, specifically as it relates to general basket foreign tax credits as discussed in note 9 to the consolidated financial statements, the company’s net deferred tax assets (dta) were $31.0 billion as of december 31, 2020. this balance is net of a valuation allowance of $5.2 billion recorded by the company. the estimation of the dta for general basket foreign tax credits (ft cs) and related valuation allowance was $5.3 billion and $1.0 billion respectively. the company evaluated the realization of the dta for general basket ft cs to determine whether there was more than a 50% likelihood that the dta for general basket ft cs would be realized, based primarily on the company’s expectations of future taxable income in each relevant jurisdiction, available tax planning strategies and timing of tax credit expirations. in particular, the covid-19 pandemic has negatively affected the economy and business activities in countries where the company operates, which has impacted the company’s future forecasts of taxable income as of december 31, 2020.we identified the assessment of the realizability of the dta for general basket ft cs as a critical audit matter. due to the significant measurement uncertainty associated with the realizability of the dta for general basket ft cs, there was a high degree of subjectivity and judgment in evaluating global tax regulations and future taxable income. this assessment encompassed the evaluation of the company’s estimations that are subjective and complex due to its global structure, given the company’s assumptions used to determine that sufficient taxable income will be generated or tax planning strategies implemented to support the realization 134of the dta for general basket ft cs before expiration of foreign tax credits.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 controls related to the company’s dta realizability process, including controls over the:•realizability of the company’s deferred tax assets for general basket ft cs•appropriateness of future taxable income and tax planning strategies.we tested the company’s process to develop the valuation allowance estimate. this included performing an assessment of the policy and methodology used by management in the valuation allowance determination. we involved income tax professionals with specialized skills and knowledge, who assisted in assessing:•certain assumptions used to determine the company’s future taxable income, including the interpretation of the various tax laws and regulations and the source and character of future taxable income•the timing of tax credit expirations•the prudence and feasibility of certain tax planning strategies.we performed sensitivity analyses over the company’s expectations of future taxable income and timing of tax credit expirations.evaluation of goodwill in the north american and asia global consumer banking reporting units as discussed in notes 1 and 16 to the consolidated financial statements, the goodwill balance as of december 31, 2020 was $22.2 billion, of which $12.1 billion related to reporting units within the global consumer banking segment and $10.1 billion related to reporting units within the institutional clients group segment. the company performs goodwill impairment testing on an annual basis and whenever events or changes in circumstances indicate that the carrying value of a reporting unit likely exceeds its fair value. this involves estimating the fair value of the reporting units using both discounted cash flow analyses and a market multiples approach. the covid-19 pandemic has negatively affected the economy and business activities in countries where the company operates, which impacted the company’s future forecasts used in the discounted cash flow analyses.we identified the evaluation of the goodwill impairment analysis for the north america global consumer banking and asia global consumer banking reporting units, two of the three reporting units within the global consumer banking segment, as a critical audit matter. the estimated fair value of the north america and asia global consumer banking reporting units marginally exceeded their carrying values, indicating a higher risk due to measurement uncertainty that the goodwill may be impaired and, therefore, involved a high degree of subjective auditor judgment. specifically, the assessment encompassed the evaluation of the key assumptions used in estimating the fair value of the north america and asia global consumer banking reporting units, which include the long-term growth rate, discount rate, exit multiple assumptions, certain forecasted macroeconomic assumptions used to inform the forecasted income by reporting unit, and certain assumptions used to forecast income by reporting unit including the forecast period, net interest revenue, and loan volume used in the discounted cash flow analyses.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 determination of the estimated fair value of the north america global consumer banking and asia global consumer banking reporting units, including controls related to management’s process for assessing the appropriateness of:•certain assumptions including the long-term growth rate, discount rate and exit multiple used in the discounted cash flow analyses•certain forecasted macroeconomic assumptions used to inform the forecasted income by reporting unit•certain assumptions used to forecast income by reporting unit including the forecast period, net interest revenue and loan volume.135we compared the company’s historical revenue forecasts to actual results to assess the company’s ability to accurately forecast. we evaluated the reasonableness of the company’s forecasts by comparing to analyst reports.in addition, we involved a valuation professional with specialized skills and knowledge, who assisted in:•developing an independent range of long-term growth rate assumptions by reviewing publicly available data for the united states and asian markets and comparable industries and comparing it to the company’s assumption•evaluating the discount rate by assessing the methodology used by management and developing an independent assumption for the discount rate•developing an independent range of the exit assumptions using publicly available data for comparable entities and comparing it to the company’s assumption•developing an estimate of the fair value of north america and asia global consumer banking reporting units using the income approach and comparing the results to the company’s fair value estimate•developing an independent range of control premium assumptions by comparing data from the 2008-2009 financial crisis to the company’s assumption•assessing the market capitalization reconciliation and the reasonableness of the implied control premium./s/ kpmg llp we have served as the company’s auditor since 1969.	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.goodwill – refer to notes 2 and 8 to the financial statements critical audit matter description the company’s evaluation of goodwill for impairment involves a quantitative analysis to measure whether the fair value of either of the reporting units is less than their carrying amounts, including goodwill. if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill recorded on the reporting unit.the fair value measurement of the reporting units is derived based on judgments and assumptions including the use of a discounted cash flow model to estimate fair value and inputs to the valuation model. the inputs included the long-term outlook for growth in natural gas and ng ls demand, the applied discount rate, and the five-year financial plan operating results. the use of alternate judgments and assumptions could substantially change the results of the goodwill impairment analysis, including the recognition of an impairment charge in the consolidated statement of income. the results of the 27quantitative goodwill impairment test indicated that the fair value of the company’s reporting units exceeded their carrying amounts and no goodwill impairment charges were recognized. we identified goodwill for boardwalk pipeline partners, lp as a critical audit matter because of the significant judgments made by management to estimate the fair value of each reporting unit. this required a high degree of auditor judgment and an increased extent of effort, including the need to involve fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s judgments and assumptions related to the applied discount rate, the long-term outlook for growth in natural gas and ng ls demand, and the company’s future estimated operating revenues within the five-year financial plan operating results. how the critical audit matter was addressed in the audit our audit procedures related to management’s assumptions underlying the applied discount rates, the long-term outlook for growth in natural gas and ng ls demand, and the company’s future estimated operating revenues within the five-year financial plan operating results included the following, among others:•we tested the effectiveness of controls over management’s goodwill impairment test, including controls over management’s estimate of the applied discount rate, the long-term outlook for growth in natural gas and ng ls demand, and the future estimated operating revenues for each reporting unit.•we evaluated management’s ability to accurately forecast future operating revenues by comparing actual results to management’s historical forecasts for each reporting unit.•we evaluated the reasonableness of the future estimated operating revenues within the five-year financial plan operating results by comparing the forecasts to:–historical operating revenues of the company’s similar or existing contracts with customers and average annual growth rates.–forecasted information in analyst and industry reports for the company and certain of its peer companies.•with the assistance of our fair value specialists, we evaluated the reasonableness of the applied discount rate, and the long-term outlook for growth in natural gas and ng ls demand used as inputs to management’s goodwill impairment test for each reporting unit by:–comparing the company’s estimate of the long-term outlook for growth in natural gas and ng ls demand for each reporting unit to industry reports and other market data.–developing a range of independent estimates of the applied discount rate for each reporting unit and comparing those to the applied discount rates selected by management for each reporting unit./s/ deloitte & touche llp houston, texas february 9, 2021 we have served as the company's auditor since 2003.	2
critical audit matters thecritical audit matters communicated below are matters arising from the current period audit of the consolidated financial statementsthat were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that arematerial to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. thecommunication 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 theaccounts or disclosures to which they relate. 2295nw corporate blvd., suite 240 • boca raton, fl 33431-7328phone:(561) 995-8270 • toll free: (866) cpa-8500 • fax: (561) 995-1920www.salbergco.com• info@salbergco.com member national association of certified valuation analysts • registered with the pcaob member cpa connect with affiliated offices worldwide • member aicpa center for audit quality f-2 derivative liabilities asdescribed in footnote 2 “fair value of financial instruments”, footnote 2 “convertible debt and warrant accounting”,footnote 4 “notes payable and convertible promissory notes” and footnote 4 “derivatives liabilities pursuant to convertible notes and warrants”, the company recorded derivative activity during 2021 that resulted primarily in a net aggregate derivativerelated expense of $4.103 million and derivative liabilities of $7.697 million at december 31, 2021. weidentified the evaluation of instruments and contracts to determine whether there are derivatives to be recorded, the analysis of theaccounting treatment and presentation for derivative transactions and the valuation of derivatives as critical audit matters. auditingmanagement’s analysis of the above critical audit matters was complex and involved a high degree of subjectivity. theprimary procedures we performed to address these critical audit matters included (a) reviewed and tested management’s conclusionsas to whether certain instruments or contracts qualified for derivative treatment by comparing management’s analysis and conclusionsto authoritative and interpretive literature, (b) compared the accounting treatment and presentation to that described by the authoritativeand interpretive literature, (c) tested management’s process for valuing derivatives by comparing it to generally accepted methodologiesfor valuing derivatives, (d) tested management’s valuation of the derivatives by testing assumptions and data used in the valuationmodel including the term, volatility and interest rate, and (e) recomputed the derivative valuations. /s/salberg & company, p.a. salberg &company, p.a.wehave served as the company’s auditor since 2021.	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. other indefinite-lived intangible assets – refer to notes 1 and 8 to the consolidated financial statements critical audit matter description the company's financial statements include indefinite lived intangible assets related to franchise agreements with vehicle manufacturers and distributors, which represent the estimated value of franchises acquired in business combinations, and distribution agreements with commercial vehicle manufacturers, which represent the estimated value for distribution rights acquired in business combinations. these intangible assets have an indefinite useful life and are measured for impairment on an annual basis. the carrying value of these intangible assets is $563.4 million as of december 31, 2020. the company’s annual impairment assessment for these intangible assets is performed on october 1 and upon the occurrence of an indicator of impairment through a comparison of its carrying amount and estimated fair value. the fair value is determined using a discounted cash flow approach, which requires management to make estimates and assumptions about revenue and profitability growth, profit margins, and the cost of capital. changes in these estimates and assumptions could have a significant impact on the fair value of the franchise agreements. the company's impairment analysis performed as of october 1, 2020, resulted in no impairment. how the critical audit matter was addressed in the audit our audit procedures related to the forecasts of future revenue and profitability growth, and the selection of the cost of capital included the following, among others:●we tested the effectiveness of controls over the intangible asset impairment analysis, including those over the inputs, assumptions, calculations, and the selection of the cost of capital. ●we evaluated the reasonableness of management’s forecasts of future revenue, and profitability growth by comparing the forecasts to:o historical revenue and profitability growth.f-4table of contentso internal communications to management and the board of directors. o analyst and industry reports for the company and certain of its peer companies. ●with the assistance of our fair value specialists, we evaluated the reasonableness of the cost of capital by:o testing the source information underlying the determination of the cost of capital and the mathematical accuracy of the calculation.o developing a range of independent estimates and comparing those to the cost of capital selected by management./s/ deloitte & touche llp detroit, michigan february 19, 2021 we have served as the company’s auditor since 1999.	2
critical audit matters the critical audit matters communicated below are matters 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. assessment of goodwill recoverability as described in note 3 to the company’s consolidated financial statements, goodwill totaled $183,397 thousands as of december 31, 2020. the company performs an annual assessment of the recoverability of its goodwill during the fourth quarter, and also performs an assessment on an interim basis when events or changes in circumstances indicate that the carrying value of a reporting unit may exceed its fair value. based on the results of the impairment testing the company recorded impairment charges for india, south africa, argentina and australia reporting units. we identified the assessment of the recoverability of goodwill as a critical audit matter. the determination of the fair value of the reporting units requires management to estimate significant assumptions including future revenue and terminal growth rates, margin assumptions and discount rates to estimate future cash flows. auditing management’s significant assumptions used in the assessment of the recoverability of goodwill involved especially challenging and subjective auditor judgment due to the company’s operating performance during 2020 which has been negatively impacted by macroeconomic factors arising from the covid-19. the primary procedures we performed to address this critical audit matter included: ● testing the design and operating effectiveness of controls related to management’s forecasting process, including the assessment of historical information utilized, future revenue and terminal growth rates, margin assumptions and discount rates to estimate future cash flows. ● evaluating the reasonableness of management’s assumptions used to develop cash flow forecasts by comparing them to prior period forecasts, historical operating performance, internal and external communications made by the company and forecasted information included in industry reports. ● utilizing personnel with specialized knowledge and skill in valuation to assist in: (i) evaluating the reasonableness of the discount rate and terminal growth rate used in the income approach, and (ii) evaluating the market capitalization reconciliation. revenue recognition as described in note 4 to the company’s consolidated financial statements, certain of the company’s revenue contracts include terms to earn bonuses or include parameters under which the company will incur penalties related to performance in any given month. bonuses and penalties are calculated based on formulas included in these revenue contracts. the company estimates the amount of the bonus or penalty using the “most likely amount” method. we identified the assessment of management’s measurement of unbilled revenue at the reporting period end as a critical audit matter because: (i) the company’s revenue contracts have discounts and penalty provisions and customer acceptance clauses, and (ii) an identified material weakness in the company’s internal controls over revenue recognition. auditing these elements involved especially challenging auditor judgment in evaluating the appropriateness of the company’s revenue recognition and an increased level of audit effort. the primary procedures we performed to address this critical audit matter included: ● evaluating management’s accounting policies and practices including the reasonableness of management’s judgments and assumptions relating to the company’s revenue recognition including evaluation of revenue contract terms. ● testing a sample of revenue contracts and underlying order documents to evaluate appropriateness of management’s revenue recognition including assessment of revenue contract terms. /s/ bdo india 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 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.the impact of proved oil and gas reserves on proved oil and gas properties, net as described in notes 1 and 3 to the consolidated financial statements, a significant portion of the company’s properties and equipment, net balance of $17,375 million as of december 31, 2021 and depreciation, depletion and amortization (dd&a) expense of $693 million for the year ended december 31, 2021 relate to proved oil and gas properties. the company uses the successful efforts method of accounting for its oil and gas producing activities. as disclosed by management, the company’s rate of recording dd&a expense is dependent upon the estimate of proved and proved developed reserves, which are utilized in the unit-of-production calculation. in estimating proved oil and natural gas reserves, management relies on interpretations and judgment of available geological, geophysical, engineering and production data, as well as the use of certain economic assumptions such as commodity prices. additional assumptions include drilling and operating expenses, capital expenditures, taxes and availability of funds. the estimates of oil and natural gas reserves have been developed by specialists, specifically petroleum engineers. the principal considerations for our determination that performing procedures relating to the impact of proved oil and natural gas reserves on proved oil and gas properties is a critical audit matter are (i) the significant judgment by management, including the use of specialists, when developing the estimates of proved oil and natural gas reserves, which in turn led to (ii) a high degree of auditor judgment and effort in performing procedures and evaluating the audit evidence related to the data, methods, and assumptions used by management and its specialists in developing the estimates of proved oil and natural gas reserves. 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 and natural gas reserves. the work of management’s specialists was used in performing the procedures to evaluate the reasonableness of the proved oil 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 completeness and accuracy of the data used by the specialists, and an evaluation of the specialist’s findings.merger with cimarex energy co. – valuation of oil and gas properties as described in note 2 to the consolidated financial statements, on october 1, 2021 the company completed a merger with cimarex energy co. for approximately $9.1 billion. the transaction was accounted for using the acquisition method of accounting, under which the assets, liabilities, and mezzanine equity will be recorded at their respective fair values. determining the fair value of the assets and liabilities requires judgment and certain assumptions to be made, the most significant of these being related to the valuation of oil and gas properties, which were recorded at a fair value of $12.9 billion. as disclosed by management, since sufficient market data was not available regarding the fair values of the acquired oil and gas properties, management prepared the estimates using discounted cash flows and engaged third party valuation experts. significant judgments and assumptions are inherent in these estimates and include, among other things, estimates of reserve quantities and production volumes, future commodity prices and price differentials, expected development costs, lease operating costs, reserve risk adjustment factors and an estimate of an applicable market participant discount rates that reflects the risk of the underlying cash flow estimates. the principal considerations for our determination that performing procedures relating to the valuation of oil and gas properties from the merger with cimarex energy co. is a critical audit matter are (i) the significant judgment by management, 68table of contentsincluding the use of specialists, when determining the fair value of the acquired oil and gas properties, 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 production volumes, future commodity prices and price differentials, lease operating costs, reserve risk adjustment factors, and the market participant discount 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 acquisition accounting, including controls over the fair value estimate of oil and gas properties. these procedures also included, among others (i) testing management’s process for developing the fair value of the acquired oil and gas properties; (ii) evaluating the appropriateness of the discounted cash flow models; (iii) testing the completeness and accuracy of underlying data used in the discounted cash flow modes; and (iv) evaluating the reasonableness of the significant assumptions used by management related to production volumes, future commodity prices and price differentials, lease operating costs, reserve risk adjustment factors, and the market participant discount rates. the work of management’s specialists was used in performing the procedures to evaluate the reasonableness of the oil and natural gas reserves as stated in the critical audit matter titled “the impact of proved oil and natural gas reserves on proved oil and gas properties” and the reasonableness of the production volumes used in the discounted cash flows. as a basis for using this work, management’s 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 completeness and accuracy of data used by the specialists, and an evaluation of the specialists’ findings. evaluating the reasonableness of management’s assumptions relating to future commodity prices and price differentials and lease operating costs involved evaluating whether the assumptions used by management were reasonable considering the past performance of cimarex energy co., the consistency with external market and 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 reasonableness of the significant assumptions related to the market participant discount rates and reserve risk adjustment factors./s/ pricewaterhouse coopers llp houston, texas march 1, 2022 we have served as the company’s auditor since 1989.	5
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. 72impairment of indefinite-lived intangibles including goodwill and trademarks description of the matter as of december 29, 2020, the balance of indefinite-lived intangibles including goodwill and trademarks was $317.4 million, which includes current period impairment charges of $99.2 million. the company conducts annual goodwill and trademark impairment tests in the fourth quarter of each fiscal year or whenever an indicator of impairment exists. as explained in note 6 to the consolidated financial statements, in march 2020, the outbreak of the covid-19 pandemic prompted authorities in most jurisdictions where the company operates to issue stay-at-home orders, leading to an unexpected significant disruption to the company's business requiring the company to close restaurant dining rooms and operate with only drive-thru, take-out and delivery orders. as such, the consequences of the outbreak of the covid-19 pandemic coupled with a decline in the company's stock price were determined to be indicators of impairment. accordingly, the company performed an interim quantitative goodwill impairment assessment as of march 24, 2020 in accordance with accounting standards codification (“asc”) 350, intangibles – goodwill and other, using both the discounted cash flow method and guideline public company method to determine the fair value of its reporting unit. based on the quantitative assessment, the company determined that the fair value of its reporting unit was less than its carrying value and recognized a goodwill impairment charge equal to the excess of the reporting unit's carrying value above its fair value. the company also performed a quantitative impairment assessment of its indefinite-lived trademarks using the relief from royalty method to determine the fair value of its trademarks, determining the fair value of its trademarks was less than its carrying value and recognized an impairment charge equal to the excess of the trademarks' carrying value above their fair value.auditing the impairment of indefinite-lived intangibles including goodwill and trademark is complex and challenging due to the significant judgment and estimation needed to develop the prospective financial information used as part of the impairment analysis. the highly judgmental nature of forecasting future revenues and operating costs, among other inputs and assumptions, requires significant auditor judgment as these assumptions have a significant impact on the results of the impairment analysis.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 impairment assessment process. this included controls over the company’s review of potential impairment indicators, the impairment calculations, the significant assumptions, and the data inputs used.our audit procedures included, among others, evaluating the methodologies used in assessing goodwill and trademarks for impairment, the significant assumptions, including restaurant sales, food and paper costs, labor costs, discount rate, royalty rates, and testing the underlying data used by the company. we compared the assumptions used by the company to historical and market trends and evaluated changes in the assumptions from prior year. in addition, we evaluated the company’s forecasts considering the continuing impacts of the covid-19 pandemic. we involved a specialist to assist in evaluating the methodologies and assumptions, including the discount and royalty rates, used by management in the fair value determination of goodwill and the company’s trademarks. further, we have evaluated the company’s indefinite-lived intangibles including goodwill impairment disclosures included in note 6 in relation to this matter.73impairment of long-lived assets, including property and equipment, net and operating lease right-of-use assets description of the matter as of december 29, 2020, the net balance of long-lived assets, including property and equipment and operating lease right-of-use assets was $395.8 million, which includes current period impairment charges totaling $8.3 million. as explained in note 3 to the consolidated financial statements, the company evaluates long-lived assets for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. the company considers a triggering event to have occurred related to a specific restaurant if the restaurant’s cash flows are less than a minimum threshold or other qualitative factors indicate that the company’s long-lived asset balances are not recoverable. long-lived assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are independent of the cash flows of other groups of assets. the company evaluates such cash flows for individual restaurants on an undiscounted basis. if it is determined that the carrying amounts of such long-lived assets are not recoverable, an impairment charge is recorded to write the asset group down to its estimated fair value. the company evaluated certain restaurants having indicators of impairment based on operating performance, taking into consideration the negative impact of the covid-19 pandemic on forecasted restaurant performance, which resulted in impairment charges during the year.auditing the company’s impairment assessment for long-lived assets is challenging because of the subjective auditor judgment necessary in evaluating management’s identification of indicators of potential impairment. additionally, significant judgment is used in evaluating the assessment of the severity of such indicators in determining whether a triggering event has occurred that requires the company to evaluate the recoverability of the assets as well as the significant estimation used in developing prospective financial information. the prospective financial information includes assumptions related to undiscounted cash flows such as expected future earnings and the discount rate applied to such cash flows. these significant assumptions are 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 controls over the company’s impairment assessment process. this included controls over management’s review of impairment indicators and the significant assumptions and the data inputs used to estimate cash flows.our audit procedures included, among others, assessing the methodologies and testing the completeness and accuracy of the company’s evaluation of indicators of impairment, including the analysis of restaurant level operating results as well as events or changes in circumstances. as part of our evaluation, we considered location specific operating results, market conditions, including economic trends, and changes to the company’s operations, in assessing whether an indicator of impairments exists. our audit procedures also included evaluating the significant assumptions for the determination of fair value of long-lived asset groups and testing the underlying data used in management’s estimation for relevancy, completeness and accuracy. evaluating the significant assumptions used by management in the impairment assessment involved considering current and past performance of the company’s restaurants, evaluating whether the assumptions were consistent with evidence obtained in other areas of the audit and with key performance indicators across the industry. in addition, we evaluated the company’s forecasts considering the continuing impacts of the covid-19 pandemic./s/ ernst & young llp we have served as the company’s auditor since 2006.	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.revenue on certain contracts recognized over time – refer to notes 2 and 3 to the financial statements critical audit matter description the company recognizes revenue from the majority of its installation contracts when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the company expects to be entitled to in exchange for those goods or services. for contracts that are not complete at the reporting date (“uncompleted contracts”), the company recognizes revenue over time utilizing a cost-to-cost input method, as the company believes this represents the best measure of when goods and services are transferred to the customer. when this method is used, the company estimates the costs to complete individual contracts and records as revenue that portion of the total contract price that is considered complete based on 49table of contentsthe relationship of costs incurred to date to total anticipated costs. under the cost-to-cost method, the estimated cost to complete each contract requires judgment and can change throughout the duration of a contract due to contract modifications and other factors impacting job completion. the costs related to earned revenue include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs.the company’s estimation process for determining revenues for uncompleted contracts accounted for under the cost-to-cost method is based upon historical experience, the professional judgment and knowledge of the company’s project management, operational and financial professionals, and an assessment of the key underlying factors, such as the value of executed contracts, change orders, and related contract costs, that may impact the revenues and costs of uncompleted contracts.given the judgments necessary to estimate the relationship between executed contract value and contract costs, auditing the amount of revenue recognized for uncompleted contracts involves a high degree of auditor judgment.how the critical audit matter was addressed in the audit our audit procedures related to estimated revenue recognized on uncompleted contracts included the following, among others:•we tested the effectiveness of the company’s controls over the determination of uncompleted contract revenue, including those over estimated total costs and revenues recognized through performance obligations.•we inquired of project managers and evaluated the reasonableness of management’s ability to accurately estimate costs by comparing incurred contract costs on uncompleted contracts to management’s projections.•we compared accounting records to executed contracts and change orders to verify accuracy of contract values in the company’s estimates.•we considered the impact of change orders and other related contract costs that may impact the determination of revenue and estimated costs to completion.•we tested the mathematical accuracy of the company’s calculation of revenue recognized over time.•we selected a sample of contract costs incurred as of december 31, 2020, agreed the costs to supplier invoices or other supporting documents, and evaluated whether the costs were properly allocated to the contracts included in management’s calculation of revenue recognized over time.•we developed an expectation of revenue for uncompleted contracts with remaining performance obligations as of december 31, 2020 based on (1) consideration of incurred contract costs and (2) results realized by the company on completed contracts. we compared this expectation to the company’s revenue recognized on uncompleted contracts at december 31, 2020./s/ deloitte & touche llp columbus, ohio february 24, 2021we have served as the company’s auditor since 2013.	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.liquidity — refer to note 1 to the financial statements critical audit matter description the company’s primary uses of cash include the payment of property operating and other expenses, including general and administrative expenses and debt service (collectively, “obligations”), and certain development expenditures. property rental income, which is the company’s primary source of operating cash flow, did not fully fund obligations and certain development expenditures incurred during the year ended december 31, 2021. obligations and certain development expenditures are projected to continue to exceed property rental income until the company has redeveloped a majority of its portfolio and additional tenants have moved into the redeveloped sites and commenced paying rent.the company expects to fund its obligations and certain development expenditures with cash on hand and sales of properties, subject to any approvals that may be required under the company’s term loan facility. f-2 we identified the company’s liquidity disclosure as a critical audit matter because of the significant judgments in management’s plans to fund its obligations and certain development expenditures. this required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate management’s conclusion that it is probable the company’s plans will be effectively implemented within one year after the date the financial statements are issued and will provide the necessary cash flows to fund the company’s obligations and certain development expenditures.how the critical audit matter was addressed in the audit our audit procedures related to the company’s liquidity disclosure included the following, among others:•we tested the effectiveness of the controls over management’s plan, key assumptions, and related disclosures.•we tested management’s key assumptions, including projected rental income and property operating costs by comparing such assumptions to underlying lease agreements and historical operating costs.•we evaluated management’s estimates relating to development expenditures by comparing to underlying development budgets and costs spent to date.•we evaluated the timing and likelihood of potential asset sales by comparing expected proceeds to executed contracts, comparable market information and historical transactions executed by the company.•we engaged in discussions with management regarding the company’s intent and ability to generate the planned capital through sales of properties. •we evaluated management’s plans in the context of other audit evidence and analyzed external filings and press releases to determine whether it supported or contradicted the conclusion reached by management.real estate investments – impairment — refer to note 2 to the financial statements critical audit matter description the company, on a periodic basis, assesses whether there are indicators that carrying value of real estate assets may not be recoverable. if an indicator is identified, management will estimate the real estate asset recoverability based on projected operating cash flows to determine whether the undiscounted cash flows exceed the real estate asset’s carrying value. if the undiscounted cash flows are less than carrying value of a real estate asset, an analysis is performed to determine the estimated fair value of the real estate asset. if management determines that the carrying value of a real estate asset is impaired, a loss will be recorded on a real estate asset for the excess of its carrying value over its estimated fair value.the company makes significant assumptions in estimating future undiscounted cash flows, including capitalization rates and, as necessary, the discount rate and sales comparables to determine the estimated fair value of real estate assets. the company recorded approximately $96 million of impairment losses for the year ended december 31, 2021.the company’s assumptions used in estimating the undiscounted cash flow for real estate assets and the estimated fair value for real estate assets when not recoverable, is subjective and requires judgment. because of this, auditing these assumptions required a high degree of auditor judgment and extensive auditor 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 evaluating management’s estimated undiscounted cash flows and the estimated fair value of real estate assets included the following, among others:•we tested the effectiveness of the controls over management’s evaluation of real estate assets for impairment, specifically controls over the estimated undiscounted cash flows and the estimated fair value of real estate assets. •we evaluated whether the assumptions were consistent with evidence obtained in other areas of the audit and industry reports.•we engaged in discussions with management to evaluate the company’s plans to develop an asset or dispose of an asset when evaluating the assumptions made by management. f-3 •we evaluated the company’s determination of the estimated undiscounted cash flows for those assets with impairment indicators and, as necessary, the estimated fair value for assets that the carrying value was determined not to be recoverable by performing the following:o with the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology; (2) significant assumptions made, including testing the source information underlying the determination of the capitalization rates and, as necessary, discount rates and sales comparables and (3) mathematical accuracy of the cash flow and estimated fair value models utilized by management. /s/ deloitte & touche llp new york, new york march 15, 2022we have served as the company’s auditor since 2015.	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. f-1 revenue recognition – refer to notes 2 and 7 to the financial statements critical audit matter description as described in notes 2 and 7 to the financial statements, the company recognizes revenue upon transfer of control of promised services to customers in an amount that reflects the consideration the company expects to receive in exchange for those services. the company primarily sells software solutions, cloud-based services and consulting services to major wireless network and cable operators. significant judgement is exercised by the company in determining revenue recognition for the company’s customers controls, and includes the following: •determination of whether promised services are capable of being distinct and are distinct in the context of the company’s customer contracts which leads to whether they should be accounted for as individual or combined performance obligations. •determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately. •determination of the timing of when revenue is recognized for each distinct performance obligation either over time or at a point in time. we identified revenue recognition as a critical audit matter because of the significant judgements required by management. this required a high degree of auditor judgement and an increased extent of error when performing audit procedures to evaluate whether revenue was recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the company expects to be entitled to in exchange for those services. how the critical audit matter was addressed in the audit our audit procedures related to the company’s revenue recognition for the company’s customer contracts included the following, among others: •we selected a sample of recorded revenue transactions and performed the following procedures: o 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. o 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. o tested the mathematical accuracy of management’s calculations of revenue and associated timing of revenue recognized in the financial statements. •we evaluated management’s significant accounting policies related to revenue recognition for reasonableness. we evaluated management’s estimate of standalone selling prices and the timing of revenue recognition. f-2 business combination – refer to note 3 to the financial statements critical audit matter description as discussed in note 3 to the financial statements, the company completed an acquisition for as a business combination during fiscal 2020: circle media labs inc. (circle) for consideration of $13.5 million. auditing the company’s accounting for its acquisition of circle was complex due to the significant estimation required in determining the fair value of intangible assets, which were valued and recorded at $11.3 million. the company used a discounted cash flow model to measure the 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. this significant assumption is forward-looking and could be affected by future economic and market conditions. how the critical audit matter was addressed in the audit our audit procedures related to the company’s estimated fair value of the intangible assets included the following, 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 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. /s/ singer lewak llp we have served as the company’s auditor since 2004.	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.valuation of casino receivables — refer to notes 2 and 4 to the financial statements critical audit matter description accounts receivable as of december 31, 2021 include credit extended to casino patrons and gaming promoters. the company records a provision for credit losses based on the amount of expected credit losses. the company applies standard reserve percentages to aged account balances, which are grouped based on shared credit risk characteristics and days past due. the reserve percentages are based on estimated loss rates supported by historical observed default rates over the expected life of the receivable and are adjusted for forward-looking information. the company also specifically analyzes the collectability of each account with a balance over a specified dollar amount, based upon the 67table of contentsage of the account, the customer's financial condition, collection history, and any other known information and adjusts the aforementioned reserve with the results from the individual reserve analysis.auditing the valuation of accounts receivable involved a high degree of subjectivity in evaluating management’s judgments related to the collectability of patron accounts receivable, especially as it relates to the evaluation of patron assets available to repay amounts owed.how the critical audit matter was addressed in the audit we planned and performed the following procedures in connection with forming our overall opinion on the financial statements:•we tested the operating effectiveness of controls over the granting of casino credit, controls over the collection processes and management’s review controls over the assessment of the collectability of casino receivables, including the information used by management in those controls.•for a selection of casino receivables, we (1) obtained evidence related to payment history and correspondence with patron or gaming promoter, (2) evaluated management’s use of this information in establishing a provision for credit losses, and (3) examined subsequent settlement, if any. •performed a retrospective analysis of historical reserves evaluating subsequent collections and write-offs.long-term debt – macao related – refer to notes 1 and 10 to the financial statements critical audit matter description the company classified (i) senior notes issued by the company’s 69.9% owned subsidiary, sands china, ltd. (“scl”), with an aggregate carrying value of $7,091 million (the “scl senior notes”), and (ii) $753 million in loans outstanding under the scl’s revolving credit facility (the “scl loans”) as long-term debt as of december 31, 2021. the scl senior notes mature, and the scl revolving credit facility (of which the scl loans are part) terminates, beyond one year after december 31, 2021.venetian macau limited (“vml”), a subsidiary of scl and indirect subsidiary of the company, conducts gaming operations in macao pursuant to concession agreements awarded by the macao government to three different concessionaires and three subconcessionaires, of which vml is one. these concession agreements are set to expire on june 26, 2022. scl intends to follow the process for a concession renewal once the process and requirements are announced by the macao government. the indentures of the scl senior notes include an “investor put option” that could potentially be triggered if none of scl or any of its subsidiaries own or manage casino or gaming areas in macao or operates casino games in substantially the same manner as of the scl senior notes issue date for a period of 30 consecutive days or more and such event has a material adverse effect on the financial condition, business properties, or results of operations of scl and its subsidiaries taken as a whole. if both of these conditions occur, it would result in each holder of the scl senior notes having the right to require scl to repurchase all or any part of such holder’s scl senior notes, potentially within one year of december 31, 2021. additionally, under the terms of scl’s credit facility, the events that trigger an investor put option under the scl senior notes (as described above) would be an event of default, which may result in commitments being immediately cancelled, in whole or in part, and the related outstanding balances and accrued interest, if any, becoming immediately due and payable.auditing the classification of the scl senior notes and scl loans as current or noncurrent liabilities involved a high degree of auditor judgment and an increased extent of effort, as this classification is, in part, dependent on management’s assessment of the probability of the investor put option becoming exercisable within one year of december 31, 2021, which is a subjective assessment that required management to consider many factors, specifically as it relates to the likelihood of the gaming subconcession being extended or renewed beyond june 26, 2022.how the critical audit matter was addressed in the audit our audit procedures related to management’s assessment of the likelihood of the gaming subconcession being extended or renewed included the following, among others:68table of contents•we tested the effectiveness of controls over management’s process to determine the classification of debt, including such controls over (i) assessing the likelihood of the gaming subconcession being extended or renewed and (ii) identifying and assessing applicable authoritative accounting standards and related interpretive literature, as well as the information used by management in those controls.•we consulted with subject matter experts within our firm regarding the application of accounting principles generally accepted in the united states of america pertaining to the classification of indebtedness. •we evaluated the company’s disclosures related to the renewal or extension of the gaming subconcession.•we evaluated relevant information known to us, including information provided to us by the company’s management and information that was publicly available, particularly regarding recent developments pertaining to the formulation by the macao government of the process and requirements for renewal or the potential extension of vml’s ability to conduct gaming operations in macao./s/ deloitte & touche llp las vegas, nevada february 4, 2022we have served as the company's auditor since 2013.	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 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. transfers of financial assets as described further in notes 2, 7, and 8 to the financial statements, the company recognized gains on loan sales of approximately $217.6 million during the year ended december 31, 2020. the company is party to various transfer agreements pursuant to which it sells finance receivables meeting specified underwriting criteria to certain financing partners. the company also transfers its finance receivables in connection with asset backed securitization transactions. the company determines the accounting for the transfers of its finance receivables under asc 860, transfers and servicing of financial assets (“asc 860”). we determined transfers of financial assets is a critical audit matter primarily because the related accounting guidance for transfers of finance receivables involves material transactions, complex judgments in determining the appropriateness of derecognition of the assets and obtaining legal opinions regarding isolation of the transferred finance receivables from the transferor.73our audit procedures related to the transfers of finance receivables and related gain on loan sales included the following, among others: • we tested the appropriateness of management’s accounting conclusions on the transfers of finance receivables by reading the various transfer or sale agreements and legal opinions, provided by the company’s external legal counsel, and compared the terms and conclusions to the criteria set forth in asc 860; • we tested the design and operating effectiveness of key controls relating to the transfers of finance receivables and related gains on loan sales, and the accounting conclusions reached thereon./s/ grant thornton llp we have served as the company’s auditor since 2015.	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 (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 citoxlab - valuation of acquired customer relationship intangible assets as described in notes 1 and 2 to the consolidated financial statements, the company completed the acquisition of citoxlab on april 29, 2019. the preliminary purchase price allocation included customer relationship intangible assets (also referred to as client relationships) of $134.6 million. the determination of the fair value of intangible assets, which represent a significant portion of the purchase price, requires the use of significant judgment with regard to (i) the fair value; and (ii) the period and the method by which the intangible assets will be amortized. to determine the fair value of the acquired client relationships, management utilized the multiple period excess earnings model (a commonly accepted valuation technique), which includes the following key assumptions: projections of cash flows from the acquired entities, which include future revenue growth rates, operating income margins, and customer attrition rates, as well as discount rates based on an analysis of the weighted average cost of capital. the principal considerations for our determination that performing procedures relating to the acquisition of citoxlab - valuation of acquired customer relationship 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 fair value measurement of customer relationship intangible assets acquired due to the significant amount of judgment and estimation by management when developing the estimate, (ii) significant audit effort was required in evaluating the key assumptions relating to the estimate, including future revenue growth rates, operating income margins, customer attrition rates, and discount rates, and in evaluating audit evidence relating to the economic useful life over which cash flow projections were estimated in the valuation of the customer relationship intangible assets, 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 valuation of acquired customer relationship intangible assets, including controls over the review of the valuation methodology, the key assumptions underlying the valuation, and the useful lives of the acquired customer relationship intangible assets. these procedures also included, among others, (i) reading the purchase agreement, (ii) testing management’s process for estimating the fair value of customer relationship intangible assets and evaluating the reasonableness of the estimated future revenue growth rates, operating margins and customer attrition rate assumptions by evaluating their consistency with data from external sources, past performance of the acquired business, and evidence obtained in other areas of the audit, and (iii) evaluating the reasonableness of the economic useful life over which cash flow projections are estimated. professionals with specialized skill and knowledge were used to assist in the evaluation of the company’s valuation model and certain significant assumptions, including customer attrition and the discount rates. discovery and safety assessment revenue recognized over time 53as described in notes 1 and 3 to the consolidated financial statements, the company recognized revenue of $1,619.0 million in its discovery and safety assessment (dsa) segment in 2019, of which $1,618.3 million was recognized over time as services are delivered to the customer based on the extent of progress towards completion of the performance obligation using either the cost-to-cost (input method) or right to invoice measures of progress (output method). the selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. management uses the cost-to-cost measure of progress when it best depicts the transfer of value to the customer, which occurs as the company incurs costs on its contract, generally related to fixed fee service contracts. under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. the costs calculation includes variables such as labor hours, allocation of overhead costs, research model costs, and subcontractor costs. revenue is recorded proportionally as costs are incurred. the right-to-invoice measure of progress is generally related to rate per unit contracts, as the extent of progress towards completion is measured based on discrete service or time-based increments, such as samples tested or labor hours incurred. revenue is recorded in the amount invoiced since that amount corresponds directly to the value of the company’s performance to date.the principal considerations for our determination that performing procedures relating to dsa revenue recognized over time is a critical audit matter are there was a high degree of auditor subjectivity and effort in performing procedures to evaluate the calculation of dsa revenue recognized over time, including the estimates of the variables within the calculation of the forecasted cost of service contracts, such as labor hours, allocation of overhead costs, research model costs, and subcontractor 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 dsa revenue recognized over time, including controls over the review of agreements, development of the forecasted costs, the review of budget versus actual costs incurred and the review of revenue recognition. these procedures also included, among others, (i) reading agreements and reports describing the results of services provided for a sample of service contracts selected for testing, (ii) evaluating and testing management’s process for determining the amount of revenue recognized for a sample of service contracts, which included evaluating the reasonableness of forecasted costs through a comparison of actual current year project costs to historical management cost estimates for completed service contracts, and (iii) testing actual costs incurred for a sample of in-process service contracts by examining evidence of costs incurred, including invoices, time cards, human resources documents, and the completeness and accuracy of overhead allocations./s/ pricewaterhouse coopers llp boston, massachusetts february 11, 2020 we have served as the company’s auditor since 1999.	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 a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.estimation of transaction price and variable consideration for revenue recognition including related valuation of accounts receivable – refer to note 2 to the financial statements critical audit matter description as described in note 2 to the financial statements, revenue is derived from sales and leases of electrotherapy devices and sales of related supplies and complementary products. the company recognizes revenue when control of the product has been transferred to the patient, in the amount that reflects the consideration the company expects to receive. the company estimates revenues using the portfolio approach based upon historical rates of collection, aging of receivables, product mix, trends in historical reimbursement rates by third-party payer types, and current relationships and experience with the third-party payers, which includes estimated variable consideration and relevant constraints for third-party payer refund requests, deductions and adjustments.f-1table of contents we identified the company's estimation of transaction price related to variable consideration for revenue recognition including the related valuation of accounts receivable as a critical audit matter. auditing the company's determination of variable consideration and the related constraint for revenue recognition including the recorded value for accounts receivable was challenging and complex due to the high degree of subjectivity involved in evaluating management’s estimates. this required a high degree of auditor judgment and increased extent of effort to audit and evaluate management’s key judgments.how the critical audit matter was addressed in the audit our audit procedures related to revenue recognition and accounts receivable include the following, among others:●we gained an understanding of the design of the controls over the company's contracts with customers including those controls over the processes to develop key management estimates.●we performed testing throughout the year on a sample of contracts to test the validity of sales transactions and cash receipts application. ●we also performed testing throughout the year on a quarterly basis over subsequent collections on recorded receivables.●we evaluated the significant assumptions and the accuracy and completeness of the underlying data used in management’s calculations, including evaluating management’s estimate of historical reimbursement experience as well as expected future payment behavior through a combination of underlying data validation by inspection of source documents, independent recalculation of management’s analysis, review of correspondence with third-party payers, inquiries with management and evaluation of trends in collection rates and refund requests.●we performed independent sensitivity analyses over the company's significant assumptions embodied within their key estimates including evaluation of subsequent payment activity compared with management’s estimate of expected collection rates.business combination – refer to note 3 to the financial statements critical audit matter description as described in note 3 to the financial statements, the company acquired kestrel labs, inc. (“kestrel”) on december 22, 2021 for consideration of $30.5 million, including cash, stock and contingent consideration. the acquisition of kestrel was accounted for under the acquisition method of accounting for business combinations. as such, assets acquired and liabilities assumed were recorded at their estimated fair values, including intangible assets of $10 million and contingent consideration of $9.7 million, as of the acquisition date. the contingent consideration consisted of potential payments in common stock of the company for achieving fda submission and approval and is remeasured to fair value each reporting period. the determination of fair value of identified intangible assets and contingent consideration required management to make significant estimates and assumptions and engage a valuation firm to assist with estimating the fair value of the intangible asset and contingent consideration liability.we identified the valuation of the intangible asset and contingent consideration liability as a critical audit matter. auditing the company’s accounting for the acquisition of kestrel was challenging and complex due to the degree of subjectivity involved in evaluating the estimation uncertainty and key assumptions involved in determining the fair value of acquisition-related contingent consideration and intangible assets. auditing the key assumptions in management’s estimates required a high degree of auditor judgment and increased effort.how the critical audit matter was addressed in the audit our audit procedures related to the assumptions impacting the fair value calculation of the acquisition-related contingent consideration and intangible asset included the following, among others:related to valuation of the acquisition-related contingent consideration liability:●we gained an understanding of the design of the controls over the company's accounting for the acquisition including controls over the process to develop estimates for the contingent consideration.f-2table of contents●we inquired of management to understand each milestone and key assumptions, including current progress and any results received to date and stock price volatility.●we evaluated the reasonableness of the key assumptions by comparing them (1) internal communications to management and the board of directors, (2) information included in the company’s external communications, and (3) regulatory trends to consider the impact of changes in the regulatory environment on the key assumptions.●we independently corroborated the reasonableness of the key assumptions by verifying the process and timing necessary to achieve each milestone.●with the assistance of our fair value specialists, we evaluated the reasonableness of the significant valuation assumptions and calculations byo evaluating the appropriateness of the method used for estimating fair value,o evaluating the reasonableness of the valuation assumptions utilized, including the discount rate, ando testing the completeness and mathematical accuracy of the model used to determine the estimated fair value of the contingent consideration.related to the valuation of intangible asset:●we gained an understanding of the design of the controls over the company's accounting for the acquisition including controls over the process to develop estimates for the intangible asset.●we inquired of management and the company’s personnel to understand the key assumptions, including revenue growth rates, projected margins, and the royalty rate. ●we evaluated whether the assumptions used were reasonable by considering industry data and current market forecasts, and whether such assumptions were consistent with evidence obtained in other areas of the audit.●with the assistance of our fair value specialists, we evaluated the reasonableness of the significant valuation assumptions and calculations byo evaluating the appropriateness of the method used for estimating fair value,o evaluating the reasonableness of the valuation assumptions utilized, including the discount rate, ando testing the completeness and mathematical accuracy of the calculation used to determine the estimated fair value of the intangible asset. /s/ plante & moran, pllc 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 company’s audit committee that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments by us. 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 company’s audit committee that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments by us. 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.audit matters does loans held for investment and the allowance for credit losses – refer to note 3 to the financial statements critical audit matter description the company presents certain financial assets carried at amortized cost, such as loans held for investment, at the net amount expected to be collected after credit losses. the measurement of expected credit losses over the life of each financial asset is based on information about past events, including historical experience, current conditions, macroeconomic factors, and reasonable and supportable forecasts that affect the collectability of the reported amount. to estimate credit losses, the company considers key credit quality indicators and utilizes a model-based approach for the majority of its financial assets and an individually-assessed approach for certain of its financial assets. as of december 31, 2021, the company recorded an allowance for credit losses of $46.2 million.given the significant amount of judgement required by management to estimate an allowance for credit losses, we identified the company’s allowance for credit losses to be a critical audit matter. auditing management’s allowance for credit losses requires a high degree of auditor judgment and increased extent of effort.how the critical audit matter was addressed in the audit our audit procedures related to the company’s allowance for credit losses included the following, among others: •we tested the design and operating effectiveness of controls implemented by the company related to the estimation of an allowance for credit losses. •we evaluated the accuracy and appropriateness of the loan-level information and credit quality indicators utilized by management to estimate the allowance for credit losses. •we evaluated the reasonableness of the methodology and significant assumptions used to develop the macroeconomic factors by considering relevant industry trends and economic conditions, including whether the methodology and significant assumptions were appropriate and not inconsistent with other market participants. •for loans with an allowance for credit loss developed using a model-based approach, we evaluated the appropriateness of the model and significant inputs to the model used by the company. •for loans with an allowance for credit loss developed using an individually assessed approach, we, with the assistance of internal fair value specialists, evaluated the appropriateness of the valuation methodology, significant assumptions and inputs, and mathematical accuracy of the valuation model used by management to determine the fair value of the collateral on which the allowance for credit loss is based. /s/ deloitte & touche llp dallas, texas february 22, 2022 we have served as the company’s auditors since 2016.	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. vitas revenue implicit price concessions as described in note 2 to the consolidated financial statements, service revenue for vitas is reported at the amount that reflects the ultimate consideration management expects to receive in exchange for providing patient care. these amounts are due from third-party payors, primarily commercial health insurers and government programs (medicare and medicaid). management estimates the transaction price for patients with deductibles and coinsurance, along with those uninsured patients, based on historical experience and current conditions. the estimate of any contractual adjustments, discounts or implicit price concessions reduces the amount of revenue initially recognized. settlement with third-party payors for retroactive adjustments due to audits, reviews or investigations are considered variable consideration and are included in the determination of the estimated transaction price for providing patient care. the variable consideration is estimated based on the terms of the payment agreement, existing correspondence from the payor and the company’s historical settlement activity. the impact of these estimates is disclosed as implicit price concessions and totaled $15 million for the year-ended december 31, 2020. the principal considerations for our determination that performing procedures relating to vitas revenue implicit price concessions is a critical audit matter are the significant judgment by management when developing the estimate of implicit price concessions used in determining the transaction price for each third-party payor. this in turn led to significant auditor judgment, subjectivity, and effort in performing procedures to evaluate the ultimate consideration management expects to receive, related to estimates of implicit price concessions including retroactive adjustments due to audits, reviews or investigations, the assessment of management’s evaluation of correspondence from the payor and the company’s historical settlement activity. 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 vitas revenue implicit price concessions estimate. these procedures also included, among others, (i) developing an independent estimate of the implicit price concessions by utilizing historical settlement activity; (ii) comparing the independent estimate to management’s estimate; and (iii) evaluating and testing management’s process for developing the estimate related to retroactive adjustments due to audits, reviews or investigations, which included evaluating the reasonableness of the estimate based on existing correspondence from the payor and the company’s historical settlement activity. evaluating the reasonableness of the implicit price concessions estimate involved inspecting evidence of correspondence from payors, testing the completeness and accuracy of historical settlement activity on a sample basis, and performing a retrospective review of consideration received subsequent to prior and current year-end to evaluate the reasonableness of the prior and current period estimated implicit price concessions applied by management. /s/ pricewaterhouse coopers llp cincinnati, ohio february 26, 2021we have served as the company’s auditor since 1971.	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.goodwill and indefinite-lived franchise rights acquired impairment assessments - united states and canada as described in notes 2 and 7 to the consolidated financial statements, goodwill associated with the united states and canada reporting units was $103 million and $41 million, respectively, as of december 28, 2019, and the indefinite-lived franchise rights acquired for the united states and canada was $672 million and $55 million, respectively, as of december 28, 2019. management reviews goodwill and indefinite-lived franchise rights acquired for potential impairment on at least an annual basis or more often if events so require. potential goodwill impairment is identified by comparing the estimated fair value of a reporting unit to its carrying value, and potential impairment of indefinite-lived franchise rights acquired is identified by comparing the estimated fair value for these rights to their carrying value. fair value of goodwill is estimated by management using a discounted cash flow approach. fair value of indefinite-lived franchise rights acquired is estimated by management using a discounted cash flow approach referred to as the hypothetical start-up approach for franchise rights related to the company’s studio + digital business and a relief from royalty methodology for franchise rights related to the company’s digital business. management uses various assumptions to determine fair value, including revenue growth rates, operating income margin, market-based royalty rate, and discount rates.the principal considerations for our determination that performing procedures relating to the goodwill and indefinite-lived franchise rights acquired impairment assessments for the united states and canada is a critical audit matter are there was significant judgment and estimation by management when developing the fair value measurements. this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to management’s revenue and cash flow projections and significant assumptions, including revenue growth rates and operating income margins.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 goodwill and indefinite-lived franchise rights acquired impairment assessments, including controls over the valuation of the company’s reporting units and indefinite-lived franchise rights acquired. these procedures also included, among others, testing management’s process for developing the fair value estimates, including (i) evaluating the appropriateness of the discounted cash flow approach and the relief from royalty methodology, (ii) testing the completeness, accuracy and relevance of underlying data used in the discounted cash flow approach and relief from royalty methodology, and (iii) evaluating the significant assumptions used by management, including revenue growth rates and operating income margins. evaluating management’s assumptions related to revenue growth rates and operating income margins involved evaluating whether the assumptions used by management were reasonable considering the current and past performance of the reporting units and indefinite-lived franchise rights acquired 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 approach and relief from royalty methodology and the discount rates./s/ pricewaterhouse coopers llp new york, new york february 25, 2020 we have served as the company’s auditor since 1999.	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.evaluation of self-insurance reserves as described in note 2 and note 15 of the consolidated financial statements, the company partially self-insures up to certain limits for workers’ compensation, professional and general liability and automobile coverage. claims in excess of these limits are insured up to contractual limits, over which the company self-insures. the company fully self-insures all health-related claims for covered employees. the company’s self-insurance reserves were $79.0 million as of december 31, 2020 and are included in accrued compensation and benefits and accrued self-insurance obligations in the accompanying consolidated balance sheet. the reserves for the casualty, liability, workers’ compensation and healthcare losses and costs are estimated utilizing a third-party actuary and are based on past experience, expectations of future events, including projected settlements for pending claims, known incidents that may result in claims, estimates of incurred but not reported claims, expected changes in premiums for insurance provided by insurers whose policies provide for retroactive adjustments, estimated litigation costs and other factors.we identified the company’s self-insurance reserves as a critical audit matter because of the significant judgments made by management in determining the estimates, as well as the sensitivity of the actuarial assumptions. auditing management’s judgments regarding the self-insurance reserves involved a high degree of auditor judgment and increased effort was required, including the involvement of actuarial specialists to evaluate the reasonableness of the significant estimates and assumptions utilized in the reserve calculations. f-1table of contents our audit procedures related to the determination of the self-insurance reserves included the following, among others: •with the assistance of our actuarial specialists, we evaluated the reasonableness of the actuarial methodologies and assumptions. our specialists also assessed the appropriateness of management’s estimates by comparing management’s estimates to our independently developed estimate. •we tested the accuracy and completeness of the underlying data utilized in the actuarial valuation including the actual claims paid during the year. •we assessed the qualifications and objectivity of management’s third-party actuarial specialists.•we evaluated the company’s ability to estimate self-insurance reserves by comparing its historical estimates with actual claims paid./s/ rsm us llp we have served as the company's auditor since 2014.	4
critical audit matters the critical audit matters communicated below are matters 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 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 matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. business combinations – acquisitions of woorank srl and hawk search, inc. as described in note 16 to the consolidated financial statements, the company completed acquisitions of (1) woorank srl on march 1, 2021, for purchase consideration of approximately $2.4 million and (2) hawk search, inc. on may 28, 2021 for purchase consideration of approximately $9.9 million. the purchase price allocations resulted in the company recording $6.3 million of intangible assets and $3.5 million of contingent consideration payable, estimated at the acquisition date. the company accounted for both acquisitions under the acquisition method of accounting for business combinations. assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. the fair value of intangible assets was determined based on valuations using a discounted cash flow model, which requires significant estimates and assumptions, including estimating future revenues and costs. management, with the assistance of an independent valuation expert, estimated the fair value of the intangible assets using the multi-period excess earnings method (customer relationships) and the relief from royalty methodology (tradename and developed technology). the fair value of contingent consideration payable was determined based on the probability of achievement of the revenue targets and operational goals, which requires significant estimates and assumptions, including estimating future revenues. management, with the assistance of an independent valuation expert, estimated the fair value of the contingent consideration payable using the monte carlo simulation model. given the fair value determination of the intangible assets and contingent consideration payable requires management to make significant estimates and assumptions related to the forecasts of future cash flows and the selection of the discount rate, performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our valuation specialists. 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: ● reviewing the purchase and sale agreements and evaluating the transactions to determine that both acquisitions met the requirements of a business combination, and our analysis of the initial allocation of the purchase price accounting as well as the determination of the balance sheet classification of each component of the transaction. ● obtaining third party valuation reports to gain an understanding of the process and key assumptions for estimating the fair value of intangible assets and contingent consideration payable. we utilized our valuation specialists to evaluate the adequacy and appropriateness of the methodologies and assumptions used in developing the forecast and the discount rates used. ● agreeing the underlying data used as part of the valuations to source documents, including the purchase and sale agreements, and assessing the reasonableness of management’s forecasts of future cash flows by comparing the projections to historical results. ● performing independent shadow calculations to test the reasonableness and mathematical accuracy of the fair values concluded on by the company. ● evaluating whether the estimated future cash flows were consistent with projections used by the company, as well as evidence obtained in other areas of the audit. furthermore, we assessed the appropriateness of the disclosures in the consolidated financial statements. derivative instruments as described in note 12 to the consolidated financial statements, in may 2021, the company offered and sold, in a registered direct offering, shares of its common stock and entered into a private placement which consisted of series d convertible preferred stock and warrants to purchase common stock upon conversion of the series d preferred stock for aggregate gross proceeds of $5.1 million. the company allocated the proceeds between equity instruments and derivative liabilities using the relative fair value approach. as described in note 5 to the consolidated financial statements, the company classifies warrants on its series a, c and d convertible preferred stock as liabilities that are subject to re-measurement on a quarterly basis. management, with the assistance of an independent valuation expert, estimates the fair value of the warrant liabilities using monte carlo simulation and black scholes models, which take into consideration the volatilities of the company and comparable public companies. 32 given the determination of the fair values of equity instruments and derivative liabilities require management to make significant estimates and assumptions regarding the relevant valuation calculations, performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve professionals in our firm having the expertise in the valuation of financial instruments. 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: ● evaluating management’s assessment and the company’s accounting analysis as to the classification of equity instruments and derivative liabilities, including the determination of the balance sheet classification of each component of the transaction and identification of any derivatives included in the arrangements. ● obtaining third party valuation reports to gain an understanding of management’s key assumptions in determining the fair value of warrant liabilities and assessing the source information underlying the valuation assumptions. ● with the assistance of our valuation specialists, evaluating the methodologies and assumptions used to assess the company’s fair value of equity instruments and derivative liabilities, including the selection of the valuation methodology and other significant assumptions used by the company. ● performing independent shadow calculations to test the reasonableness of the fair values for warrant liabilities concluded on by the company’s specialist. such calculations assessed the mathematical accuracy of the valuation model and assessed the source information underlying the valuation assumptions used in the model to determine the fair value for the series d issuance at inception and liability classified warrants on a quarterly basis. ● assess the appropriateness of the disclosures in the consolidated financial statements. /s/ pkf o'connor davies, llppkf o'connor davies, llp new york, new york december 20, 2021 we have served as the company’s auditor since february 27, 2021.	2
critical audit matters thecritical audit matters communicated below are matters arising from the current period audit of the consolidated financial statementsthat were communicated or required to be communicated to the board of directors and that: (1) relate to accounts or disclosuresthat are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complexjudgments. 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 criticalaudit matters or on the accounts or disclosures to which they relate. evaluationand identification of related parties and related party transactions asdiscussed in note 7 to the consolidated financial statements, jason c. chang, the chief executive officer, chief financial officerand director, is the majority beneficial owner of the company and is a related party. during the year ended december 31, 2020,the company entered into a number of transactions with mr. chang, including 1) debt agreements for funds advanced to the companyfor the use of settling other convertible notes payable and outstanding as of december 31, 2019; such related party debt was eitherrepaid by the company during the year ended december 31, 2020 or in the subsequent period, or converted into the company’scommon stock during the year ended december 31, 2020 at a price below market value, which further caused the company to recorda loss from settlement with the related party, 2) equity agreement for the issuance of series a convertible preferred stock forcash, which was also used to repay part of the other convertible notes payable outstanding as of december 31, 2019. weidentified the evaluation of the identification of related parties and recording of related party transactions as a critical auditmatter. auditor judgment was involved in assessing the sufficiency of the procedures performed to identify related parties andrelated party transactions of the company. thefollowing are the primary procedures we performed to address this critical audit matter. we evaluated the design and the operatingeffectiveness of certain internal controls over the company’s related party process, including controls over the identificationof the company’s related party relationships and transactions. we performed the following procedures to evaluate the identificationof related parties and recording of related party transactions by the company: ●read debt and equity agreements and contracts between the company and the related party; ●received confirmation from related party and compared response to the company’s records; ●reviewed bank and legal confirmations for reference to related party transactions and obligations; ●reviewed material purchase and sales transactions to determine whether they may have created a related party; ●evaluated whether transactions are occurring but are not given accounting recognition; ●reviewed accounting records for large, unusual, or nonrecurring transactions or balances, paying particular attention to related party transactions recognized at or near december 31, 2020; ●received third party confirmation from the company’s stock transfer agent for all related party common and preferred stock outstanding as of december 31, 2020; ●evaluated the price at which common stock was issued to the related party during the year ended december 31, 2020 and obtained the fair market value of the common stock from third party independent sources; ●queried the accounts payable general ledger for transactions with related parties; ●evaluated the company’s reconciliation of its applicable accounts to the related parties’ records of transactions and balances; ●read the company’s “consents of directors in lieu of meeting” minutes of the board of directors; ●inquired with executive officers, key members of management, and the board of directors regarding related party transactions; ●read public filings, external news, and research sources for information related to transactions between the company and related parties. /s/macias gini & o’connell llp wehave served as the company’s auditor since 2021	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.liability for future policy benefits – refer to notes 1 and 3 to the financial statements critical audit matter description as of december 31, 2021, the liability for future policy benefits totaled $846 million, and included benefits related to variable annuity contracts with guaranteed benefit riders. 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. 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, benefit election and utilization, and withdrawals, auditing management’s selection of these assumptions involves an especially high degree of estimation.55table of contents 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, 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 for a sample of policies, 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 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 $224 million as of december 31, 2021, are amortized over the expected life of the policy contract in proportion to actual and expected future gross profits, premiums or margins. for deferred annuity 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.•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.56table of contents embedded derivative liabilities related to variable annuity guarantees – refer to notes 1, 7, and 8 to the 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, 2021, the fair value of the embedded derivative liability associated with certain of the company’s annuity contracts was $762 million. 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, 2022we have served as the company’s auditor since 2000.	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 determination of the estimated offering period considers the following factors: •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•disclosed service periods for competitors’ games.the company reported net revenue of $5,629 million for the year-ended april 3, 2021, and deferred net revenue of $1,636 million as of april 3, 2021.we identified the assessment of the estimated offering period as a critical audit matter. a high degree of audit effort and subjective and complex auditor judgment was required to evaluate the sufficiency of audit evidence obtained over the estimated offering period, including whether historical experience and other qualitative factors, such as those described above, are indicative of the time period during which the company’s games and extra content are played by its customers.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 determine the estimated offering period, including controls over the factors noted above and the company’s review of the estimated offering period concluded for use in recognizing revenue. we evaluated the model the company used to develop the estimated offering period against the accounting requirements and for potential management bias. 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 these computations against the periods used by the company in its estimated offering period model. we obtained disclosed service periods for competitors’ games and compared them against the data used by the company. we compared known and expected online gameplay trends used in the determination of the estimated offering period to historical company information and publicly available industry information. we performed a sensitivity analysis over the company’s estimated offering period to assess the impact of potential changes in the estimated offering period on revenue. we assessed the sufficiency of evidence obtained related to the estimated offering period by evaluating the results of the procedures performed. evaluation of the realizability of the swiss deferred tax assets as discussed in notes 2 and 11 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 was 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 period that the 82table of contents swiss deferred tax assets will reverse. as of april 3, 2021, the swiss intra-entity deferred tax asset balance was $1.781 billion.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 period that the swiss deferred tax assets will 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 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 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 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 8 and 16 to the financial statements, the 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 $50 billion, of which 80% were designated as hedging instruments, and the net fair value of derivative assets and liabilities as of december 31, 2020 was $283 million and $23 million, respectively. the fair values of interest-rate related derivatives and hedged items are generally estimated using standard valuation techniques such as discounted cash-flow analysis and comparisons to similar instruments. the discounted cash-flow analysis uses market-observable inputs, such as interest rate curves and volatility assumptions. 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 interest rate curves and 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 method, 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 interest rate curves and volatility assumptions./s/ pricewaterhouse coopers llp indianapolis, indiana march 10, 2021 we have served as the 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 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.reserve for net sales adjustments as described in notes 2 and 4 to the financial statements, when the company recognizes sales, a simultaneous adjustment to gross sales is made for estimated chargebacks, rebates, returns, promotional adjustments and other adjustments. the estimates of these reserves are primarily based on historical experience, future expectations, contractual arrangements with wholesalers and indirect customers and other factors known to management at the time the reserves are recorded and are presented in the financial statements as a reduction to gross sales with the corresponding reserves presented as reductions of accounts receivable or included as rebates payable, depending on the nature of the reserve. we identified the estimation of the reserves for these net sales adjustments by management as a critical audit matter.112table of contents the principal considerations for our determination that the reserves for net sales adjustments for estimated chargebacks, rebates, returns, promotional adjustments and other adjustments is a critical audit matter includes the high degree of estimation uncertainty and judgment involved in determining the reserve estimates. there is a high degree of subjectivity in management’s assessment of the reasonableness of the reserves for net sales adjustments, specifically the amount of chargebacks, rebates, returns, promotional adjustments and other adjustments, which requires a heightened level of auditor judgment in auditing the estimates. further, variations in these estimates could have a significant impact on the recorded reserves for net sales adjustments.our audit procedures related to this critical audit matter included the following, among others:●we obtained an understanding of management’s processes and controls over calculating the reserves for net sales adjustments, including understanding relevant inputs and assumptions.●we evaluated the design and tested the operating effectiveness of key controls relating to the calculation of the reserves for net sales adjustments, including key management review controls over the period-end accrual of chargebacks, rebates, returns, promotional adjustments and other adjustments. we also utilized information technology specialists to assist in testing key controls over the processing of chargebacks submitted by customers.●we tested management’s process for calculating the reserves for net sales adjustments. we tested key inputs and assumptions relevant to the adjustments, such as contractual pricing and rebate arrangements with customers, historical returns data, and other contractual arrangements.●we reviewed subsequent transactions occurring prior to the date of our audit report, which involved inspecting customer contracts and relevant source documents submitted by customers in conjunction with the chargeback, rebate, return, or other adjustment claims.●we performed a look back analysis to assess management’s ability to estimate the reserves for net sales adjustments through review of actual activity compared to previous estimates.measurement of the long-lived intangible asset impairment charge as described further in notes 2 and 8 to the financial statements, the company’s long-lived assets, including definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances (“triggering events”) indicate that the carrying amount of the asset may not be recoverable. in december 2020, the company determined that as a result of the discontinuation of certain lower gross margin product lines and the reduction in net sales and gross margin of certain other product lines, a triggering event and an impairment of intangible assets was present. the impairment loss is measured as the excess of the asset’s carrying value over its fair value, which is calculated using a discounted cash flow model. we identified the measurement of the long-lived asset impairment charge as a critical audit matter.the principal consideration for our determination that the measurement of the long-lived asset impairment charge is a critical audit matter is that the impairment assessment includes a high degree of estimation uncertainty due to significant management judgments in regards to the assumptions used within the assessment, including the estimates of future cash flows, discount rates and the probability of achieving the estimated cash flows, and for which management utilized an independent valuation specialist (“management’s valuation specialist”). there is a high degree of subjectivity in management’s assessment of the inputs of the impairment assessment, which requires a heightened level of auditor judgment in auditing the estimates. further, variation in these estimates could have a significant impact on the measurement of the impairment charge.our audit procedures related to this critical audit matter included the following, among others:●we evaluated the design and tested the operating effectiveness of controls relating to the company’s quantitative impairment analysis processes, including controls related to the forecasted cash flows and management’s review of key assumptions which were prepared by management’s valuation specialists.●we evaluated the level of knowledge, skill, and ability of management’s valuation specialists and their relationship to the company.113table of contents●we compared the company’s cash flows used in the forecast model to historical actual results as well as available industry data. with the assistance of internal valuation specialists, we performed audit procedures over the data, methods and assumptions utilized in performing the quantitative impairment assessment, which included reviewing supporting documents and assessing reasonableness by comparing to historical trends and industry expectations. certain key inputs/ assumptions tested by us included the following:o long-term growth rateso discount rates/s/ grant thornton llp we have served as the company’s auditor since 2000.	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.acquisition of mvc capital, inc. as discussed in note 11 to the consolidated financial statements, the company completed its acquisition of mvc capital, inc. on december 23, 2020. the transaction was accounted for as an asset acquisition under accounting standards codification 805-50. the difference between the fair value of net assets acquired and the fair value of the merger consideration paid was recognized as deemed contribution from the company’s investment adviser and shareholder, barings llc. f-1we identified the evaluation of the acquisition of mvc capital, inc. as a critical audit matter because the application of asset acquisition guidance and the accounting for the difference between the fair value of the net assets acquired and the fair value of the merger consideration paid involved a higher degree of auditor judgment.the following are the procedures we performed to address this critical audit matter. we evaluated the design of certain internal controls over the company’s acquisition process, including controls related to the application of the asset acquisition guidance. we assessed the evidence underlying the accounting of the transaction as an asset acquisition and the recognition of deemed contribution from barings llc. specifically, we read and evaluated the company’s asset acquisition accounting memorandum that documented the facts and circumstances in the transaction, which included the factors the company considered in determining the applicable accounting treatment. in addition, we compared the facts and circumstances in the company’s accounting memorandum to the acquisition agreement.credit support agreement as discussed in note 2 to the consolidated financial statements, the company entered into a credit support arrangement (csa) with barings llc. the csa was recognized as a derivative asset and deemed contribution from barings llc.we identified the evaluation of the csa as a critical audit matter. a higher degree of auditor judgment was required to evaluate the application of the derivative accounting guidance due to the nature of the csa. the following are the procedures we performed to address this critical audit matter. we evaluated the design of certain internal controls over the company’s derivatives process, including the control related to the application of the derivative guidance to the csa. we assessed the evidence underlying the accounting of the csa as a derivative and the recognition of deemed contribution from barings llc. specifically, we read and evaluated the company’s csa accounting memorandum that documented the business purpose and the terms of the csa, which included the factors the company considered in determining the applicable accounting treatment. in addition, we compared the facts and circumstances in the company’s accounting memorandum to the csa.assessment of the fair value of investments as discussed in notes 1 and 3 to the consolidated financial statements, the company measures its investments at fair value. in determining the fair value of investments that are not publicly traded and whose market quotations are not readily available, the company makes subjective judgments and estimates using unobservable inputs.we identified the assessment of the fair value of investments with no readily determinable market value as a critical audit matter. the evaluation of certain assumptions used to estimate the fair value of investments with no readily determinable market value involved a high degree of subjective auditor judgment and specialized skills and knowledge. specifically, market yields for investments with similar terms and credit risks used in income approach analyses and the selection of comparable companies and financial performance multiples of such comparable companies used in market approach analyses required subjective auditor judgment. changes in these assumptions could have a significant impact on the estimate of the fair value of investments. the following are the procedures we performed to address this critical audit matter. we evaluated the design of certain internal controls over the process to value investments. these included controls related to the determination of market yields, credit risk, selection of comparable companies, and financial performance multiples assumptions. we evaluated the company’s ability to estimate fair value by comparing prior period fair values for a selection of investments to transaction prices of transactions occurring subsequent to the valuation date. we involved valuation professionals with specialized skills and f-2knowledge who, for a selection of the company’s investments, assisted in evaluating the company’s fair value estimate by:•developing a market yield, for investments fair valued using an income approach, by assessing available market information, such as market yields of comparable companies of similar credit risk•developing a market multiple, for investments fair valued using a market approach, by assessing market information from third-party sources, including financial performance multiples of comparable companies•developing independent estimates of fair value, for the selected investments, based upon developed market yields and financial performance multiples and compared the results to the company’s fair value estimates.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 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.51table of contents contingencies - epa investigation of portland harbor- refer to note 19 to the financial statements critical audit matter description the company is an identified potentially responsible party (prp) related to the united states environmental protection agency’s (epa’s) investigation of portland harbor, for which total undiscounted clean-up costs are estimated to be $1.7 billion based on the selected remediation plan in the record of decision issued by the epa in january 2017. in accounting for environmental obligations, management should record a liability associated with the company’s environmental obligations when such a loss becomes both probable and reasonably estimable, the determination of which requires significant judgment by management. management has concluded that a loss is probable, but the amount of such loss cannot be reasonably estimated, and therefore no liability has been recorded as of december 31, 2019.given the level of management judgment involved in determining whether sufficient information exists to reasonably estimate the amount, or range, of the company’s potential liability, auditing management’s determination involved a high degree of auditor judgment. how the critical audit matter was addressed in the audit our audit procedures related to management’s assessment of the ability to reasonably estimate the company’s potential liability related to the portland harbor site included the following, among others:•we evaluated the design, and tested the operating effectiveness, of controls over management’s evaluation as to whether a loss related to the portland harbor site is probable and is reasonably estimable.•we read management’s analysis of the epa investigation of portland harbor and evaluated whether management had appropriately applied the relevant accounting guidance based on the facts identified in the analysis. •with the assistance of our environmental specialists, we performed a public domain search specifically tailored to identify relevant information from the epa, united states department of justice, local news reports and other relevant sources to identify items that may represent triggering events that could potentially impact management’s assertion that any loss associated with portland harbor is not reasonably estimable. we compared this information to the information included in management’s analysis and evaluated whether management had omitted any relevant evidence, including evidence that may be contradictory to management’s assertion. •we compared the company’s disclosures associated with the matter to those of other prp’s. regulatory accounting - refer to notes 2 and 7 to the financial statements critical audit matter description the company is subject to rate regulation by the public utility commission of oregon (the opuc), which has jurisdiction with respect to the rates for retail electricity in the state of oregon. 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 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; income taxes; and depreciation expense.the company’s rates for retail customers are determined and approved in regulatory proceedings based on an analysis of the company’s costs. the opuc has the authority to disallow the recovery of any costs that it considers imprudently incurred. although the opuc is required to establish customer prices that are fair, just and reasonable, it has significant discretion in the interpretation of this standard. we identified the impact of rate regulation as a critical audit matter due to the significant judgments made by 52table of contentsmanagement to support its assertions about impacted account balances and disclosures and the degree of subjectivity involved in assessing the impact of future regulatory proceedings on the financial statements. management judgments include assessing the likelihood of recovery in future rates of incurred costs and refunds to customers. given that management’s accounting judgments are based on assumptions about the outcome of future decisions by the opuc, 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 opuc 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 also tested the effectiveness of management’s controls over regulatory developments that may affect the likelihood of recovering costs in future rates or of a refund or future reduction in 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 opuc for the company, regulatory statutes, and other publicly available information to assess the likelihood of recovery in future rates or of a refund or future reduction in rates based on precedence of the opuc’s treatment of similar costs under similar circumstances. •for selected regulatory assets and liabilities, we evaluated whether management had determined such amounts in accordance with the regulatory orders. /s/ deloitte & touche llp portland, oregon february 13, 2020we have served as the company’s auditor since 2004.	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 separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. liquidity & management’s plan as disclosed in note 17 of the consolidated financial statements, the company has been reliant on their senior secured lender for liquidity and has been required to remit substantially all excess cash from operations to the senior secured lender. management believes, based on the company’s business plan, that cash flows from operations and established financing arrangements, including financing available under the reserve liquidity facility provided by the company’s senior secured lender, and potential additional issuances of common stock are sufficient to fund future cash flow requirements and satisfy the company’s obligations as they come due for at least one year from the financial statement issuance date. 56 we determined the adequacy of the available commitment on the reserve liquidity facility to be a critical audit matter because management’s plan includes certain significant assumptions related to the company’s cash flow needs. auditing management’s assumptions related to the company’s cash flow needs involved a high degree of auditor judgment and increased audit efforts. our audit procedures related to the company’s liquidity evaluation and the adequacy of the commitment on the reserve liquidity facility included the following, among others: ·we evaluated the reasonableness of forecasted cash needs by comparing to historical operating results as well as forecasted market data for both ethanol and corn. · we evaluated the reasonableness of management’s estimated reduction in current liabilities from the company’s cash needs for a period of greater than a year from the financial statement issuance date by evaluating subordination agreements that are in place and the ability for the company to defer interest payments on various debt agreements. ·we evaluated management’s forecasted cash needs in the context of other audit evidence obtained, including, but not limited to, board of director minutes and investor presentation to determine whether the other audit evidence supported or contradicted the forecast. · we tested the subsequent event activity related to additional cash available or needed to fund working capital. ·we tested the company’s ability to maintain compliance with covenants under the existing loan agreements and the ability of the company’s senior lender to provide the additional funding under the amended reserve liquidity facility. /s/ rsm us llp we have served as the company's auditor since 2012.	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.revenue – long term contracts — refer to note 2 to the financial statements critical audit matter description the company recognizes revenue on long-term contracts with u.s. government customers over time as the work progresses, either as products are produced or as services are rendered, because transfer of control to the customer is continuous. ordinarily the company’s contracts represent a single distinct performance obligation due to the highly interdependent and interrelated nature of the underlying goods, services, or both. the use of the cost-to-cost method to measure performance progress over time is supported by clauses in the related contracts that 57allow the customer to unilaterally terminate the contract for convenience, pay the company for costs incurred plus a reasonable profit, and take control of any work in process. the accounting for these contracts involves judgment, particularly as it relates to the process of estimating total material costs, labor costs, and profit for the performance obligation. cost of sales is recognized as incurred, and revenues are determined by adding a proportionate amount of the estimated profit to the amount reported as cost of sales. for the year ended december 31, 2021, revenue was $9.5 billion, most of which was derived from long-term contracts. given the judgments necessary to estimate total material costs, labor costs, and profit in order to recognize revenue for certain long-term contracts, auditing such estimates required extensive audit effort due to the complexity of long-term contracts and a high degree of auditor judgment, especially given the limited historical data for certain contracts, 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 management’s estimates of total material costs, labor costs, and profit in order to recognize revenue for certain long-term contracts included the following, among others: •we tested the effectiveness of controls over long-term contract revenue, including management’s controls over the estimates of total material costs, labor costs, and profit for performance obligations. •we developed independent estimates of revenue based on historical profit margins and current year recorded costs. we compared those estimates to revenue recognized by the company.•we obtained the population of active contracts during 2021 and assessed the financial and performance risk of the contracts based on our knowledge gained through prior year audits of the company, industry experience, and ongoing conversations with members of program management regarding the contract performance to identify contracts that we believe were riskier. for those contracts selected, we performed further audit procedures that were tailored to address the specific characteristics of audit interest identified. procedures performed, among others, included:◦read the relevant portions of contracts to understand contract terms, including incentives, fee arrangement, scope of work, and other unusual contract terms.◦compared the transaction prices to the consideration expected to be received based on current rights and obligations under the contracts and any modifications that were agreed upon with the customers. ◦tested management’s identification of distinct performance obligations by evaluating whether the underlying goods, services, or both were highly interdependent and interrelated.◦tested the accuracy and completeness of the costs incurred to date for the performance obligation. ◦evaluated the estimates of total materials costs, labor costs, and profit for the performance obligation by: ▪evaluating management’s ability to achieve the estimates of total material costs, labor costs and profit by 1) performing inquiries with the business managers and corroborating the information gained from these inquiries with other parties who have detailed knowledge of the contract’s progress, issues being encountered, and overall production status, 2) considering management’s historical performance against estimates, 3) detail testing the appropriateness of the timing of changes in estimates, and 4) considering any contradictory information. ▪comparing materials cost estimates to purchase orders, supplier contracts, or other source documents.▪comparing management’s estimates for the selected contracts to costs and profits of similar performance obligations, when applicable. /s/ deloitte & touche llp richmond, virginia february 10, 2022we have served as the company’s auditor since 2011.	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.allowance for loan losses - refer to notes 2 and 10 in the financial statements critical audit matter description the company generates vacation ownership contract receivables by extending financing to the purchasers of its vacation ownership interests. the company assesses the adequacy of the allowance for loan losses related to these vacation ownership interests using a technique referred to as a static pool model. the model is based upon the historical performance of similar vacation ownership contract receivables and incorporates more recent history of default information. management prepares a static pool analysis to track defaults for each year's sales over the entire life of the contract receivable as a means to project future losses. a further qualitative assessment is also performed by the company which considers whether any external economic conditions or internal portfolio characteristics exist which indicate an adjustment is necessary to reflect expected impacts on the contract receivable portfolio. due to the economic disruption resulting from covid-19, the company estimated an additional loan loss allowance related to the impacts on the owners’ ability to repay their contract receivables. the company based its covid-19 loan loss estimate upon historical data on the relationship between unemployment rates and net new defaults observed during the most recent recession in 2008.given the level of difficulty required to accurately predict losses over the life of the contract receivables, including the determination of any qualitative adjustments, auditing the allowance for loan losses involved especially complex and subjective judgements.how the critical audit matter was addressed in the audit our audit procedures related to the vacation ownership interest allowance for loan loss included the following, among others:•we tested the effectiveness of controls over the company’s static pool model, covid-19 loan loss estimate, historical loss data, and the calculation of a loss rate.•we evaluated the qualitative adjustment to the historical loss rates, including assessing the basis for the adjustments and the reasonableness of the significant assumptions for the static pool model and covid-19 loan loss estimate.•we tested the accuracy and evaluated the relevance of the historical loss data as an input to the static pool model and covid-19 loan loss estimate.•we tested the accuracy and evaluated the relevance of the historical and future projected unemployment rate data as an input to the covid-19 loan loss estimate.•we performed our own independent analyses using alternative assumptions to assess the reasonableness of the specific allowance models used by the company.•we evaluated the predictability of the company’s models through analyzing the results of a look-back analysis.•we utilized our credit specialists to evaluate the static pool model and covid-19 loan loss estimate./s/ deloitte & touche llp tampa, florida february 24, 2021we have served as the company's auditor since 2005.	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.impairment of investment in real estate description of the matter the company’s net investment in real estate totaled $377.3 million as of december 31, 2020. as discussed in note 2 to the consolidated financial statements, the company periodically assesses whether there has been any impairment in the carrying value of its properties and whenever events or changes in circumstances indicate that the carrying value of a property may not be recoverable. impairment is recognized on real estate assets held for investment when indicators of impairment are present and the future undiscounted cash flows for a real estate asset are less than its carrying amount, at which time the real estate asset is written down to its estimated fair value.27auditing the company's impairment assessment for real estate assets was complex because of the subjective auditor judgment necessary in evaluating management’s identification of indicators of potential impairment. our evaluation of management’s identification of indicators of impairment included our related assessment of such indicators, either individually or in combination, in determining whether a triggering event has occurred that requires the company to evaluate the recoverability of the real estate asset.how we addressed the matter in our audit we obtained an understanding of the company’s controls over the company’s real estate asset impairment assessment process. our testing of the company’s impairment assessment included, among other procedures, evaluating significant judgments applied in determining whether indicators of impairment existed for the company’s real estate assets. our procedures included obtaining evidence to corroborate such judgments and searching for evidence contrary to such judgments, including searching for significant tenant write-offs or upcoming lease expirations with little prospects for replacement tenants. we also searched for any significant declines in operating results of a real estate asset due that could be a triggering event or an indicator of potential impairment.collectability of notes receivable description of the matter at december 31, 2020, the company had notes receivable in the amount of $130.6 million. the company performs an assessment as to whether or not substantially all of the amounts due under these notes receivable is deemed probable of collection. subsequently, for notes where the company concludes that it is not probable that it will collect substantially all payments due under the note, the company creates an allowance for any amounts not probable of collection. auditing the company's collectability assessment is complex due to the judgment involved in the company’s determination of the collectability of these notes. the determination involves consideration of the terms of the note, whether or not the note is currently performing, and any security for the note.how we addressed the matter in our audit we obtained an understanding of the company's controls over notes receivable and their collectability assessment. our testing included among other things, confirming selected notes receivable, determining if the notes were performing according to their terms and testing the company’s evaluation of the underlying security interest if necessary.revenue recognition (straight-line) for commercial tenants description of the matter during 2020, the company recognized office rental revenues and tenant recoveries of $37.2 million and recorded tenant receivables of $.1 million and deferred rent receivables of $3.2 million at december 31, 2020. as described in note 2 to the consolidated financial statements, the company recognizes revenue from commercial properties on a straight-line basis over the terms of the related leases.auditing the company's straight-line calculations is complex due to the free rent periods, lease amendments and escalation clauses contained in many of the leases.how we addressed the matter in our audit we obtained an understanding of the company's controls over office rental revenues and tenant recoveries, including controls over management’s calculation of the straight-line calculation and deferred rent receivable. to test the straight-line rent revenue and deferred rent receivable, we performed audit procedures that included, among others, evaluating the data and assumptions used in determining the calculation and agreeing amounts in the calculation to copies of lease agreements. in addition, we tested the complet28emphasis of liquidity as described in the note 17, management intends to sell income-producing assets, refinance real estate and obtain additional borrowings primarily secured by real estate to meet the company’s liquidity requirements. supplemental information the supplemental information contained in schedules iii and iv has been subjected to audit procedures performed in conjunction with the audit of the company’s financial statements. the supplemental information is the responsibility of the company’s management. our audit procedures included determining whether the supplemental information reconciles to the financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental information. in forming our opinion on the supplemental information, we evaluated whether the supplemental information, including its form and content, is presented in conformity with the security and exchange commission’s rules. in our opinion, the supplemental information is fairly stated, in all material respects, in relation to the financial statements as a whole.farmer, fuqua & huff, pc richardson, texas march 24, 2021we have served as the company’s auditor since 2004.	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.107table of contents deferred policy acquisition costs and value of business acquired description of the matter as disclosed in note 1 and note 6 to the consolidated financial statements, the company’s deferred policy acquisition costs and value of business acquired ("dac/voba") totaled $1.5 billion at december 31, 2020, net of unrealized gains and losses. the carrying amount of the dac related to 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 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 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 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 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 policies for comparison with the actuarial result developed by management.realizability of deferred tax assets description of the matter as described in note 17 to the consolidated financial statements, at december 31, 2020, the company had total deferred tax assets from continuing operations of $2.3 billion, net of a $0.3 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 was complex because management’s projection of future taxable income includes forward-looking assumptions which are inherently judgmental as they may be affected by future market or other economic conditions.108table of contents 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. business held for sale and discontinued operations 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 resulted in a net loss on sale of $0.3 billion for the year ended december 31, 2020, which is included within the results of the operations of the business to be divested as discontinued operations in the consolidated statement of operations.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.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: (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.sufficiency of audit evidence over net sales as discussed in note 1 to the company’s consolidated financial statements, the company recognizes net sales when it satisfies a performance obligation by transferring control over a product or service to a customer. the company recorded $3,902.3 million of net sales in 2020.we identified the evaluation of the sufficiency of audit evidence over net sales as a critical audit matter. evaluating the sufficiency of audit evidence obtained required especially subjective auditor judgment because of the geographical dispersion of the company’s net sales generating activities. this included determining the company locations for which procedures were performed.the following are the primary procedures we performed to address this critical audit matter. we applied auditor judgment to determine the nature and extent of procedures to be performed over net sales, including the determination of the company locations for which those procedures were to be performed. at each company location for which procedures were performed, we evaluated the design and tested the operating effectiveness of certain internal controls over the company’s net sales process, including the controls over the accurate recording of net sales. we assessed the recorded net sales for each of these locations by selecting transactions and comparing the amounts recognized for consistency with 43table of contentsunderlying documentation, including contracts with customers, customer acceptance, and shipping documentation. we evaluated the sufficiency of audit evidence obtained by assessing the results of procedures performed, including the appropriateness of the nature and extent of audit effort.assessment of goodwill impairment in the emea retail reporting unit as discussed in notes 1 and 8 to the consolidated financial statements, the company evaluates goodwill for impairment annually as of october 31 and when events or circumstances change that would more likely than not reduce the carrying value of a reporting unit below its reported amount. as of december 31, 2020, the retail segment, which includes the emea retail reporting unit, had $179.0 million of goodwill. the fair values of the reporting units are determined based on a combination of an income approach and a market approach. as of october 31, 2020, the company determined that the fair value of all reporting units were in excess of their carrying values and therefore did not record any goodwill impairment. the estimated fair value of the emea retail reporting unit at that date exceeded its carrying value by approximately 15%. we identified the october 31, 2020 assessment of goodwill impairment for the emea retail reporting unit as a critical audit matter because a high degree of subjective auditor judgment was required to evaluate the fair value of the reporting unit determined under the income approach. the key assumptions used in the income approach included revenue growth projections and the discount rate.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 process, including controls over the revenue growth projections and the discount rate. we performed sensitivity analyses over the revenue growth projections and the discount rate to assess their impact on the company’s fair value determination. we compared the company’s revenue growth projections used in the valuation model against peer company projected revenue growth rates. in addition, we involved valuation professionals with specialized skills and knowledge who assisted in:–comparing the company’s discount rate inputs to publicly-available market data and information for comparable entities to test the selected discount rate–testing the estimate of fair value for the reporting unit using the company’s key assumptions and comparing the result to the company’s fair value estimate./s/ kpmg llp we or our predecessor firms have served as the company’s auditor since 1965.	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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.inventories and valuation of related estimates and obsolescence as described in notes 2 and 4 to the consolidated financial statements, the company’s consolidated inventories balance was $10.3 million as of december 31, 2020. inventory is stated at the lower of cost or net realizable value. the company values inventories using the weighted average cost approach, which approximates actual costs. the company writes down inventory based on specific identification of excess and obsolete inventory items based on estimated sales forecasts and an analysis of inventory items approaching expiration date. if factors such as future usage and forecast product demand are less favorable than those projected, additional inventory write downs may be required.the valuation of inventories requires management to make significant assumptions and complex judgments about the future salability of the inventory and its net realizable value. these assumptions include the assessment of net realizable value by inventory category considering approaching expiration dates, future usage and forecast product demand for the company’s products. changes in such assumptions could have a significant impact on the valuation of the company’s inventories. additionally, management makes qualitative judgments related to discontinued, slow 53moving and obsolete inventories. this leads to a high degree of auditor judgment and an increased extent of effort is required when performing audit procedures to evaluate the methodology and reasonableness of the estimates and assumptions.the following are the most relevant procedures we performed to address this critical audit matter:•we evaluated and tested the appropriateness of management’s process for determining the valuation of inventories, including:◦the reasonableness of the significant assumptions used by management including those related to forecasted inventory usage and backlog;◦the completeness, accuracy, and relevance of the underlying data used in management’s estimate, including inventory expiration dates;◦the calculations related to the application of the methodology to specific inventory categories; and◦inquiries with appropriate non-financial personnel regarding obsolete or discontinued inventory models, cancelled sales orders and other factors to corroborate management’s assertions regarding qualitative judgments about discontinued, slow moving and obsolete inventories;•we developed an independent expectation of inventory write-downs at year end based on historical trends and compared it to management’s estimate; and•we developed an independent expectation of inventory valuation at the product level based on historical costs and current year cost increases and compared it to management’s valuation. /s/ moss adams llp dallas, texas february 25, 2021 we have served as the company’s auditor since 2020.	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.83presentation and disclosure of related party transactions – refer to note 13 to the consolidated financial statements critical audit matter description as described in note 13 to the consolidated financial statements, the partnership currently derives a majority of its revenue from long term, fee-based related party agreements with pbf holding, which generally includes minimum volume commitments (mv cs), contractual fee escalations for inflation adjustments and certain increases in operating costs. the partnership believes that the terms and conditions of these agreements are no less favorable to either party than those that could have been negotiated with unaffiliated parties with respect to similar services. auditing the presentation and disclosure of these related party transactions, including the completeness thereof, was challenging due to pbf’s involvement in many aspects of the partnership’s business, including the revenue earned from providing transportation, terminaling and storage services and lease revenues under long-term contracts with pbf, the direct and allocated expenses charged from pbf for services provided under operating and administrative management agreements, fees charged for centralized general and administrative services provided by pbf, and reimbursements received under the omnibus and other service agreements.how the critical audit matter was addressed in the audit our audit procedures related to the presentation and disclosure of related party transactions included the following, among others:•we obtained sufficient understanding of internal controls of the partnership associated with related party transactions through our control testing in conjunction with the integrated audit of the partnership.•we obtained a listing of all related party relationships and compared the listing to the pbf legal structure and evidence obtained from other audit procedures, including inquiries of management and the audit committee.•we inspected audit confirmation responses received during our audit, company filings, articles, board of director meeting minutes and other committee meeting minutes. •we read contracts and agreements and tested revenue and expense transactions.•we evaluated the aggregation and presentation of related party financial statement line items./s/ deloitte & touche llp parsippany, new jersey february 17, 2022we have served as the partnership’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 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.performance allocations - refer to note 2 in the consolidated financial statements critical audit matter description as fund manager, the company recognizes performance allocations from the funds it manages to the extent these funds meet or achieve certain performance criteria. the company calculates performance allocations each reporting period based on the terms, which includes the fair value of the underlying investments held by the funds as a significant input, outlined in the respective fund governing agreement.certain funds may hold significant investments in illiquid investments whose fair values are based on unobservable inputs. these investments have limited observable market activity and changes in the fair value of these investments directly impact the amount of performance allocations the company is entitled to recognize as revenue for the period.auditing the performance allocation calculations involves critical evaluation of the appropriate legal interpretation and application of the terms of the respective fund governing agreements. auditing the fair value of investments which are based on unobservable inputs involves especially subjective auditor judgment, and the integral subject matter expertise of our internal fair value specialists, to evaluate the appropriateness of the valuation techniques, assumptions, and unobservable inputs used by the company to determine fair value. how the critical audit matter was addressed in the audit our audit procedures related to funds’ performance allocations and the testing of fair value of illiquid investments held included the following, among others:◦we involved senior, more experienced audit team members to perform audit procedures. ◦we tested the design and operating effectiveness of controls over the performance allocation calculations and the determination of the fair value of illiquid investments. ◦we evaluated whether the company’s performance allocation calculations were performed in accordance with the terms of the funds’ governing agreements.◦we utilized our fair value specialists to assist in the evaluation of the valuation methods, assumptions and unobservable inputs used by the company to determine fair value of illiquid investments.◦we evaluated the company’s historical ability to accurately estimate fair value of illiquid investments by comparing previous estimates of fair value to market transactions with third-parties and investigated differences. /s/ deloitte & touche llp new york, new york february 19, 2021 we have served as the company's auditor since 2007.	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.revenue recognition — refer to note 1 to the consolidated financial statements critical audit matter description the company recognizes revenue from sales of products as control is transferred to customers, which generally occurs at the point of shipment or upon delivery, unless customer acceptance is uncertain. revenue from distributors is recognized when the customer obtains control of the product, which generally occurs at the point of shipment or upon delivery, unless customer acceptance is uncertain. net sales for the fiscal year ended march 31, 2021 was $349.6 million, which principally consist of product sales.we identified the timing of revenue recognition for product sales (i.e., whether the company recorded product sales in the appropriate fiscal year) as a critical audit matter because of the significant judgments used when applying accounting standards codification topic 606 – revenue from contracts with customers – to contracts with customers. the company utilizes a broad network of distributors, value-added resellers (“va rs”), direct marketing resellers (“dm rs”), original equipment manufacturers (“oe ms”) and other suppliers ship products and fulfill performance obligations. this made auditing the timing of revenue recognition for product sales challenging and required significant audit effort to validate the timing of revenue recognition.48table of contents how the critical audit matter was addressed in the audit our principal audit procedures related to the timing of revenue recognition for product sales included the following, among others:•we tested the effectiveness of internal controls over the timing of revenue recognition.•we selected a sample of product sales obtained the invoice, purchase order, customer contract or agreement, packing list, bill of lading, proof of delivery, and evidence of cash collection, to validate revenue was recognized in the appropriate fiscal year.•we selected a sample of product sales for the year and examined the related contract to validate no customer acceptance clauses existed that would preclude revenue recognition.•we selected a sample of credit memos from the period immediately subsequent to the company’s fiscal year end and the related invoice, return merchandise authorization form, and shipping documents, to and validated revenue was recognized in the fiscal year ended march 31, 2021 only when control was transferred to the customer and if applicable, customer acceptance had occurred.•we obtained and evaluated internal certifications provided by the company’s sales employees to validate no side agreements existed that could impact the timing of revenue recognition.49table of contents inventories – excess and obsolescence reserve — refer to note 1 to the consolidated financial statements critical audit matter description the company’s manufacturing and service parts inventories are recorded on a first-in, first-out (“fifo”) basis, subject to the lower of cost or net realizable value, and as necessary, the company writes down the valuation of inventories for excess and obsolescence. provision for manufacturing and service inventories for the fiscal year ended march 31, 2021 was $12.8 million.we identified the excess and obsolescence write-down as a critical audit matter because of the judgment’s management makes to estimate the excess and obsolescence write-downs. this required a high degree of auditor judgment and significant effort to validate the methodology and the reasonableness of the excess and obsolescence write-downs.how the critical audit matter was addressed in the audit our principal audit procedures related to the company’s excess and obsolescence write-down included the following procedures, among others:•we tested the effectiveness of internal controls over inventory valuation.•we gained an understanding and evaluated the company’s methodology for determining inventory that is excess or obsolete and the key assumptions and judgments made as part of the process.•we evaluated the assumptions used by the company to define what is considered aged inventory by assessing historical trends in the company’s product life cycle as well as evaluating the underlying calculations applied to the aged inventory.•we evaluated the inventory valuation utilizing the methodology above to assess the inventory write-down rate applied to different products./s/ armanino llp san ramon, california may 26, 2021we have served as the company's auditor since 2019.	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. impairment assessment of certain gas processing facilities and gathering systems associated with the north texas and coastal operations in the gathering and processing segment as described in notes 3 and 6 to the consolidated financial statements, the company’s consolidated property, plant and equipment balance was $14,548.5 million as of december 31, 2019. management evaluates long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. asset recoverability is measured by comparing the carrying value of the asset or asset group with its expected future pre-tax undiscounted cash flows. if the carrying amount exceeds the expected future undiscounted cash flows, management recognizes an impairment equal to the excess of net book value over fair value as determined by quoted market prices in active markets or present value techniques if quotes are unavailable. in the fourth quarter of 2019, management recorded an impairment charge of $225.3 million for the partial impairment of gas processing facilities and gathering systems associated with the north texas and coastal operations in the company’s gathering and processing segment. underlying management’s assessment was the expected continuing decline in natural gas production across the barnett shale in north texas and gulf of mexico due to the sustained low commodity price environment. the impairments were a result of management’s assessment that forecasted undiscounted future net cash flows from operations, while positive, will not be sufficient to recover the existing total net book value of the underlying assets. for each analysis, management measured the impairment of property, plant and equipment using discounted estimated future cash flows (“dcf”) including a terminal value (a level 3 fair value measurement). the future cash flows were based on management’s estimates of operating and cash flow results, economic obsolescence, the business climate, contractual, legal, and other factors. management took into account current and expected industry and market conditions, including commodity prices and volumetric forecasts. the discount rate used in the dcf analysis was based on a weighted average cost of capital determined from relevant market comparisons. the principal considerations for our determination that performing procedures relating to the impairment assessment of certain gas processing facilities and gathering systems associated with the north texas and coastal operations in the gathering and processing segment is a critical audit matter are there was significant judgment by management when developing the estimated undiscounted cash flows, which have a discount rate applied to determine the estimated fair value. this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence obtained related to management’s significant assumptions, including the future natural gas production volumes, future commodity prices and terminal value. 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 the assessment of property and equipment impairment, including controls over management’s development of assumptions used in the estimated undiscounted cash flows and the estimated fair value associated with the north texas and coastal operations in the gathering and processing segment. our procedures also included, among others, evaluating the appropriateness of the model, and evaluating the significant assumptions used by management in developing the undiscounted cash flows and the estimated fair value, including future natural gas production volumes, future projected commodity prices and terminal value. evaluating management’s assumptions related to future natural gas production volumes, future projected commodity prices and terminal value 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 the assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in assessing the appropriateness of the model and the reasonableness of the terminal value used. /s/ pricewaterhouse coopers llp houston, texas february 20, 2020 we have served as the company’s auditor since 2005.	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.178 aig \| 2021 form 10-ktable of contents item 8 \| report of independent registered public accounting firm valuation of certain level 3 fixed maturity securities as described in note 4 to the consolidated financial statements, as of december 31, 2021, the total fair value of the company’s level 3 fixed maturity securities, including bonds available for sale and other bond securities, was $29.6 billion, comprised of residential mortgage backed securities, commercial mortgage backed securities, collateralized debt obligations, other asset-backed securities, and fixed maturity securities issued by corporations (including private placements), states, municipalities, and other governmental agencies. as the volume or level of market activity for these securities is limited, management determines fair value either by requesting brokers who are knowledgeable about the particular security to provide a price quote, which according to management is generally non-binding, or by employing market accepted valuation models. in both cases, certain inputs used by management to determine fair value may not be observable in the market. for certain private placement securities, fair value is determined by management based on discounted cash flow models using discount rates based on credit spreads, yields or price levels of comparable securities, adjusted for illiquidity and structure. for other level 3 fixed maturity securities, such assumptions may include loan delinquencies and defaults, loss severity, and prepayments. as disclosed by management, fair value estimates are subject to management review to ensure valuation models and related inputs are reasonable.the principal considerations for our determination that performing procedures relating to the valuation of certain level 3 fixed maturity securities is a critical audit matter are (i) the significant judgment by management to determine the fair value of these securities, which in turn led to a high degree of auditor subjectivity and judgment in performing the audit procedures relating to the aforementioned assumptions that are used to determine the fair value, (ii) the significant audit effort and judgment in evaluating the audit evidence related to the valuation, 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 valuation of level 3 fixed maturity securities, including controls related to (i) management’s review over the pricing function and (ii) identifying and resolving pricing exceptions. these procedures also included, among others, obtaining independent third party vendor pricing, where available, and the involvement of professionals with specialized skill and knowledge to assist in developing an independent range of prices for a sample of securities. developing the independent range of prices involved testing the completeness and accuracy of data provided by management on a sample basis and evaluating management’s assumptions noted above. the independent third party vendor pricing and the independently developed ranges were compared to management’s recorded fair value estimates.valuation of insurance liabilities - unpaid losses and loss adjustment expenses (loss reserves), net of reinsurance as described in note 12 to the consolidated financial statements, loss reserves represent the accumulation of estimates of unpaid claims, including estimates for claims incurred but not reported and loss adjustment expenses, less applicable discount. as of december 31, 2021, the company’s net liability for unpaid losses and loss adjustment expenses was $43.8 billion. as disclosed by management, the estimate of the loss reserves relies on several key judgments, including (i) actuarial methods, (ii) relative weights given to these methods by product line, (iii) underlying actuarial assumptions, and (iv) groupings of similar product lines. actuarial assumptions include (i) expected loss ratios and (ii) loss development factors. during management’s actuarial reviews, various factors are considered, including economic conditions; the legal, regulatory, judicial and social environment; medical cost trends; policy pricing, terms and conditions; changes in the claims handling process; and the impact of reinsurance. as described in note 12 to the consolidated financial statements, management uses a combination of actuarial methods to project ultimate losses for both long-tail and short-tail exposures.the principal considerations for our determination that performing procedures relating to the valuation of insurance liabilities - loss reserves, net of reinsurance is a critical audit matter are (i) the significant judgment by management when developing their estimate, which in turn led to a high degree of auditor subjectivity and judgment in performing the audit procedures related to the estimate, (ii) the significant audit effort and judgment in evaluating the audit evidence related to the actuarial methods, weights given to these methods by product line, groupings of similar product lines, and the aforementioned actuarial assumptions, 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 valuation of the net liability for unpaid losses and loss adjustment expense, including controls over the selection of actuarial methods and development of significant assumptions, as well as controls designed to identify and address management bias and contrary evidence. these procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in performing one or a combination of procedures for a sample of product lines, including (i) independently estimating reserves using actual historical data and loss development patterns, as well as industry data and other benchmarks, and comparing management’s actuarially determined reserves to these independent estimates and (ii) evaluating management’s actuarial reserving methods and aforementioned factors, including actuarial assumptions and judgments impacting loss reserves and the consistency of management’s approach period-over-period. performing these procedures involved testing the completeness and accuracy of data used by management on a sample basis. aig \| 2021 form 10-k 179 table of contents item 8 \| report of independent registered public accounting firm valuation of embedded derivatives for variable annuity and fixed index annuity products and valuation of certain guaranteed benefit features for universal life products as described in notes 4 and 13 to the consolidated financial statements, certain fixed index annuity and variable annuity contracts contain embedded derivatives that are bifurcated from the host contracts and accounted for separately at fair value in policyholder contract deposits. as of december 31, 2021, the fair value of these embedded derivatives was $6.4 billion and $2.5 billion for fixed index annuity and variable annuities with guaranteed minimum withdrawal benefits, respectively. the fair value of embedded derivatives contained in certain variable annuity and fixed index annuity contracts is measured based on policyholder behavior and capital market assumptions related to projected cash flows over the expected lives of the contracts. the policyholder behavior assumptions for these liabilities include mortality, lapses, withdrawals, and benefit utilization, along with an explicit risk margin to reflect a market participant’s estimates of projected cash flows. estimates of future policyholder behavior assumptions are subjective and based primarily on the company’s historical experience. the capital market assumptions related to the embedded derivatives for variable annuity contracts involve judgments regarding expected market rates of return, market volatility, credit spreads, correlations of certain market variables, fund performance, and discount rates. unobservable inputs used for valuing the embedded derivative include long-term equity volatilities which represent the volatility beyond the period for which observable equity volatilities are available. with respect to embedded derivatives for fixed index annuity contracts, option pricing models are used to estimate fair value, taking into account the capital market assumptions. such models use option budget assumptions which estimate the expected long-term cost of options used to hedge exposures associated with equity price changes. the option budget determines the future costs of the options, which impacts the growth in account value and the valuation of embedded derivatives. additional policyholder liabilities are also established for universal life policies with secondary guarantees, as well as other universal life policies for which profits followed by losses are expected at contract inception. as of december 31, 2021, the liability for universal life secondary guarantees and similar features was $4.5 billion, which is included within future policy benefits. the policyholder behavior assumptions for these liabilities include mortality, lapses and premium persistency. the capital market assumptions used for the liability for universal life secondary guarantees include discount rates and net earned rates.the principal considerations for our determination that performing procedures relating to the valuation of embedded derivatives for variable annuity and fixed index annuity products and valuation of certain guaranteed benefit features for universal life products is a critical audit matter are (i) the significant judgment by management in developing the aforementioned policyholder behavior assumptions, as well as long-term equity volatilities and option budget assumptions, which in turn led to a high degree of auditor subjectivity and judgment in performing the audit procedures related to the significant assumptions used in the estimate, (ii) the significant audit effort and judgment in evaluating the audit evidence relating to the significant assumptions used by management in the valuation of the embedded derivatives and additional policyholder liabilities, 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 development of assumptions used in the valuation of embedded derivatives for variable annuity and fixed index annuity products and valuation of certain guaranteed benefit features for universal life products. these procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in performing an evaluation of the appropriateness of management’s methodology and the reasonableness of management’s judgments used in developing policyholder behavior, as well as long-term volatilities and option budget assumptions used in estimating the valuation of guaranteed benefit features. these procedures considered the consistency of the assumptions across products, in relation to prior periods, and in relation to management’s historical experience or observed industry practice, and the continued appropriateness of unchanged assumptions. procedures were performed to test the completeness and accuracy of data used by management on a sample basis.valuation of deferred policy acquisition costs for universal life and individual retirement variable annuity products as described in note 8 to the consolidated financial statements, as of december 31, 2021, a portion of the $5.8 billion deferred policy acquisition costs (dac) for investment-oriented products are associated with universal life and individual retirement variable annuity products. policy acquisition costs and policy issuance costs related to investment-oriented products are deferred and amortized, with interest, in relation to the incidence of estimated gross profits to be realized over the estimated lives of the contracts. estimated gross profits are affected by a number of factors, including current and expected interest rates, net investment income and spreads, net realized gains and losses, fees, surrender rates, mortality experience, policyholder behavior experience, equity market returns, and volatility. if the assumptions used for estimated gross profits change, dac is recalculated using the new assumptions, including actuarial assumptions related to mortality, lapse, benefit utilization, and premium persistency, and any resulting adjustment is included in income. dac for investment-oriented products is reviewed by management for recoverability, which involves estimating the future profitability of the current business. if actual profitability is substantially lower than previously estimated profitability, dac may be subject to an impairment charge. the principal considerations for our determination that performing procedures relating to the valuation of dac for universal life and individual retirement variable annuity products is a critical audit matter are (i) the significant judgment by management to determine the policyholder behavior assumptions related to mortality, lapse, benefit utilization, and premium persistency, which in turn led to a high degree of auditor subjectivity and judgment in performing the audit procedures related to the significant assumptions used in the estimate, (ii) the significant audit effort and judgment in evaluating the audit evidence relating to management’s policyholder behavior assumptions, 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 amortization and recoverability of dac for universal life and individual retirement variable annuity products, including controls over the development of significant assumptions. these procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in evaluating the appropriateness of management’s methodology and the reasonableness of management’s policyholder behavior assumptions related to mortality, lapse, benefit utilization, and premium persistency, which are used in the calculation of estimated gross profits. the evaluation of the reasonableness of the assumptions included consideration of the consistency of the assumptions across products in relation to prior periods and in relation to management’s historical experience or observed industry practice. procedures were performed to test the completeness and accuracy of data used by management in developing the assumptions on a sample basis.180 aig \| 2021 form 10-ktable of contents item 8 \| report of independent registered public accounting firm recoverability of u.s. federal deferred tax asset as described in note 21 to the consolidated financial statements, as of december 31, 2021, the company had a net u.s. federal deferred tax asset of $11.0 billion, $6.1 billion of which related to federal u.s. tax attributes with a limited carryforward period. management evaluates the recoverability of the deferred tax asset and the need for a valuation allowance based on the weight of all positive and negative evidence to reach a conclusion of whether it is more likely than not that all or some portion of the deferred tax asset will not be realized. as disclosed by management, in assessing the recoverability of the deferred tax asset, management considers a number of factors, which include forecasts of future income for each of the businesses and actual and planned business and operational changes, using assumptions about future macroeconomic and company specific conditions and events. management subjects the forecasts to changes in key assumptions and evaluates the effect on tax attribute utilization, including tax attribute carryforward periods. management also applies changes to assumptions about the effectiveness of relevant prudent and feasible tax planning strategies. as of december 31, 2021, management determined that it is no longer more-likely-than-not that $850 million of the company’s deferred tax assets related to tax attribute carryforwards will be utilized prior to expiration.the principal considerations for our determination that performing procedures relating to the recoverability of the u.s. federal deferred tax asset is a critical audit matter are (i) the significant judgment by management when developing their estimate of the recoverability, which in turn led to a high degree of auditor subjectivity and judgment in performing the audit procedures relating to the forecasts of future income for each of the businesses, assumptions about future macroeconomic and company specific conditions and events, tax attribute carryforward periods, and tax planning strategies, (ii) the significant audit effort and judgment in evaluating the audit evidence related to the recoverability of the u.s. federal deferred tax asset, 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 recoverability of the u.s. federal deferred tax asset, including controls over the accuracy of input data relevant to the analysis, such as cumulative income/loss measurement, reversal of temporary differences, adjustments to forecasted pre-tax income to calculate future taxable income, impacts of tax audits, and enacted and effective tax law considerations. these procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in (i) evaluating management’s assessment of the recoverability of the u.s. federal deferred tax asset and the need for a valuation allowance, including the reasonableness of the application of tax law, (ii) testing management’s process for forecasting future income for each of the businesses, which included evaluating the impact of actual and planned business and operational changes, the reasonableness of assumptions about future macroeconomic and company specific conditions and events, impacts of tax audits, as well as considering whether management demonstrated their ability and intent in executing planned strategies, (iii) testing the tax attribute carryforward periods, and (iv) evaluating the prudence and feasibility of the implementation of available tax planning strategies that impact the recoverability of the u.s. federal deferred tax asset./s/ pricewaterhouse coopers llp new york, new york february 17, 2022 we have served as the company’s auditor since 1980.	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 certain assumptions impacting the government and insurance plan rebate reserves as discussed in note 2 to the consolidated financial statements, the company records estimated reserves for rebates and chargebacks, which includes government and insurance plan rebate reserves. as of december 31, 2020, the reserve for rebates and chargebacks was $7,187 thousand. the estimated reserves for government and insurance plan rebates are recorded as a reduction to product revenue in the same period that the related revenue is recognized and the reserves are included within current liabilities in the consolidated balance sheets. the government and insurance plan rebate reserves are based on unit sales data, contractual terms with third-party payers, historical and estimated future percentages of rebates incurred on sales, historical and estimated future insurance plan billings, any new or anticipated changes in programs or regulations that would impact the amount of the actual rebates, and levels of inventory in the distribution channel. we identified the evaluation of the government and insurance plan rebate reserves as a critical audit matter. subjective and challenging auditor judgment was required to evaluate the estimated future percentages of rebates incurred on sales and the estimated future insurance plan billings due to the unpredictability of those future amounts, and the length of time between when the sale occurred and when the rebates are paid to the administrator of the programs. payments are generally made in four to six months for government rebates and two to three months for insurance plan rebates.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 government and insurance plan rebate reserves process. this included controls over management’s process to develop the estimated future percentages of rebates incurred on sales and the estimated future insurance plan billings. we tested the historical rebates incurred on sales and insurance plan billings that were utilized as inputs to the estimated reserves. we assessed management’s estimate by evaluating the consistency of the inputs with the trend of actual historical percentages of rebates incurred on sales and insurance plan billings. for the insurance plan rebate reserve, we evaluated management’s estimate by comparing insurance plan billings received after period end to the reserve estimate recorded at year-end. for the government plan rebate reserve, we performed sensitivity analyses, using historical information, on the estimated future percentages of rebates incurred on sales and compared the results to management’s estimate. we evaluated the company’s ability to estimate government and insurance plan rebate reserves accurately by comparing actual amounts incurred for the related rebates to historical estimates.evaluation of the realizability of deferred tax assets as discussed in note 13 to the consolidated financial statements, the company recorded a net valuation allowance release of $53,383 thousand on its deferred tax assets during the year ended december 31, 2020. in assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized based on an assessment of the available positive and negative evidence. the company had gross deferred tax assets of $51,349 thousand, which includes u.s. net operating losses of $36,071 thousand as of december 31, 2020.we identified the evaluation of the realizability of deferred tax assets as a critical audit matter due to the company’s history of generating significant net operating losses. subjective and challenging auditor judgment was required to assess the application of tax laws and evaluate the projected future taxable income over the periods in which those temporary differences become deductible.59 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 evaluation of the realizability of deferred tax assets, including controls related to the application of tax laws and the projections of future taxable income. to evaluate the company’s ability to project future taxable income, we compared the company’s previous annual projections to actual results. we performed a sensitivity analysis over the amount and timing of forecasted taxable income to assess the impact on utilization of deferred tax assets. we involved income tax professionals with specialized skills and knowledge, who assisted in assessing the company’s application of tax laws and evaluating the realizability of deferred tax assets. /s/ kpmg llp we have served as the company’s auditor since 1995.	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.118table of contents accrued research and development expense description of the matter the company’s accrual for research and development expenses totaled $10.2 million at december 31, 2020. as discussed in note 2 to the consolidated financial statements, the company expenses research and development costs as incurred. the company’s determination of costs incurred to conduct research and development on the company’s product candidates, as well as the related accrued expenses at each reporting period incorporates judgment and utilizes various assumptions, including an evaluation of the information provided to the company by third parties on actual costs incurred but not yet billed, estimated project timelines and patient enrollment. payments for these activities are based on the terms of the individual arrangements, which often differ from the pattern of costs incurred. how we addressed the matter in our audit auditing the company’s research and development accruals is especially complex due to the judgments and estimations of the research and development expenses. the company uses judgment and estimation to estimate costs incurred and not yet billed at each reporting period as a result of the volume of pre-clinical and clinical trials and the related manufacturing activities, as well as the extent of third-party vendors utilized. additionally, due to the timing of invoices received from third parties, actual amounts incurred are not always known as of the audit report date. we obtained an understanding of the company’s process, evaluated and tested the design and operating effectiveness of internal controls that address the risks related to the completeness and valuation of accrued research and development expenses. to test the research and development accrual, our audit procedures included, among others, testing the accuracy and completeness of the underlying data used in the estimates and evaluating and testing the significant assumptions that are used by management to estimate the accruals. to test the significant assumptions, we inspected the contracts and any amendments to the contracts with third-party service providers, corroborated the progress of pre-clinical and clinical trials and other research and development projects with the company’s research and development personnel that oversee the clinical trials and the related manufacturing activities, and obtained information received directly from third parties, which included the third parties’ estimate of costs incurred to date. we also tested subsequent invoicing received from third parties. /s/ ernst & young llp we have served as the company’s auditor since 2015.	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-1estimation of overall transaction price for collaboration agreements description of the matter at december 31, 2019 the company has nine collaboration agreements. as discussed in notes 2 and 4 of the financial statements, amounts are included in the transaction price when management determines that it is probable that the amount will not result in a significant reversal of revenue in the future. during 2019, the company recognized $5.5 million of variable consideration in the transaction price under their collaboration arrangements. auditing management’s conclusions related to determining the probability of achievement of milestones is complex and highly judgmental as a result of the uncertainties and limited visibility by the company into the progression of developing and commercializing the combined targets as completed by the collaboration partners how we addressed the matter in our audit we obtained an understanding and evaluated the design and tested the operating effectiveness of controls over the company’s process to routinely evaluate the probability of achievement of milestones and any related constraint for each collaboration, in addition to the controls over the completeness and accuracy of determining the population of agreements and potential milestone payments.to test the milestone amounts included, or excluded, from the transaction price, we performed audit procedures that included, among others, observing the quarterly meetings with accounting and alliance managers discussing the status of each collaboration. for each milestone, we examined available evidence including correspondence with the collaboration partner and evaluated management’s conclusions on the probabilities of achievement. we reviewed supporting documentation to corroborate that milestones were included in the transaction price when determined to be probable of achievement. we reviewed the collaboration agreements and related amendments to validate the completeness of the list of targets and potential milestone payments that management considered in their analysis. we performed a lookback analysis to validate the company’s accuracy of determining the probability of achieving these milestones. accounting for convertible senior notes description of the matter on november 18, 2019 the company issued $460 million of convertible senior notes due 2024. as discussed in note 6 of the financial statements, the convertible notes include conversion terms that require the company to account for the debt and equity components of the convertible notes separately including allocating value to the debt component with the remaining value allocated to the equity component reflected as a debt discount to be amortized to interest expense over the terms of the notes.auditing management’s conclusions related to the value allocated to the debt portion of the convertible note is complex and involves estimation to determine the effective yield that the company would have received on the debt issuance had it not included in the conversion feature.f-2how we addressed the matter in our audit we obtained an understanding and evaluated the design and tested the operating effectiveness of controls over the company’s process to determine the valuation allocation between debt and equity components, including the valuation model and assumptions.to test the value assigned to each component, we performed audit procedures that included, among others, evaluating the company’s use of independent valuation specialist, and the valuation methodology. in addition, we involved our valuation specialists to assist in testing the concluded effective yield used to determine the value allocated to the debt component by performing an independent credit analysis including comparison to market rates for similarly rated instruments. we also tested the completeness and accuracy of the calculation used to estimate the fair value of the debt component./s/ ernst & young llp we have served as the company’s auditor since 2006.	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 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.earn-out liability as described in note 2 to the consolidated financial statements, the earn-out liability represents a portion of the purchase consideration from a prior year business combination. the company has classified the earn-out liability as a level 3 liability and the fair value of the liability is evaluated each reporting period. as of december 31, 2020, the earn-out liability was $11,936,000. the earn-out liability includes both quantitative and qualitative components. the calculation of the fair value of the earn-out liability used a monte carlo simulation, which was applied to remaining estimated earn-out payments discounted back to december 31, 2020. the payment of the earn-out amounts is subject to the company meeting certain earnings thresholds as detailed in the acquisition agreement and could requirement payments up to $26,000,000. f-2 the principal considerations for our determination that performing procedures relating to the earn-out liability is a critical audit matter are (i) there was significant judgment and estimation used by management in determining the earn-out liability, which led to an increased level of auditor judgment, subjectivity and effort in performing procedures and in evaluating audit evidence obtained relating to the earn-out liability, including the qualitative component; and (ii) the audit effort involved professionals with specialized skill and knowledge to assist in evaluating certain audit evidence. 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 documenting the control environment in which judgements were made, including significant unobservable inputs and data. these procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in assessing the inputs and assumptions used in the monte carlo simulation. assessing the inputs and assumptions involved testing the completeness of accuracy of data provided by management and evaluating the reasonableness of management’s assumptions used to develop the significant unobservable inputs. /s/ armanino, llp we have served as the company’s auditor since 2020.	1
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 the 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.f-2 accrued and prepaid clinical trial expenses description of the matter the company’s total accrued expenses were $28.6 million at december 31, 2020, which included the estimated obligation for clinical trial expenses incurred as of december 31, 2020 but not paid as of that date. in addition, the company’s total prepaid expenses and other current assets were $17.9 million, which included amounts that were paid in advance of services incurred pursuant to clinical trials. as discussed in note 2 to the consolidated financial statements, when vendors billing terms do not coincide with the company’s period-end, the company is required to make estimates of its obligations to those vendors, including clinical trial and pharmaceutical development costs, contractual services costs and costs for supply of its product candidates incurred in a given accounting period and record accruals at the end of the period. the company bases its estimates on its knowledge of the research and development programs, services performed for the period, past history for related activities and the expected duration of the vendor service contract, where applicable. payments for these activities are based on the terms of the individual arrangements and may result in payment terms that differ from the pattern of costs incurred. there may be instances in which payments made to vendors will exceed the level of services provided and result in a prepayment of the clinical expense. auditing the company’s accrued and prepaid clinical trial expenses is especially challenging due to the large volume of information received from multiple vendors that perform service on the company’s behalf. while the company’s estimates of accrued and prepaid clinical trial expenses are primarily based on information received related to each study from its vendors, the company may need to make an estimate for additional costs incurred. additionally, due to the long duration of clinical trials and the timing of invoicing received from vendors, the actual amounts incurred are not typically known at the time the financial statements are issued. how we addressed the matter in our audit we evaluated and tested the design and operating effectiveness of internal controls over the company’s process used in determining the valuation and completeness of accrued and prepaid clinical trial expenses. to evaluate the accrued and prepaid clinical trial expenses, our audit procedures included, among others, testing the accuracy and completeness of the underlying data used in determining the accrued and prepaid clinical trial expenses and evaluating the assumptions/estimates used by management to adjust the actual information received. to assess the nature and extent of the services incurred, we corroborated the progress of clinical trials with the company’s research and development personnel that oversee the clinical trials and obtained information directly from vendors of their costs incurred to date. to evaluate the completeness and valuation of the accrual, we also tested subsequent invoices received and inspected the company’s contracts with vendors and any pending change orders to assess the impact to the accrual. /s/ ernst & young llp we have served as the company’s auditor since 2009.	4

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