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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/board of directors 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. f-2table of contents going concern as described further in note 2 to the financial statements, the company has incurred significant losses, had negative working capital and lacks significant revenues. the ability of the company to continue as a going concern is dependent on raising capital and ultimately to attain profitable operations. accordingly, the company has determined that these factors raise substantial doubt as to the company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements. management intends to alleviate the going concern risk by investigating and securing various financing resources, including but not limited to borrowing from the company’s major shareholder, private placements, and the possibility of raising funds through a future public offering. we determined the company’s ability to continue as a going concern is a critical audit matter due to the estimation and uncertainty regarding the company’s available capital and the risk of bias in management’s judgments and assumptions in their determination. our audit procedures related to the company’s assertion on its ability to continue as a going concern included the following: ·we performed testing procedures such as analytical procedures to identify conditions and events that indicated there was substantial doubt about the company’s ability to continue as a going concern for a reasonable period of time. ·we reviewed and evaluated management’s plans for dealing with the adverse effects of these conditions and events. ·we inquired of company management and reviewed company records to assess whether there are additional factors that contribute to the uncertainties disclosed. ·we assessed whether the company’s determination that there is substantial doubt about its ability to continue as a going concern was adequately disclosed. /s/ wei, wei & co., llp we have served as the company’s auditor since 2017. | 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 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 a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.revenue recognition—accrual for earned but uncollected pawn loan fees as described in note 2 of the consolidated financial statements, the company’s revenue recognition policy for pawn loan fees is to accrue pawn loan fee revenue on a constant-yield basis over the life of the pawn loan for all pawn loans of which the company deems collection to be probable based on historical pawn redemption statistics. the company's accrual for earned but uncollected pawn loan fees as of december 31, 2021 was $42.9 million, which is included in accounts receivable, net in the accompanying consolidated balance sheets. the determination of the accrual for earned but uncollected pawn loan fees was subjective and required management to make significant judgements related to the probability of redemption and the expected effective yield of the pawn loan portfolio at the measurement date. we identified the accrual for earned but uncollected pawn loan fees as a critical audit matter as auditing the probability of redemption and the expected yield of the pawn loan portfolio was complex and required a high degree of auditor judgement and subjectivity due to the significant judgements applied by management noted above.f-1 table of contents our audit procedures related to the company’s accrual for earned but uncollected pawn loan fees, specifically the assumptions for the probability of redemption and expected effective yield of the pawn loan portfolio, included the following, among others:•we obtained an understanding of the relevant controls related to the accrual for earned but uncollected pawn loan fees and tested such controls for design and operating effectiveness, including (a) the review and approval of key assumptions and (b) the completeness and accuracy of data inputs.•we obtained management’s calculation of the accrual for earned but uncollected pawn loan fees and tested the calculation for completeness and accuracy of data used as inputs.•we evaluated the methodology and assumptions used by management to develop the effective pawn loan yield, including consideration of historical patterns and the probability of redemption.•we assessed the validity of data used in the calculation of the accrual for earned but uncollected pawn loan fees by agreeing, on a sample basis, key data inputs to source documents.allowance for credit losses—finance receivables as described in notes 2 and 7 to the consolidated financial statements, the company established an allowance for credit losses on its finance receivable portfolios of $75.6 million as of december 31, 2021, which was estimated using the company’s current expected credit loss (cecl) model. credit losses on finance receivables were estimated and recognized upon purchase of the receivable, based on expected credit losses for the life of the receivable. the company’s cecl model segmented the finance receivable population into monthly pools of receivables and estimated the allowance for credit losses by applying modeled loss rates primarily derived from internal, historical cumulative loss experience from comparable economic cycles, then adjusted by qualitative factors to address recent and forecasted business trends. qualitative factors to address recent and forecasted business trends included, but were not limited to, loss trends, delinquency levels, economic conditions, underwriting and collection practices.the determination of the allowance for credit losses on finance receivables was subjective and required management to make significant judgements related to the selection and application of modeled loss rates and adjustments to address recent and forecasted business trends. specifically, incorporating observable and forecasted economic conditions could have a material impact on the measurement of the allowance for credit losses to the extent that forecasted economic conditions change significantly. we identified the allowance for credit losses on finance receivable portfolios as a critical audit matter as auditing the judgements surrounding the selection of modeled loss rates and adjustments to address recent and forecasted business trends was complex and required a high degree of auditor judgement and subjectivity.our audit procedures related to the company’s allowance for credit losses on finance receivables, specifically the selection and application of modeled loss rates and adjustments to address recent and forecasted business trends, included the following, among others:•we tested the completeness and accuracy of data inputs into the cecl model, including historical origination balances, loss rates, first payment default rates, and delinquency rates, by tracing to internal source documents.•we evaluated key assumptions and judgements surrounding the selection of modeled loss rates and adjustments for current conditions and future expectations for reasonableness by comparing to internal and external source data.allowance for lease losses—leased merchandise as described in notes 2 and 8 to the consolidated financial statements, the company established an allowance for lease losses on its portfolio of merchandise subject to operating leases of $5.4 million as of december 31, 2021, representing estimated losses from uncollectible rental agreements. the company estimated this reserve based on a combination of historical losses and expected future losses that gave consideration to recent and forecasted business trends including, but not limited to, loss trends, delinquency levels, economic conditions, underwriting and collection practices.the determination of the allowance for lease losses on merchandise subject to operating leases was subjective and required management to make significant judgements related to the selection and application of historical losses and adjustments for expected future losses. we identified the allowance for lease losses on merchandise subject to operating leases as a critical audit matter as auditing the judgements surrounding the selection and application of historical losses and adjustments for expected future losses was complex and required a high degree of auditor judgement and subjectivity.our audit procedures related to the company’s allowance for lease losses on merchandise subject to operating leases, specifically the selection and application of historical losses and adjustments for expected future losses, included the following, among others:f-2 table of contents•we tested the completeness and accuracy of data inputs into the allowance for lease losses model, including historical origination balances, loss rates, first payment default rates, and delinquency rates, by tracing to internal source documents.•we evaluated key assumptions and judgements surrounding the selection of historical losses and adjustments for expected future losses for reasonableness by comparing to internal and external source data.acquisition of american first finance—valuation of acquired finance receivables, leased merchandise, developed technology and merchant relationships intangible assets, and contingent consideration as described in note 3 and 6 to the consolidated financial statements, the company completed its acquisition of american first finance on december 17, 2021 with total purchase consideration of $1.1 billion. in conjunction with the acquisition, acquired finance receivables were recorded at a fair value of $225.3 million; acquired leased merchandise was recorded at a fair value of $139.6 million; an intangible asset for developed technology was recorded at a fair value of $99.4 million; an intangible asset for merchant relationships was recorded at a fair value of $194.0 million; and contingent consideration in the form of earnout liabilities was recorded at fair value of $127.4 million on the opening balance sheet, along with other acquired assets and liabilities. to determine the fair value of acquired finance receivables, management first segmented the finance receivable population into pools of receivables with similar risk characteristics and then bifurcated each segment by receivables that have experienced a more-than-insignificant deterioration in credit quality since origination based on delinquency status (i.e., purchase credit deteriorated finance receivables) and non-purchase credit deteriorated finance receivables. management then used discounted cash flow analyses that considered factors such as discount rate and estimated losses to determine the fair value. management determined estimated losses by applying modeled loss rates primarily derived from internal, historical cumulative loss experience from comparable economic cycles, adjusted by qualitative factors to address recent and forecasted business trends. qualitative factors to address recent and forecasted business trends included, but were not limited to, loss trends, delinquency levels, economic conditions, underwriting and collection practices. to determine the fair value of leased merchandise, management used a model that considered factors including assumptions about replacement cost sourced from third parties that was then adjusted for depreciation over estimated useful lives, as well as economic obsolescence of the leased merchandise. management estimated economic obsolescence by applying modeled loss rates primarily derived from historical losses and expected future losses that gave consideration to recent and forecasted business trends including, but not limited to, loss trends, delinquency levels, economic conditions, underwriting and collection practices. to determine the fair value of the developed technology intangible asset, management utilized a cost method that contained assumptions on the estimated costs to rebuild the developed technology, including developer’s profit margins and economic obsolescence. to determine the fair value of the merchant relationships intangible asset, management utilized a discounted cash flow model that contained assumptions on projected cash flows from merchants, a discount rate, and an attrition rate. the earnout liabilities primarily consisted of two separate components that were recorded at fair value on the acquisition date of december 17, 2021 and remeasured at fair value on december 31, 2021. the first component provides for a defined payment to the seller should certain income-based thresholds be achieved over a defined earnout measurement period. to determine the fair value of the income-based earnout liability, management utilized a model which simulated scenarios that contained assumptions on projected cash flows and a discount rate. the second component provides for a defined payment to the seller should certain share price-based thresholds be achieved over a defined measurement period. to determine the fair value of the share price-based earnout liability, management utilized a model which simulated scenarios that contained assumptions on projected stock price, volatility and a discount rate.we identified the determination of the fair value of acquired finance receivables, leased merchandise, developed technology and merchant relationships intangible assets and the valuation of earnout liabilities as critical audit matters as auditing those estimates required a high degree of auditor judgment, subjectivity, and effort in performing procedures and included the use of professionals with specialized skill and knowledge.our audit procedures related to the determination of the fair value of acquired finance receivables, leased merchandise, developed technology and merchant relationships intangible assets and the valuation of earnout liabilities included the following, among others:•we obtained an understanding of the relevant controls related to the valuation model applied and tested such controls for design and operating effectiveness, including those controls over (a) validation of data within the model, and (b) the f-3 table of contentsmanagement review and approval of the computed fair value, including the selection and application of the inputs into the model.•we utilized internal valuation specialists to assist the audit team in testing the methodologies and techniques for appropriateness, as well as evaluating significant, challenging assumptions in the models and methods to determine fair value of the acquired assets and liabilities as outlined above. specifically, audit procedures included the following, among others:•for acquired finance receivables:◦we tested the completeness and accuracy of data inputs into the discounted cash flow and cecl models, including discount rate, historical origination balances, loss rates, first payment default rates, and delinquency rates by segment, by tracing to internal source documents.◦we evaluated key assumptions and judgements surrounding the selection of modeled loss rates and adjustments for current conditions and future expectations for reasonableness by comparing to internal and external source data.•for acquired leased merchandise:◦valuation specialists assisted us in testing the reasonableness of inputs by comparing assumptions related to replacement cost to external sources and recalculating depreciation over estimated useful lives, including reviewing the estimated useful lives applied to the leased merchandise for reasonableness in their application.◦we evaluated economic obsolescence by testing the completeness and accuracy of data inputs into the lease losses model, including historical origination balances, loss rates, first payment default rates and delinquency rates, by tracing to internal source documents.◦we evaluated the economic obsolescence inputs by assessing key assumptions and judgements surrounding the selection of historical losses and adjustments for expected future losses for reasonableness and comparing to internal and external source data.•for the acquired developed technology intangible asset: ◦together with valuation specialists, we compared assumptions related to costs to rebuild and economic obsolescence to internal sources.◦valuation specialists assisted us in assessing the reasonableness of inputs by comparing assumptions related to developer’s profit margin to external sources.•for the acquired merchant relationships intangible asset: ◦together with valuation specialists, we tested the completeness and accuracy of data inputs into the discounted cash flow model, including assessing the reasonableness of the discount rate by tracing to internal and external source documents and performing calculations to form independent expectations.◦valuation specialists assisted us in evaluating the reasonableness of inputs by comparing assumptions related to the attrition rate to external sources and performing calculations to form independent expectations.•for earnout liabilities: ◦together with valuation specialists, we tested both components of the earnout liability by comparing key terms, including the measurement period and defined income and stock price thresholds, utilized in the valuation models to internal source documents. ◦valuation specialists assisted us in evaluating the reasonableness of inputs in the income-based earnout liability fair value calculation by comparing assumptions in the projected cash flows model, including earnings volatility and discount rate assumptions, tracing to internal and external source documents, and performing calculations to form independent expectations.◦valuation specialists assisted us in evaluating the reasonableness of inputs in the stock price-based earnout liability fair value calculation by assessing the reasonableness of projected stock price, including stock price volatility and discount rate assumptions, through tracing to internal and external source documents and performing calculations to form independent expectations.s/ rsm us llp we have served as the company’s auditor since 2016. | 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.96part ii item 8 revenue recognition – refer to note 1 to the financial statements critical audit matter description the company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those products or services. the company offers customers the ability to acquire multiple licenses of software products and services, including cloud-based services, in its customer agreements through its volume licensing programs.significant judgment is exercised by the company in determining revenue recognition for these customer agreements, and includes the following: •determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based services. •the pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation. •identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., variable consideration, optional purchases, and free services). •determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately. given these factors and due to the volume of transactions, the related audit effort in evaluating management's judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.how the critical audit matter was addressed in the audit our principal audit procedures related to the company's revenue recognition for these customer agreements included the following: •we tested the effectiveness of controls related to the identification of distinct performance obligations, the determination of the timing of revenue recognition, and the estimation of variable consideration. •we evaluated management's significant accounting policies related to these customer agreements for reasonableness. •we selected a sample of customer agreements and performed the following procedures: -obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement. -tested management's identification and treatment of contract terms. -assessed the terms in the customer agreement and evaluated the appropriateness of management's application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions. •we evaluated the reasonableness of management's estimate of stand-alone selling prices for products and services that are not sold separately. •we tested the mathematical accuracy of management's calculations of revenue and the associated timing of revenue recognized in the financial statements. 97part ii item 8 income taxes – uncertain tax positions – refer to note 12 to the financial statements critical audit matter description the company's long-term income taxes liability includes uncertain tax positions related to transfer pricing issues that remain unresolved with the internal revenue service ("irs"). the company remains under irs audit, or subject to irs audit, for tax years subsequent to 2003. while the company has settled a portion of the irs audits, resolution of the remaining matters could have a material impact on the company's financial statements. conclusions on recognizing and measuring uncertain tax positions involve significant estimates and management judgment and include complex considerations of the internal revenue code, related regulations, tax case laws, and prior-year audit settlements. given the complexity and the subjective nature of the transfer pricing issues that remain unresolved with the irs, evaluating management's estimates relating to their determination of uncertain tax positions required extensive audit effort and a high degree of auditor judgment, including involvement of our tax specialists.how the critical audit matter was addressed in the audit our principal audit procedures to evaluate management's estimates of uncertain tax positions related to unresolved transfer pricing issues included the following: •we evaluated the appropriateness and consistency of management's methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls. •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 positions. •we tested the reasonableness of management's judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions. •for those uncertain tax positions that had not been effectively settled, we evaluated whether management had appropriately considered new information that could significantly change the recognition, measurement or disclosure of the uncertain tax positions. •we evaluated the reasonableness of management's estimates by considering how tax law, including statutes, regulations and case law, impacted management's judgments. /s/ deloitte & touche llp seattle, washington july 29, 2021 we have served as the company's auditor since 1983. | 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. goodwill interim impairment assessment – certain reporting units within the north america & australia (“naa”) and europe & asia (“ea”) reportable segments as described in notes 2 and 10 to the consolidated financial statements, the company’s consolidated goodwill balance was $807 million as of november 30, 2020. the goodwill associated with the naa and ea reportable segments as of november 30, 2020 was $579 million and $228 million, respectively. management reviews goodwill for impairment as of july 31 every year, or more frequently if events or circumstances dictate. the impairment review for goodwill allows management to first assess qualitative factors to determine whether it is necessary to perform the more detailed quantitative goodwill impairment test. management performs the quantitative test if the qualitative assessment determined it is more-likely-than-not that a reporting unit’s estimated fair value is less than its carrying amount, or management may elect to bypass the qualitative assessment and proceed directly to the quantitative test for any reporting unit. when performing the quantitative test, if the estimated fair value of the reporting unit exceeds its carrying value, no further analysis is required. however, if the estimated fair value of the reporting unit is less than the carrying value, goodwill is written down based on the difference between the reporting unit’s carrying amount and its fair value, limited to the amount of goodwill allocated to the reporting unit. as a result of the effect of covid-19 on management’s expected future operating cash flows, management performed interim discounted cash flow analyses for certain reporting units with goodwill as of february 29, 2020 and for all reporting units with goodwill as of may 31, 2020 (i.e., prior to the company’s annual test date of july 31, 2020). consequently, management determined that the estimated fair values of two of the company’s naa segment reporting units and two of the company’s ea segment reporting units no longer exceeded their carrying values. management recognized goodwill impairment charges of $1,319 million and $777 million within the naa and ea reportable segments, respectively and the company has no remaining goodwill for those reporting units. as of july 31, 2020, management performed the annual goodwill impairment review and determined there was no incremental impairment for goodwill at the annual test date. as a result of the extended pause in operations, management performed an additional quantitative goodwill impairment review for all remaining reporting units as of november 30, 2020 and determined there was no incremental impairment for goodwill. the determination of the fair value of the company’s reporting units includes numerous assumptions that are subject to various risks and uncertainties. the principal assumptions used in management’s cash flow analyses consisted of the timing of the company’s return to service; changes in market conditions; and port or other restrictions; forecasted revenues net of the most significant variable costs, which are travel agent commissions, costs of air and other transportation, and certain other costs that are directly associated with onboard and other revenues, including credit and debit card fees; the allocation of new ships; the timing of the transfer or sale of ships amongst brands; and the estimated proceeds from ship sales; and the weighted-average cost of capital of market participants, adjusted for the risk attributable to the geographic regions in which these cruise brands operate. the principal considerations for our determination that performing procedures relating to the goodwill interim impairment assessment for certain reporting units within the naa and ea reportable segments at may 31, 2020 is a critical audit matter are (i) the significant judgment by management in determining the fair value 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 forecasted revenues net of the most significant variable costs, which are travel agent commissions, costs of air and other f-41table of contentstransportation, and certain other costs that are directly associated with onboard and other revenues, including credit and debit card fees; the timing of the transfer or sale of ships amongst brands; and the weighted-average cost of capital of market participants, adjusted for the risk attributable to the geographic regions in which these cruise brands operate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments, including controls over the valuation of the company’s reporting units. these procedures also included, among others (i) testing management’s process for determining the fair value estimates of certain reporting units within the naa and ea reportable segments related to the interim impairment assessment; (ii) evaluating the appropriateness of the discounted cash flow analyses; (iii) testing the completeness and accuracy of underlying data used in the analyses; and (iv) evaluating the significant assumptions used by management related to forecasted revenues net of the most significant variable costs, which are travel agent commissions, costs of air and other transportation, and certain other costs that are directly associated with onboard and other revenues, including credit and debit card fees; the timing of the transfer or sale of ships amongst brands; and the weighted-average cost of capital of market participants, adjusted for the risk attributable to the geographic regions in which these cruise brands operate. evaluating management’s assumptions related to forecasted revenues net of the most significant variable costs, which are travel agent commissions, costs of air and other transportation, and certain other costs that are directly associated with onboard and other revenues, including credit and debit card fees and the timing of the transfer or sale of ships amongst brands involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of the discounted cash flow analyses and the weighted-average cost of capital of market participants, adjusted for the risk attributable to the geographic regions in which these cruise brands operate.certain ship impairment assessments as described in notes 2, 3, and 10 to the consolidated financial statements, the company’s consolidated ship and ship improvements balance was $49.8 billion as of november 30, 2020. management reviews their long-lived assets for impairment whenever events or circumstances indicate potential impairment. as a result of the effect of covid-19 on the company’s expected future operating cash flows and management’s decision to dispose of certain ships, management determined certain impairment triggers occurred. accordingly, management performed undiscounted cash flow analyses on certain ships in the company’s fleet throughout 2020. based on these undiscounted cash flow analyses, management determined that certain ships, specifically those being disposed, had net carrying values that exceeded their estimated undiscounted future cash flows. management determined the fair values of these ships based on their estimated selling value. management then compared these estimated fair values to the net carrying values and, as a result, recognized ship impairment charges of $1.5 billion and $0.3 billion within the naa and ea segments during 2020. the principal assumptions used in management’s undiscounted cash flow analyses consisted of the timing of the respective ship’s return to service; changes in market conditions; and port or other restrictions; forecasted ship revenues net of the most significant variable costs, which are travel agent commissions, costs of air and other transportation, and certain other costs that are directly associated with onboard and other revenues, including credit and debit card fees; and the timing of the sale of ships and estimated proceeds.the principal considerations for our determination that performing procedures relating to certain ship impairment assessments is a critical audit matter are (i) the significant judgment by management in developing the undiscounted cash flow analyses for the ships with triggering events; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to forecasted ship revenues net of the most significant variable costs, which are travel agent commissions, costs of air and other transportation, and certain other costs that are directly associated with onboard and other revenues, including credit and debit card fees and the timing of the sale of ships and estimated proceeds. 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 ship impairment assessments, including controls over the analysis of the company’s ships that were subject to undiscounted cash flow impairment analyses. these procedures also included, among others (i) testing management’s process for developing the undiscounted cash flow estimates for ships with triggering events; (ii) evaluating the appropriateness of the undiscounted cash flow methods; (iii) testing the completeness and accuracy of underlying data used in the estimates; and (iv) evaluating the significant assumptions used by management related to forecasted ship revenues net of the most significant variable costs, which are travel agent commissions, costs of air and other transportation, and certain other costs that are directly associated with onboard and other revenues, including credit and debit card fees and the timing of the sale of ships and estimated proceeds. evaluating management’s assumptions related to the forecasted ship revenues net of the most significant variable costs, which are travel agent commissions costs of air and other transportation, and certain other costs that are directly associated with onboard and other revenues, including credit and debit card fees and the timing of the sale of ships and f-42table of contentsestimated proceeds involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the company; (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.liquidity - impact of covid-19as described in note 1 to the consolidated financial statements, in the face of the global pandemic, management paused its guest cruise operations in mid-march 2020. in september 2020, the company resumed limited guest operations as part of its phased return to service. management believes that the ongoing effects of covid-19 on their operations have had, and will continue to have, a material negative impact on their financial results and liquidity. management has taken and continues to take actions to improve the company’s liquidity, including capital expenditure and operating expense reductions, amending credit agreements, accelerating the removal of certain ships from the company’s fleet, suspending dividend payments on, and the repurchase of, common stock of carnival corporation and ordinary shares of carnival plc and pursuing various capital market transactions. based on these actions and considering the company’s available liquidity including cash and cash equivalents of $9.5 billion at november 30, 2020, management concluded there is sufficient liquidity to satisfy the company’s obligations for at least the next twelve months. the principal assumptions used in management’s cash flow analyses used to estimate future liquidity requirements consisted of the expected continued gradual resumption of guest cruise operations; the expected lower than comparable historical occupancy levels; the expected incremental expenses for the resumption of guest cruise operations for the maintenance of additional public health protocols and complying with additional regulations. the principal considerations for our determination that performing procedures relating to the impact of covid-19 on the company’s liquidity is a critical audit matter are (i) the significant judgment by management when evaluating the uncertainty related to the effects of the covid-19 pandemic on the company’s financial results and liquidity, which impacts the company’s forecasted financial results and estimated liquidity requirements to satisfy obligations; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s liquidity assessment to satisfy obligations for at least the next twelve months. 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 company’s liquidity. these procedures also included, among others, (i) testing management’s process for forecasting financial results and liquidity within one year after the date the financial statements are issued and (ii) testing the completeness and accuracy of underlying data used in the forecast; and (iii) evaluation of management’s liquidity assessment and their disclosure in the consolidated financial statements regarding having sufficient liquidity to satisfy its obligations for at least the next twelve months./s/pricewaterhouse coopers llp miami, florida january 26, 2021we have served as the company’s auditors since 2003. | 2 |
critical audit matters the critical audit matters communicated beloware matters arising from the current period audit of the financial statements that were communicated or required to be communicated tothe audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved ourespecially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinionon the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinionson the critical audit matters or on the accounts or disclosures to which they relate. critical audit matter description the company’s evaluation of goodwill andrelated impairment, if any, involves the comparison of the fair value of each reporting unit to its carrying value. the company uses thediscounted cash flow model to estimate fair value, which requires management to make significant estimates and assumptions related toforecasts of future revenues and operating margins. changes in these assumptions which may include but are not limited to macroeconomicfactors, political risks, product adoption or obsoletion rates, and effectiveness of sales channels may have a significant impact on thefair value, and related potential impairment, if any. the company’s reporting unit, sichuan wuge network games co., ltd. (“wuge”)generated a substantial proportion of the company’s consolidated revenues and gross margins via the sales of digital door signs.the value of goodwill related to wuge is derived from the sales generated by this unit. as a result of the significant judgments madeby management to estimate the fair value of wuge for which there is limited historical data and the judgments involved in selecting significantbusiness assumptions to forecast future revenue and operating margin for wuge, performing audit procedures to evaluate the reasonablenessof management’s estimates and assumptions required a high degree of auditor judgment and an increased effort. how the critical audit matter was addressedin the audit our audit procedures related to the determinationof forecasts of future revenue and operating margin used by management to estimate the fair value contributed by wuge included the following,among others: we evaluated management’s ability to accuratelyforecast future revenue and operating margin by comparing actual results to management’s historical forecasts for the sales of wuge’sproducts. we also developed our own independent analysis and estimate of revenues and profits and applied them and a discounted cash flowmodel to evaluate the fair value of goodwill. to support our independent model we enquired of management regarding their assumptions,searched for market data, used historical data, and performed sensitivity and scenario analysis to test different outcomes from the model. /s/ wwc, p.c. wwc, p.c. certified public accountants pcaob id: 1171 we have served as the company’s auditorsince october 26, 2018. | 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.f-2table of contents assessment of the fair value measurement of fixed maturity securities, available for sale, classified as level 3 in the fair value hierarchy as discussed in note 2, 4 and 6 to the consolidated financial statements, the company’s investments in fixed maturity securities classified as level 3 within the fair value hierarchy have been designated as available for sale and are reported at fair value which was $2.8 billion as of december 31, 2019. to estimate the fair value of fixed maturity securities classified as level 3 in the fair value hierarchy the company employs a market approach which utilizes prices and other relevant information generated by market transactions involving identical or comparable securities. sources of inputs to the market approach include third-party pricing services and independent broker quotations.we identified the assessment of the fair value measurement of fixed maturity securities, available for sale, classified as level 3 in the fair value hierarchy as a critical audit matter. due to the significant measurement uncertainty, this assessment involved subjective auditor judgment and required specialized skills and knowledge in identifying and applying comparable market information that is relevant and reliable.the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s evaluation of quotations obtained from third-party pricing services and independent brokers, including the assessment of the valuation methodologies, and a comparison to portfolio and market trends.we involved financial instrument valuation professionals with specialized skills and knowledge, who assisted in:•testing the company’s methodology to produce fair value estimates compliant with u.s. generally accepted accounting principles, and•developing an independent estimate of fair value for securities selected for testing using key assumptions and market data sources, and comparing those fair value estimates to the company’s value.assessment of certain assumptions used in the valuation of insurance intangible assets as discussed in notes 2 and 7 to the consolidated financial statements, the company amortizes insurance intangible assets reflecting the value of insurance and reinsurance contracts acquired, deferred acquisition costs, and deferred sales inducements over the lives of the respective policies in relation to the expected emergence of estimated gross profits (egp’s). egp’s are derived from the estimates of future investment income, surrender charges and other product fees, less the cost of amounts credited to policyholders, maintenance expenses, mortality, net of reinsurance ceded, and expense margins. the determination of egp’s requires the company to use certain assumptions, including (1) surrender rates, (2) the earned rate, which represents the long term assumptions of the company’s expected earnings on investments, and(3) budgeted option costs, which represents the expected cost to purchase call options in future periods to fund the equity indexed linked feature related to the company’s fixed indexed annuity contracts. the value of insurance and reinsurance contracts acquired, deferred acquisition costs, and deferred sales inducements were $0.6 billion, $0.6 billion and $0.2 billion, respectively as of december 31, 2019.we identified the assessment of certain assumptions used in the valuation of insurance intangible assets as a critical audit matter. due to the significant measurement uncertainty, this assessment involved subjective auditor judgment and required specialized skills and knowledge to evaluate the assumptions listed above used to determine the egp estimates.the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s development, review, and approval of the egp assumptions listed above. we involved actuarial professionals with specialized skills and industry knowledge, who assisted in:•evaluating the company’s methodology used to produce egp estimates compliant with u.s. generally accepted accounting principles,•comparing estimated gross profits for the current year to actual gross profits for the current year,f-3table of contents•comparing the company’s actual historical experience to expected experience for surrender rates,•comparing the earned rates and budgeted option costs to historic and current experience, and•performing an analysis to evaluate the application of the earned rate and budgeted option cost assumptions used in the projection of egp’s.we also involved financial instrument valuation professionals with specialized skills and knowledge, who assisted in:•comparing the earned rate assumptions to actual company projections and observable market information, and•re-performing calculations of projected cash flows for a selection of securities used in determining the earned rate assumptions.assessment of certain assumptions used in the fair value measurement of the fixed indexed annuity embedded derivative liability as discussed in notes 2, 5, and 6 to the consolidated financial statements, the company permits the holder of a fixed indexed annuity contract to elect an equity index linked feature, where amounts credited to the contract are linked to the performance of the equity indices selected by the contract holder. this feature is accounted for as an embedded derivative liability and reported at fair value which was $3.2 billion as of december 31, 2019. the embedded derivative liability was classified as level 3 in the fair value hierarchy, and the fair value measurement uses inputs deemed unobservable, including the mortality multiplier, surrender rates, non-performance spread and budgeted option cost.we identified the assessment of certain assumptions used in the fair value measurement of the fixed index annuity embedded derivative liability as a critical audit matter. due to the significant measurement uncertainty, this assessment involved subjective auditor judgment and required specialized skills and knowledge to evaluate the assumptions related to the (1) surrender rates, and (2) budgeted option costs, which represent the expected cost to purchase call options in future periods to fund the equity indexed linked feature.the primary procedures we performed to address the critical audit matter included the following. we tested certain internal controls over the company’s development, review, and approval of the assumptions. we involved actuarial professionals with specialized skills and industry knowledge, who assisted in:•evaluating the company’s methodology to produce a fair value estimate compliant with u.s. generally accepted accounting principles,•comparing the company’s actual historical experience to expected experience for surrender rates,•comparing the budgeted option cost to the historic and current experience, and•testing the application of the company’s methodology and assumptions by developing independent estimates for a selection of policies and comparing the results to the company’s estimates./s/ kpmg llp we have served as the company’s auditor since 1998. | 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. 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 $14.9 million for the year-ended december 31, 2019. the principal considerations for our determination that performing procedures relating to vitas revenue implicit price concessions is a critical audit matter are there was 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, including estimates of implicit price concessions, 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, evaluating and testing management’s process for developing the estimate, which included evaluating the reasonableness of the estimate for each third-party payor based on existing correspondence from the payor and the company’s historical settlement activity. evaluating the reasonableness of the estimate for each third-party payor 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. acquisition of hsw rr, inc.– valuation of reacquired franchise rights intangible asset as described in notes 1 and 7 to the consolidated financial statements, in september 2019, the company completed the acquisition of substantially all of the assets of hsw rr, inc. for $120 million, subject to a working capital adjustment that resulted in an additional $1.4 million payment to hsw, which resulted in $53 million of reacquired franchise rights intangible asset being recorded. management applied significant judgment in estimating the fair value of the reacquired franchise rights intangible asset acquired, which involved the use of significant estimates and assumptions including revenue growth rates, the amount and timing of future cash flows, discount rates, useful lives, royalty rates and future tax rates. the principal considerations for our determination that performing procedures relating to the valuation of the reacquired franchise rights intangible asset 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 the reacquired franchise rights intangible asset acquired due to the significant amount of judgment by management when developing the estimate, (ii) significant audit effort was required in evaluating the significant assumptions relating to the estimate, such as the revenue growth rates, amount and timing of future cash flows 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. 44 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 acquisition accounting, including controls over management’s valuation of the reacquired franchise rights intangible asset and controls over development of the assumptions related to the valuation of the reacquired franchise rights intangible asset, including revenue growth rates, amount and timing of future cash flows, 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 reacquired franchise rights intangible asset; and (iii) testing management’s cash flow projections used to estimate the fair value of the reacquired franchise rights intangible asset. testing management’s process included evaluating the appropriateness of the valuation methods and the reasonableness of significant assumptions, including the revenue growth rates, amount and timing of future cash flows and the discount rate for the intangible assets. evaluating the reasonableness of the revenue growth rates and amount and timing of future cash flows involved considering the past performance of the acquired business, as well as the company’s historical results, and considering whether they were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the valuation methods and the reasonableness of significant assumptions, including the discount rate. /s/ pricewaterhouse coopers llp cincinnati, ohio february 26, 2020we have served as the company’s auditor since 1971. | 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.measurement of it solutions revenue description of the matter as discussed in note 2 of the financial statements, the company recognized $602 million of it solutions revenue. it solutions customer agreements are long-term contracts that frequently contain multiple performance obligations. judgment exists in determining which performance obligations are distinct and accounted for separately. these contracts also contain variable consideration in the form of tiered pricing, contractual minimums or discounts. judgment exists in estimating the total contract consideration and allocating amounts to each distinct performance obligation. contracts with variable consideration may require forecasts over the term of the contract to determine the appropriate rate used to recognize revenue. auditing management’s recognition of it solutions revenue was complex and involved a high degree of judgment because of the significant management judgments and estimates required to identify the distinct performance obligations, estimate and allocate contract consideration, and determine the rate used to recognize revenue.57how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls related to the company’s process for recognizing it solutions revenue, including management’s review of the significant judgments and estimates used in the identification of distinct performance obligations, the estimation and allocation of amounts to each performance obligation, the estimation of revenue to constrain, and the determination of the rate used to recognize revenue. our audit procedures included, among others, testing management’s identification of the distinct performance obligations based on terms in the contracts and the company’s policies. our procedures also included testing the judgments and estimates used to determine the rate to recognize revenue and estimation of revenue to constrain, based on the contractual minimums, tiered pricing and other discounts, current economic conditions and customer concessions. to test the calculation of the amount of consideration allocated to each distinct performance obligation, we performed procedures to test management’s judgments and assumptions related to the allocation of consideration to each distinct performance obligation. our procedures included an evaluation of the significant assumptions and the accuracy and completeness of the underlying data used in management’s calculation of revenue recognized. we have also evaluated the adequacy of the company’s it solutions revenue disclosures included in note 2 in relation to these revenue recognition matters.uncertain tax positions description of the matter as discussed in note 7 of the financial statements, the company operates in the united states and multiple international jurisdictions, and its income tax returns are subject to examination by tax authorities in those jurisdictions who may challenge income tax positions on these returns. uncertainty in a tax position may arise because tax laws are subject to interpretation. the company uses significant judgment in (1) determining whether, based on the technical merits, a tax position is more likely than not to be sustained and (2) measuring the amount of tax benefit that qualifies for recognition. as of december 31, 2021, the company accrued liabilities of $110 million for uncertain tax positions, including penalties and interest.auditing management’s estimate of the amount of tax benefit that qualifies for recognition involved auditor judgment and use of tax professionals with specialized skills and knowledge to evaluate the company’s interpretation of, and compliance with, tax laws and legal rulings across its multiple subsidiaries located in multiple taxing jurisdictions. 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 process for uncertain tax positions. for example, we tested controls over the company’s assessment of the technical merits of tax positions and management’s process to measure the benefit of those tax positions. among other procedures performed, we involved our tax professionals to assess the technical merits of the company’s tax positions. this included assessing the company’s correspondence with the relevant tax authorities and evaluating income tax opinions or other third-party advice obtained by the company. we also evaluated the appropriateness of the company’s accounting for its tax positions taking into consideration relevant information, local income tax laws, and legal rulings. we analyzed the company’s assumptions and data used to determine the amount of tax benefit to recognize and tested the accuracy of the calculations. we have also evaluated the adequacy of the company’s income tax disclosures included in note 7 in relation to these tax matters./s/ ernst & young llp we have served as the company’s auditor since 1993. | 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.112index allowance for loan losses (all)description of the matter the company’s loan portfolio totaled $1.4 billion as of december 31, 2021, and the associated all was $17.3 million. as discussed in notes 1 and 5 to the consolidated financial statements, determining the amount of the all requires significant judgment about the collectability of loans, which includes an assessment of quantitative factors such as historical loss experience within each risk category of loans and testing of certain commercial loans for impairment. management applies additional qualitative adjustments to reflect the inherent losses that exist in the loan portfolio at the balance sheet date that are not reflected in the historical loss experience. qualitative adjustments are made based upon changes in lending policies and practices, economic conditions, changes in the loan portfolio mix, trends in loan delinquencies and classified loans, collateral values, and concentrations of credit risk for the commercial loan portfolios.we identified these qualitative adjustments within the all as critical audit matters because they involve a high degree of subjectivity. in turn, auditing management’s judgments regarding the qualitative factors applied in the all calculation involved a high degree of subjectivity.how we addressed the matter in our audit we gained an understanding of the company’s process for establishing the all, including the qualitative adjustments made to the all. we evaluated the design and tested the operating effectiveness of controls over the company’s all process, which included, among others, management’s review and approval controls designed to assess the need and level of qualitative adjustments to the all, as well as the reliability of the data utilized to support management’s assessment.to test the qualitative adjustments, we evaluated the appropriateness of management’s methodology and assessed whether all relevant risks were reflected in the all.regarding the measurement of the qualitative adjustments, we evaluated the completeness, accuracy, and relevance of the data and inputs utilized in management’s estimate. for example, we compared the inputs and data to the company’s historical loan performance data and third-party macroeconomic data, and considered the existence of new or contrary information. furthermore, we analyzed the changes in the components of the qualitative reserves relative to changes in external market factors, the company’s loan portfolio, various internal risk metrics, and asset quality trends.we also utilized internal credit review specialists with knowledge to evaluate the appropriateness of management’s risk-rating processes, to ensure that the risk ratings applied to the commercial loan portfolio were reasonable.we have served as the company’s auditor since 1994. | 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.recognition of collaboration revenue related to research and development performance obligations as described in note 1 to the consolidated financial statements, revenues related to collaboration arrangements where the company satisfies performance obligations during the development phase over time are typically recognized using an input method on the basis of research and development costs incurred relative to the total expected costs which determines the extent of progress in each period towards completion of the performance obligation. collaboration revenue for non-refundable up-front payments, development milestones, and payments for development activities, for which management used an input method, was $497.6 million for the year ended december 31, 2019. management has disclosed that there is variability in the scope of activities and length of time necessary to develop a drug product, potential delays in development programs, changes to development plans and budgets as programs progress, and uncertainty in the ultimate requirements to obtain governmental approval for commercialization related to these estimates.the principal considerations for our determination that performing procedures relating to recognition of collaboration revenue related to research and development performance obligations is a critical audit matter are there was significant judgment by management when developing the total expected research and development costs to complete the performance obligation. this in turn led to significant audit effort in performing procedures and evaluating evidence to assess the reasonableness of the estimates of the costs to complete.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 total expected research and development costs to complete the performance obligation. these procedures also included, among others, evaluating and testing management’s process for determining the total expected research and development costs at completion for a sample of contracts, which included evaluating the reasonableness of actual costs incurred and estimated costs to complete. evaluating the reasonableness of estimated costs to complete involved assessing management’s ability to reasonably estimate costs to complete the performance obligation by (i) obtaining supporting evidence for expected development activities; (ii) evaluating the identification of circumstances that may warrant a modification to estimated costs to complete; and (iii) agreeing estimates of total budgeted costs to contracts or other agreements with collaboration partners./s/ pricewaterhouse coopers llp florham park, new jersey february 7, 2020 we have served as the company’s auditor since 1989. | 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.proved oil and gas properties and depletion — estimated proved reserves — refer to note 1 to the consolidated financial statements critical audit matter description the company’s capitalized costs of proved oil and gas properties are depleted using the units of production method based on estimated proved reserves, and such costs are evaluated for impairment by comparison of the carrying value of the assets to the undiscounted future net cash flows of the underlying estimated proved reserves. the development of the company’s estimated proved reserves and the related undiscounted future net cash flows requires management to make significant estimates and assumptions related to the company’s ability to convert proved undeveloped reserves to producing properties within five years of their initial proved booking and future oil and natural gas prices. the company engages an independent reserve engineer to estimate oil and natural gas quantities using these estimates and assumptions and engineering data. changes in these assumptions could materially affect the estimated quantities of the company’s reserves. the proved oil and gas properties, net balance was $845 million, as of december 31, 2020. depletion expense was $82.6 million for the year ended december 31, 2020. no proved oil and gas property impairment was recognized during the year ended december 31, 2020. 76table of contents given the significant judgments made by management, performing audit procedures to evaluate the company’s estimated proved reserves and the related undiscounted future net cash flows including management’s estimates and assumptions related to (1) converting proved undeveloped reserves to producing properties within five years and (2) future oil and natural gas prices 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 management’s significant judgments and assumptions related to converting proved undeveloped reserves to producing properties within five years and future oil and natural prices included the following, among others:•we tested the operating effectiveness of controls related to the company’s estimation of proved reserves, including controls relating to the five-year conversion plan and future oil and natural gas prices.•we evaluated the reasonableness of management’s five-year conversion plan by comparing the forecasts to:–historical conversions of proved undeveloped oil and gas reserves into proved developed oil and gas reserves.–the company’s drill plan and the availability of capital relative to the drill plan. –internal communications to management and the board of directors.–permits and approval for expenditures. –forecasted information for the denver-julesburg basin included in company press releases as well as in analyst and industry reports for the company and certain of its peer companies. •we evaluated management’s estimated future oil and natural gas prices by:–understanding the methodology used by management for development of the future prices and comparing the estimated prices to an independently determined range of estimated future prices.–comparing management’s estimates to published forward pricing indices and third-party industry sources.–comparing the price differentials incorporated in the future oil and natural gas prices to historical realized price differentials.•we evaluated the experience, qualifications and objectivity of management’s expert, an independent reserve engineering firm./s/ deloitte & touche llp denver, colorado february 17, 2021we have served as the company's auditor since 2019. | 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. revenue recognition - determination of total estimated contract cost for fixed-price contracts as described in note 3 to the consolidated financial statements, the company’s services are performed under three principal types of contracts: fixed-price, time-and-materials and cost-plus. under fixed-price contracts, which account for approximately 34% of the company's total consolidated revenue, the company’s clients pay an agreed fixed-amount negotiated in advance for a specified scope of work. revenue on fixed-price contracts is recognized over time as the related performance obligation is satisfied by transferring control of a promised good or service to the company’s customers. progress toward complete satisfaction of the performance obligation is primarily measured using a cost-to-cost measure of progress method. the cost input is based primarily on contract cost incurred to date compared to total estimated contract cost. as disclosed by management, this measure includes forecasts based on the best information available and reflects the judgment to faithfully depict the value of the services transferred to the customer. due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. for those performance obligations for which revenue is recognized using a cost-to-cost measure of progress method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. when the current estimate of total costs for a performance obligation indicates a loss, a provision for the entire estimated loss on the contract is made in the period in which the loss becomes evident. the principal considerations for our determination that performing procedures relating to revenue recognition - determination of total estimated contract cost for fixed-price contracts is a critical audit matter are there was a significant amount of judgment required by management in determining the total estimated contract cost for fixed-price contracts which, in turn, led to a high degree of auditor judgment, subjectivity and audit effort in performing our procedures to evaluate the total estimated contract costs for fixed-price contracts and the audit evidence obtained.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the determination of total estimated contract cost for fixed-price contracts. these procedures also included, among others, (i) evaluating and testing management’s process for determining the total estimated contract cost for a sample of contracts, which included review of contracts and other documents that support those estimates, and testing of underlying contract costs; (ii) assessing management's ability to reasonably estimate total contract cost by performing a comparison of the actual total estimated contract cost as compared with prior period estimates, including evaluating the timely identification of circumstances that may warrant a modification to the total estimated contract cost and (iii) evaluating management’s methodologies and assessing the consistency of management’s approach over the life of the contract. goodwill impairment assessment - remediation and field services reporting unit as described in notes 2 and 7 to the consolidated financial statements, the company's consolidated goodwill balance was $924.8 million as of september 29, 2019, and the goodwill associated with the remediation and field services (rfs) reporting unit was $48.8 million. management performs an annual goodwill impairment review at the beginning of the fiscal fourth quarter of each year, july 1, 2019, for fiscal 2019, or more frequently when an event occurs or circumstances indicate that the carrying value of the asset may not be recoverable. during the fourth quarter of fiscal 2019, management performed a strategic review of 58the company's operations. as a result, management decided to dispose of the canadian turn-key pipeline activities in the rfs reporting unit, which is in the commercial/international services group (cig) reportable segment. management performed an interim goodwill impairment review of the rfs reporting unit and recorded a $7.8 million goodwill impairment charge. as a result of the impairment charge, the estimated fair value of the rfs reporting unit equals its carrying value of $61 million at september 29, 2019, including the remaining $48.8 million of goodwill. the impairment test for goodwill involves the comparison of the estimated fair value of each reporting unit to the reporting unit's carrying value, including goodwill. management estimates the fair value of reporting units based on a comparison and weighting of the income approach, specifically the discounted cash flow method and the market approach. management's cash flow projections for the rfs reporting unit included significant judgments and assumptions relating to revenue growth rate, operating profit margin forecasts and the discount rate.the principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the rfs reporting unit is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the reporting unit which, in turn, led to a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management's cash flow projections and significant assumptions, including revenue growth rate, operating profit margin forecasts and the discount rate. in addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures.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 management's goodwill impairment assessment, including controls over the evaluation of the company's reporting units. these procedures also included, among others, testing management's process for developing the fair value estimate; evaluating the appropriateness of the discounted cash flow method; testing the completeness, accuracy, and relevance of underlying data used in the cash flow projections; and evaluating the significant assumptions used by management, including revenue growth rate, operating margin forecasts and the discount rate. evaluating management's assumptions related to revenue growth rates and projected operating income involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of the company's discounted cash flow method and certain significant assumptions, including the discount rate./s/ pricewaterhouse coopers llp los angeles, california november 27, 2019we have served as the company’s auditor since 2004. | 1 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (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.49table of contents valuation of inventories as described in notes 1 and 4 to the consolidated financial statements, the company’s consolidated inventory balance is stated at lower of cost or net realizable value. the valuation of inventories is adjusted by the company when conditions indicate a decline in value due to obsolescence and is generally adjusted based on estimates for inventory levels in excess of forecasted demand for a specific product. forecasting customer demand can be challenging due to relatively short order lead times from customers and contract terms allowing customers to cancel orders with minimal advance notice. we identified the valuation of inventories as a critical audit matter due to the significant judgment and estimates required by management. determining whether a decline in value has occurred requires management’s complex judgments related to: (i) future demand for excess units on hand based on historical sales and expected future orders, and (ii) obsolescence of certain products based on changes in technology and demand. auditing these judgments was especially challenging and involved subjective auditor judgment to evaluate sales trends and evolving customer demands. the primary procedures we performed to address this critical audit matter included: ●evaluating the appropriateness of management's valuation methodology designed to identify potential (i) excess units on hand based on ending inventory quantities compared to recent and forecasted shipment quantities, and (ii) obsolete inventory based on declining shipment trends. ●challenging the reasonableness of management's assumptions related to future sales by verifying the reliability of current backlog and historical sales data, evaluating fluctuations in demand for certain materials ordered by a limited number of customers, and assessing changes in macroeconomic conditions. valuation of contingent consideration as described in note 14 to the consolidated financial statements, on november 23, 2015, the company acquired all of the outstanding stock of mika monu group ltd. (“mika monu”) for cash and future contingent consideration payable to former mika monu shareholders based on the achievement of certain milestones, including development of qualifying products and meeting certain revenue targets from the sale of those products. since the initial measurement at the acquisition date, the liability has been re-measured to fair value at each reporting period. the inputs used in the valuation include the estimated amount and timing of future cash flows, the probability of success (achievement of the various contingent events) and a risk-adjusted discount rate to adjust the probability-weighted cash flows to their present value. we identified the valuation of the contingent consideration liability as a critical audit matter due to the significant judgment required to estimate the fair value at the balance sheet date. valuation of the contingent consideration liability involves management’s complex judgments related to determining: (i) the continued appropriateness of the valuation model selected, and (ii) the reasonableness of inputs and assumptions used in the valuation model, including estimated amount and timing of future cash flows, the probability of success and the risk-adjusted discount rate. auditing these inputs and assumptions involved especially challenging and subjective auditor judgement due to the nature and extent of procedures performed and the specialized knowledge required to audit the valuation. the primary procedures we performed to address this critical audit matter included:●evaluating the reasonableness of inputs used in the valuation including management’s forecast of amount and timing of future cash flows, including challenging assumptions such as the probability of 50table of contentsachieving forecasted cash flows and examining contradictory evidence from retrospective reviews and third-party market and industry sources.●utilizing professionals with specialized skills and knowledge in valuation to: (i) test the appropriateness of the valuation model utilized by management to estimate the fair value of the contingent consideration; (ii) verify the reasonableness of the discount rate used in the model; and (iii) perform sensitivity analyses to test the effects of potential changes in the risk-adjusted discount rate based on comparable public companies, and incorporating market risk to management’s revenue forecasts. /s/ bdo usa, llp we have served as the company's auditor since 2017. | 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.valuation of acquired intangible assets description of the matter as described in note 18 to the consolidated financial statements, the company completed its acquisition of optimal plus ltd. (“optimal plus”) during 2020 for total consideration of $353 million. this transaction is being accounted for as a business combination using the acquisition method of accounting.auditing the accounting for the acquisition was complex due to the significant estimation uncertainty in determining the fair values of identified intangible assets, which consisted of developed technology of $82.4 million, customer relationships of $30.1 million, in-process research and development of $10.4 million and other intangible assets of $6.1 million. these intangible assets were valued using the discounted cash flow method under the income approach. the significant assumptions used to estimate the value of the intangible assets were anticipated revenue growth rates and the technology migration curves, each of which are forward looking and could be affected by future economic and market 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 the company’s controls over its accounting for the acquisition. this included testing controls over the estimation process supporting the recognition and measurement of the fair value of the identified intangible assets, including the review of the valuation models and significant assumptions used in the valuation models.to test the estimated fair value of the intangible assets, our audit procedures included, among others, evaluating the company's valuation methodology and testing the significant assumptions used in the models, including the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. to test the significant assumptions, we compared them to current industry, market and economic trends, and to historical results of the acquired business. we involved our valuation specialists to assist in evaluating the methodology used by the company and significant assumptions included in the fair value estimates.determining the adjustment for excess and obsolete inventories description of the matter as described in note 1 to the financial statements, inventory is presented net of the adjustment for excess and obsolete inventories which is the difference between the cost of inventory and estimated net realizable value based on assumptions of future demand and market conditions. as of december 31, 2020, the company’s net inventory balance was $194.0 million, net of the adjustment for excess and obsolete inventories of $17.0 million.auditing management’s estimate of the adjustment for excess and obsolete inventories was complex and judgmental due to the high degree of subjectivity of certain assumptions and inputs. in particular, the estimate of the adjustment for excess and obsolete inventories was sensitive to significant assumptions such as the customer forecasted demand of each inventory part and the adjustment percentage for those parts. the adjustment percentage by part is estimated through historical and forecasted usage and scrap rates. these assumptions, among other observable inputs, are utilized to calculate the estimate of the adjustment for excess and obsolete inventories.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 used in determining the adjustment for excess and obsolete inventories. this included controls over the company’s calculation and review of the significant assumptions underlying the estimate of the adjustment for excess and obsolete inventories including the customer forecasted demand and the adjustment percentage.to test the estimate of the adjustment for excess and obsolete inventories, we performed audit procedures that included, among others, evaluating the methodology utilized to calculate the adjustment, evaluating the significant assumptions stated above and testing the accuracy and completeness of the underlying data used in management’s calculation of the estimate. we tested management’s assumptions relating to forecasted product demand, which included inspecting a one-year look-back analysis on forecasted demand compared to actual usage as well as conducting inquiries with, and obtaining forecast support from, individuals outside of the accounting department who are involved in manufacturing and part-level planning.determining reserve for uncertain tax positions description of the matter as described in note 10 to the financial statements, the company operates in a complex multinational tax environment and is subject to international tax law and transfer pricing guidelines for intercompany transactions. uncertainty in a tax position may arise as tax laws are subject to interpretation. the company uses significant judgment in (1) determining whether a tax position’s technical merits are more-likely-than-not to be sustained and (2) measuring the amount of tax benefit that qualifies for recognition. as of december 31, 2020, the company accrued liabilities of $10.9 million with respect to uncertain tax positions including transfer pricing.auditing the recognition and measurement of tax positions related to transfer pricing was especially challenging due to first establishing the technical merits of the income tax position for purposes of recognition and second due to the measurement of the tax position. the key assumptions used in determining the reserve for the uncertain tax positions related to transfer pricing are how the taxing authority would classify the relevant related parties and the royalty rates and operating margins by jurisdiction that are utilized in transfer pricing as well as the probabilities applied to the scenarios utilized to calculate the amount of benefit to recognize.f-3table 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 accounting process to assess the technical merits of tax positions related to transfer pricing including evaluating certain intercompany transactions and to measure the potential exposure to reserve for those tax positions. this included controls over the completeness of the tax positions evaluated for recognition and measurement and the probabilities applied to each scenario.to test the reserve for uncertain tax positions related to transfer pricing, our audit procedures included, among others, involving our tax and transfer price professionals to assist us in assessing the technical merits and measurement of certain of the company’s tax positions. this included assessing the company’s correspondence with the relevant tax authorities and evaluating income tax opinions and other third-party advice obtained by the company. to support our evaluation, we used our knowledge of and experience with the application of international, transfer pricing and local income tax laws by the relevant income tax authorities to evaluate the company’s accounting for those uncertain tax positions. we analyzed the company’s assumptions and data used to determine the amount of tax position to recognize and tested the accuracy of the calculations. we have also evaluated the company’s income tax disclosures included in note 10 of the financial statements in relation to these matters./s/ ernst & young llp we have served as the company's auditor since 2005. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.60table of contents stock-based compensation description of the matter during the year ended december 31, 2019, the company recorded stock-based compensation expense of $89.7 million. as discussed in note 11 to the consolidated financial statements, the company issues various types of equity awards, including stock options, restricted stock units, performance-based stock units, market-based awards and equity instruments denominated in the shares of certain subsidiaries.auditing the company’s accounting for stock-based compensation required complex auditor judgement due to the number and the variety of the types of equity awards, the subjectivity of assumptions used to value stock-based awards (e.g. expected term), the frequent use of performance-based vesting conditions and the existence of awards denominated in the shares of certain subsidiaries.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of the company’s controls over stock-based compensation. for example, we tested controls over the company’s process to assess the completeness of its share-based awards and for measuring and recording stock-based compensation, including management’s review of the underlying calculations, the significant assumptions used in valuing certain awards and related valuation reports prepared by its specialists.to test stock-based compensation expense, we performed audit procedures that included, among others, assessing the completeness of the awards granted and evaluating the methodologies used to estimate the fair value of the awards granted and the significant assumptions described above. our procedures also included, evaluating the key terms and conditions of awards granted to assess the accounting treatment for a sample of awards and testing the clerical accuracy of the calculation of the expense recorded. additionally, for certain awards issued by the company, we involved our internal valuation specialists to assess the valuation methodologies and assumptions used in estimating the fair value of the awards.recoverability of indefinite-lived intangible assets description of the matter as of december 31, 2019, the company’s indefinite-lived intangible asset balance was $221.2 million. as disclosed in note 2 to the consolidated financial statements, indefinite-lived intangible assets are assessed annually for impairment as of october 1, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of an indefinite-lived intangible asset below its carrying value.auditing management’s impairment test for indefinite-lived intangible assets was complex and judgmental due to the measurement uncertainty in estimating the fair value of indefinite-lived intangible assets. specifically, the fair value estimates for indefinite-lived intangible assets were sensitive to assumptions such as discount rates, revenue growth rates, royalty rates and projected cash flow terminal growth rates. these assumptions are affected by such factors as expected future market or economic conditions.61table of contents how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of the company’s controls over its indefinite-lived intangible assets impairment review process. for example, we tested of controls over the company’s forecasting and budgeting process as well as controls over management’s review of the significant assumptions used to estimate the fair values of the indefinite-lived intangible assets.to test the estimated fair value of indefinite-lived intangible assets, our audit procedures included, among others, assessing the methodologies and testing the significant assumptions and underlying data used by the company. we evaluated the company’s underlying forecast and budget information by comparing the significant assumptions to current industry and economic trends, changes in the company’s business model and assessed the historical accuracy of management’s estimates. for example, we evaluated management’s forecasted revenue to identify, understand and evaluate changes as compared to historical results. we performed sensitivity analyses of significant assumptions to evaluate the change in the fair value of indefinite-lived intangible assets resulting from changes in the assumptions. in addition, we involved an internal valuation specialist to assist in evaluating the methodologies and significant assumptions applied in developing the fair value estimates./s/ ernst & young llp we have served as the company’s auditor since 2014. | 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.60snap-on incorporated finance receivables - net - refer to notes 1 and 4 to the financial statements critical audit matter description the company’s finance receivables are comprised of extended-term installment payment contracts to both technicians and independent shop owners (i.e., franchisees’ customers) to enable them to purchase tools, diagnostics, and equipment products on an extended-term payment plan, generally with average payment terms of approximately four years. the receivables are generally secured by the underlying tools and/or diagnostic or equipment products financed. at january 2, 2021, these loans totaled $1,742.8 million with an allowance of $76.3 million recorded against the receivables. determining the proper level of allowance requires management to exercise judgment about the timing, frequency and severity of credit losses expected to occur over the life of the contracts. the company estimates and records an allowance for credit losses over the expected contractual life of their contracts considering collectability, historical loss experience, current conditions and future market changes. evaluating the judgments related to the finance receivable allowance for credit losses is subjective and requires auditor judgment to effectively evaluate whether management’s judgments were reasonable.how the critical audit matter was addressed in the audit our audit procedures related to the finance receivables allowance for credit losses balance included the following procedures, among others:•we tested the design, implementation and operating effectiveness of management’s controls over the allowance for credit losses including controls over the completeness and accuracy of underlying data.•where appropriate, we assessed the reasonableness of, and evaluated support for, qualitative adjustments based on market conditions and/or portfolio performance metrics.•we tested the completeness and accuracy and evaluated the relevance of the key data used as inputs in management’s allowance for credit losses calculation, including loan balances, recoveries, charge-offs, portfolio characteristics and other data.•we tested the mathematical accuracy of the allowance for credit losses calculation with the assistance of our credit specialists and developed an expectation of the allowance for credit losses and compared it to the recorded balance.•we performed a retrospective review based on net losses as compared to estimates in the company’s allowance to highlight any inconsistencies./s/ deloitte & touche llp milwaukee, wisconsin february 11, 2021 we have served as the company’s auditor since 2002. | 3 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) 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 opinions on the critical audit matters or on the accounts or disclosures to which it relates.revenue recognition—deferred revenue related to annual and season admission pass products—refer to note 2 and note 4 to the consolidated financial statements critical audit matter description the company’s annual and season passes allow guests access to specific parks over a specified time period. such revenue is deferred and recognized over the terms of the admission product based on estimated redemption rates for similar products and is adjusted periodically. the company estimates a redemption rate using historical and forecasted growth rates and attendance trends by park for similar products. attendance trends factor in seasonality and are adjusted based on actual trends periodically. as a result of the temporary park closures due to the covid-19 pandemic, the company upgraded some of their pass products and extended pass expiration dates for at least the equivalent period the related parks were closed which were considered in the estimated redemption and recognition patterns. revenue is recognized on a pro rata basis based on the estimated allocated selling price of the admission product.the company tracks and recognizes deferred revenue utilizing internally developed models. auditing the attendance projections by park, which is the primary input used in the deferred revenue models, and the redemption rates calculated through the models, required extensive audit effort due to the complexity and manual nature of the models.f-2how the critical audit matter was addressed in the audit our audit procedures related to the attendance projections by park and the recognition of revenue from the deferred revenue related to annual and season admission pass products included the following, among others:•we tested the effectiveness of management’s controls over revenue recognition related to annual and season admission pass products, including controls over actual and forecasted attendance used in the models.•we evaluated management’s ability to accurately forecast expected attendance by comparing actual results to management’s historical forecasts on a quarterly basis.•we evaluated the reasonableness of the current-year attendance forecasts compared to historical results, considering recent trends in the company’s attendance.•we tested the mathematical accuracy and appropriateness of management’s deferred revenue models and timing of recognition, including changes to the model to account for pass extensions as a result of park closures.•we detail tested the deferred revenue balances, related to annual and season admission pass products. further, we evaluated the reasonableness of the expected future relief of the deferred balances, in particularly with respect to the impact of covid-19 and pass product upgrades and extensions. /s/ deloitte & touche llp tampa, florida february 26, 2021 we have served as the company’s auditor since 2009. | 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—gsm and fsi reporting units—refer to notes 1 and 17 to the consolidated financial statements critical audit matter description goodwill is tested for impairment annually as of october 1, or more frequently if impairment indicators arise. the company uses a one-step quantitative approach that compares the business enterprise value (bev) of each reporting unit with its carrying value. the bev was computed based on both an income approach (discounted cash flows) and a market approach. the income approach uses a reporting unit’s estimated future cash flows, discounted at the weighted-average cost of capital of a hypothetical third-party buyer. the market approach estimates fair value by applying cash flow multiples to the reporting unit’s operating performance. the multiples are derived from comparable publicly traded companies with similar operating and investment characteristics to the reporting unit.the andersons, inc. | 2021 form 10-k | 28table of contents the consolidated goodwill balance was $129.3 million as of december 31, 2021, of which $78.5 million and $41.3 million was allocated to the grain storage and merchandising (gsm) and food and specialty ingredients (fsi) reporting units, respectively. the bev of the gsm and fsi reporting units exceeded its carrying values by 26% and 24%, respectively, as of october 1, 2021, and, therefore, no impairment was recognized. the bev for the gsm and fsi reporting units are sensitive to changes in the weighted-average cost of capital. given the significant judgments made by management to estimate the bev of the gsm and fsi reporting units, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to selection of the weighted-average cost of capital as of october 1, 2021, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.how the critical audit matter was addressed in the audit our audit procedures related to the selection of the weighted-average cost of capital used by management to estimate the fair values of the gsm and fsi reporting units included the following, among others:•we tested the effectiveness of internal control over management’s selection of the valuation assumptions used to determine each bev, including the weighted-average cost of capital.•with the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) weighted-average cost of capital by:◦testing the source information underlying the determination of the weighted-average cost of capital and the mathematical accuracy of the calculation◦evaluating the underlying factors that led to management's determination of the company specific risk premium◦developing a range of independent estimates and comparing those to the weighted-average cost of capital selected by management/s/ deloitte & touche llp cleveland, ohio february 24, 2022we have served as the company’s auditor since 2015. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.acquisition of bardy diagnostics, inc. as described in note 3 to the consolidated financial statements, on august 6, 2021, the company purchased all of the outstanding equity interest of bardy diagnostics, inc. (“bardy”), for total consideration of $434.2 million. management recorded $383.8 million of goodwill and $65.2 million of contingent consideration in connection with the business combination. the difference between the purchase price amount and the net fair value of assets acquired and liabilities assumed is recognized as goodwill on the balance sheet if the purchase price exceeds the estimated net fair value. as disclosed by management, the identification and determination of the net fair value of assets acquired and liabilities assumed requires significant judgment by management. the fair value of contingent consideration is estimated by management using the monte carlo model. management applied significant judgment in estimating the fair value of contingent consideration which involved the use of a significant assumption with respect to the revenue growth rate used in the model. the principal considerations for our determination that performing procedures relating to the acquisition of bardy diagnostics, inc. is a critical audit matter are (i) a high degree of auditor judgment and subjectivity in performing procedures relating to the identification and determination of the net fair value of assets acquired and liabilities assumed and the fair value of contingent consideration related to the acquisition due to the significant judgment by management when identifying and determining the net fair value estimates; (ii) the significant audit effort in evaluating the significant assumption related to the revenue growth rate related to contingent consideration; 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 management’s identification and determination of the net fair value of assets acquired and liabilities assumed and controls over the development of the significant assumption related to revenue growth rate. these procedures also included, among others, (i) reading the purchase agreement, (ii) testing management’s process for identifying and determining the fair value of assets acquired and liabilities assumed, and the total consideration estimated to be transferred. testing management’s process included evaluating the appropriateness of the valuation models, testing completeness and accuracy of data provided by management, and evaluating the reasonableness of the significant assumption related to revenue growth rate. evaluating the reasonableness of management’s significant assumption related to the revenue growth rate involved considering the current and past performance of the business, the consistency with external market and industry data, and whether this 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 monte carlo model./s/ pricewaterhouse coopers llp chicago, illinois november 12, 2021we have served as the company’s auditor since 1985. | 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. fair value of contingent consideration as described in notes 2 and 5 to the consolidated financial statements, contingent consideration is recorded at fair value on the acquisition date and is revalued each reporting period, with changes in the fair value recognized within the consolidated statement of operations and comprehensive loss. as of and for the year ended december 31, 2019, management recorded a total contingent consideration asset of $32.4 million and expense of $22.8 million. management estimated the fair value of contingent consideration through valuation models that incorporate probability-adjusted assumptions related to the achievement of milestones and thus the likelihood of receiving related payments. changes in the fair value of contingent consideration can result from changes to one or multiple assumptions, including adjustments to discount rates, changes in the amount and timing of cash flows, changes in the assumed achievement and timing of any development and sales-based milestones and changes in the assumed probability associated with regulatory approval. these fair value measurements are based on significant inputs not observable in the market.the principal considerations for our determination that performing procedures relating to the fair value of contingent consideration is a critical audit matter are there was significant judgment by management in developing the assumptions used in the fair value measurement, including the discount rate, the amount and timing of cash flows, the assumed achievement and timing of any development and sales-based milestones, and the assumed probability associated with regulatory approval. this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures related to the fair value of contingent consideration and the audit effort involved the use of professionals with specialized skill and knowledge to assist in 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 estimation of the fair value of contingent consideration, including controls over the assumptions used to estimate the fair value. these procedures also included, among others, testing management’s process for developing the fair value of contingent consideration, evaluating the reasonableness of valuation models and assumptions used, including the discount rate, the amount and timing of cash flows, the assumed achievement and timing of any development and sales-based milestones, and the assumed probability associated with regulatory approval. evaluating management’s assumptions related to cash flows, probability of success, and achievement and timing of milestone payments involved evaluating whether the assumptions used by management were reasonable considering the agreements associated with the transaction, 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 models and evaluating the reasonableness of the assumptions used in the models. rebate accruals - medicaid drug rebate program as described in note 2 and note 10 to the consolidated financial statements, the company’s revenue from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with the company’s customers, health care providers or payers. accruals for rebates to states under the medicaid drug rebate program are recorded as a reduction of sales when the product is shipped into the distribution channel using the expected value method. as of december 31, 2019, total accrued sales discounts, allowances and reserves were $153.9 million, of which a significant amount related to medicaid rebates. the company rebates individual states for all eligible units purchased under the medicaid program based on a rebate per unit calculation, which is based on the company’s average manufacturer prices. management estimated expected unit sales and rebates per unit under the medicaid program and adjusted its rebate accrual based on actual unit sales and rebates per unit.the principal considerations for our determination that performing procedures relating to rebate accruals for the medicaid drug rebate program is a critical audit matter are there was significant judgment by management in developing the rebate accruals, f-2table of contentsincluding developing assumptions related to the estimates of units sold and rebates per unit under the medicaid program. this in turn led to a high degree of auditor judgment, effort, and subjectivity in performing procedures related to rebate accruals for the medicaid drug rebate program.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 rebate accruals for the medicaid drug rebate program, including controls over the assumptions used to estimate the rebate accruals. these procedures also included, among others, (i) obtaining an understanding of management’s process and methodology for determining the medicaid rebate accruals, (ii) assessing the appropriateness of management’s methodology, (iii) comparing accrual balances and deduction to sales year over year, (iv) assessing the reasonableness of management’s forecast of medicaid units by comparing to historical results and considering the historical accuracy of the accrual for management bias, and (v) testing rebate claims processed by the company. /s/ pricewaterhouse coopers llp boston, massachusetts february 13, 2020we have served as the company’s auditor since 2007. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements thatwas communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) 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 matter below, providing a separate opinionon the critical audit matter or on the accounts or disclosures to which it relates. valuation of certain level 3 debt investments developed using significant unobservable inputs utilized in the income approach as described in note 5 to the consolidated financialstatements, the company held $1,341 million of total level 3 investments at fair value as of december 31, 2019, with debt investments representing approximately 93% of this total. for $1,041 million or 84% of those level 3 debt investments, the fairvalues were determined by management using the income approach. the significant unobservable inputs used in the income approach are the discount rate or market yield used to discount the estimated future cash flows expected to be received from theunderlying investment. included in the consideration and selection of discount rates or market yields is risk of default, rating of the investment, call provisions and comparable company investments. the principal considerations for our determination that performing procedures relating to the valuation of certain level 3 debt investmentsdeveloped using significant unobservable inputs utilized in the income approach is a critical audit matter are that there was significant judgment and estimation by management to determine the fair value of these investments due to the developmentof the discount rate or market yield. this in turn led to a high degree of auditor judgment, subjectivity and effort to perform procedures and to evaluate the audit evidence obtained related to the valuation of certain level 3 debt investments. inaddition, 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 theconsolidated financial statements. these procedures included testing the effectiveness of controls relating to the valuation of certain level 3 debt investments, including controls over the development of significant unobservable inputs used in theincome approach, including the discount rate or market yield. these procedures also included, among others, either (i) testing managements process for determining the fair value estimate, which included evaluating the appropriateness of thediscounted cash flow technique; testing the completeness, accuracy, and relevance of the underlying data used in the technique; and evaluating the significant unobservable inputs used by management, including the discount rate or market yield, byconsidering the consistency of the unobservable inputs with external market and industry data and evidence obtained in other areas of the audit; or (ii) the involvement of professionals with specialized skill and knowledge to assist in developing anindependent fair value estimate range for certain level 3 debt investments and comparison of managements estimate to the independently developed range of fair value estimates. developing the independent range involved developing independentsignificant unobservable inputs for the discount rate or market yield in order to evaluate the reasonableness of managements fair value estimate of these certain level 3 debt investments using a range of available market information. /s/ pricewaterhouse coopers llp boston, massachusetts february20, 2020 we have served as the auditor of one or more investment companies in the following group of business development companies since 2012 | 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.initial measurement of crisco trademark and customer relationships as discussed in note 3 to the consolidated financial statements, on december 1, 2020, the company acquired crisco brand oils and shortening business (crisco) in a business combination. the company acquired trademark and customer relationships associated with the generation of future income from crisco’s existing customers. the acquisition-date fair values for the crisco trademark and customer relationships were $322.0 million and $52.8 million, respectively. the preliminary purchase price allocation may be adjusted as a result of the finalization of the purchase price allocation procedures related to the assets acquired and liabilities assumed.- 58 -table of contents we identified the evaluation of the initial measurement of the acquired crisco trademark and customer relationships as a critical audit matter. there is a high degree of subjectivity and judgment in evaluating the discounted cash flow model used to calculate the acquisition-date fair value of the crisco trademark and customer relationships. specifically, the discounted cash flow model included the following assumptions for which there was limited observable market information, and the calculated fair values of such assets were sensitive to possible changes in these assumptions:●forecasted revenue growth rates attributable to crisco trademark and customer relationships●forecasted earnings before interest, taxes, depreciation and amortization (ebitda)●the estimated discount rate●estimated annual attrition.the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of an internal control over the company’s acquisition-date valuation process to develop the relevant assumptions, as listed above, including the analysis of the assumptions based on market participants’ views. we evaluated the company’s forecasted revenue growth rates by comparing them to industry benchmarks and publicly available market data. we also compared the company’s estimates of (1) forecasted revenue growth and ebitda to crisco’s historical actual results and (2) forecasted annual attrition to crisco’s historical customer attrition data. in addition, we involved valuation professionals with specialized skills and knowledge, who assisted in: ●evaluating the company’s discount rate, and comparing it against a discount rate that was independently developed using publicly available market data for comparable entities●assessing an estimate of the fair value of the crisco trademark and customer relationships using the company’s discounted cash flow model and independently developed discount rate and comparing the results to the company’s fair value estimates.assessment of the carrying value of a certain indefinite-lived intangible asset as discussed in notes 2 and 6 to the consolidated financial statements, the company had $1,697.3 million of indefinite-lived trademark assets as of january 2, 2021, which included a certain indefinite-lived intangible asset. the company performs indefinite-lived intangible assets impairment testing as of the last day of each fiscal year. the company tests the indefinite-lived intangible assets by comparing the fair value with the carrying value and recognizes a loss for the difference. the company estimates the fair value of the indefinite-lived intangible assets based on discounted cash flows that reflect certain third-party market value indicators.we identified the assessment of the carrying value of a certain indefinite-lived intangible asset as a critical audit matter. the revenue growth rates and the discount rate assumptions used to calculate the fair value of a certain indefinite-lived intangible asset were challenging to audit due to the significant estimation in the assumptions and that minor changes to these assumptions would have a significant effect on the company’s assessment of the carrying value of the indefinite-lived intangible asset.the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls over the company’s indefinite-lived intangible asset impairment assessment process, including controls related to the determination of the fair value of the indefinite-lived intangible asset, related revenue growth rates, and determination of the discount rate. we evaluated the company’s revenue growth rates by comparing them to historical results. in addition, we compared the company’s historical revenue forecasts to actual results. we involved valuation professionals with specialized skill and knowledge, who assisted in evaluating the company’s discount rate, by comparing it to a discount rate that was independently developed using publicly available market data for comparable entities./s/ kpmg llp we have served as the company’s auditor since 1996. | 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.evaluation of software license revenue from arrangements with terms and conditions that are not standard as discussed in note 2(p) and 4 to the consolidated financial statements, the company enters into arrangements containing software licenses. software license revenue totaled $425 million for the year ended december 31, 2020. software license revenue typically relates to the company's promise to provide the customer a right to use the company's intellectual property and is typically part of an offering of multiple services. contracts that contain software licenses often have non-standard terms that require significant judgments to determine the amount and timing of revenue to be recognized. we identified the evaluation of software license revenue from arrangements with terms and conditions that are not standard as a critical audit matter. significant auditor judgment was required to evaluate the company's assessment of the impact on revenue recognition of certain terms and conditions that are unique to individual contracts. specifically, judgment was required to evaluate the company's identification of performance obligations and the determination of the timing of revenue recognition for each distinct performance obligation, particularly for new contracts or renewals with software license performance obligations.the following are the primary procedures performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls over the company's revenue recognition process, including controls over the company's assessment of contractual terms and conditions on software license revenue recognition, identification of performance obligations, and the determination of the timing of revenue recognition. we selected a sample of individual software license revenue transactions and:51table of content•read the underlying contract and other documents that were part of the contract for each selection•evaluated the company's identification and assessment of terms and conditions that could give rise to additional performance obligations or different patterns of revenue recognition by assessing the company's accounting analysis in accordance with the revenue recognition requirements•tested the mathematical accuracy of management’s calculations of revenue recognized in the consolidated financial statements. additionally, we tested the company's identification of performance obligations for certain of the company's customers by inspecting external confirmation directly from the company's customers and comparing the key terms and conditions relevant to the company's revenue recognition to the company's written customer agreement. assessment of the recoverability of the carrying value of goodwill for the merchant solutions reporting unit as discussed in note 2(h) to the consolidated financial statements, the company performs goodwill impairment testing on an annual basis during the fourth quarter of each fiscal year or more frequently if circumstances indicate potential impairment. the goodwill balance as of december 31, 2020 related to the merchant solutions reportable segment was $36,267 million, which is the same as the merchant solutions reporting unit. in connection with its annual impairment test for the merchant solutions reporting unit, the company performed a quantitative assessment of goodwill due to the economic impact of the covid-19 pandemic on the company's merchant solutions business.we identified the assessment of the recoverability of the carrying value of goodwill for the merchant solutions reporting unit as a critical audit matter. we performed a sensitivity analysis to determine the significant assumptions used to value the merchant solutions reporting unit, individually and in the aggregate, which required significant auditor judgment. this included forecasted revenues, operating expenses, and the risk-adjusted discount rate used in the discounted cash flow model. due to the impact of covid-19 on the company's business, there was significant uncertainty associated with these assumptions. in addition, professionals with specialized skills and knowledge were required to evaluate the risk-adjusted 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 related to the company's goodwill assessment process, including controls over the selection and development of the relevant assumptions used in the discounted cash flow model, including forecasted revenues, operating expenses, and the risk-adjusted discount rate. we evaluated the merchant solutions reporting unit's forecasted revenue and operating expense assumptions by comparing the assumptions to the reporting unit's historical revenues and operating expenses and to i) internal communications to management and the board of directors, ii) growth rates of comparable companies, and iii) industry and market conditions. we involved valuation professionals with specialized skills and knowledge, who assisted in: •evaluating the company's risk-adjusted discount rate, by comparing it to a risk-adjusted discount rate that was independently developed using publicly available market data for comparable entities•evaluating the company's estimated fair value of the reporting unit, by comparing it to a range of fair values that was independently developed using the reporting unit's cash flow forecast, an independently developed risk-adjusted discount rate, and publicly available market multiples for comparable entities./s/ kpmg llp we have served as the company's auditor since 2004. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.revenue recognition - towers segment as described in notes 2 and 14 to the consolidated financial statements, the company recognized $3,804 million in site rental revenues and $601 million in services and other revenues from its towers segment for the year ended december 31, 2021. the company generates site rental revenues from its core business by providing tenants with access to its shared communications infrastructure via long-term tenant contracts in various forms, including lease, license, sublease and service agreements. providing such access over the length of the tenant contract term represents the company’s sole performance obligation under its tenant contracts. site rental revenues from the company's tenant contracts are recognized on a straight-line, ratable basis over the fixed, noncancelable term of the relevant tenant contract. the company also offers certain services primarily relating to its towers segment, predominately consisting of (i) site development services and (ii) installation services. the transaction price for the company's tower installation services consists of amounts for (i) permanent improvements to the company's towers that represent a lease component and (ii) the performance of the service. amounts under the company's tower installation service agreements that represent a lease component are recognized as site rental revenues on a straight-line basis over the length of the associated estimated lease term. for the performance of the installation service, the company has one performance obligation, which is satisfied at the time of the applicable installation or augmentation and recognized as services and other revenues. the principal considerations for our determination that performing procedures relating to revenue recognition for the towers segment is a critical audit matter are the significant auditor subjectivity and effort in performing procedures and evaluating the audit evidence obtained related to tenant contracts and installation service 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 revenue recognition for towers. these procedures also included, among others (i) testing the completeness and accuracy of management’s identification of the contractual terms by examining tenant contracts and installation service agreements on a test basis and (ii) testing the appropriateness of the timing and amount of revenue recognized based on contractual terms and estimated lease term for selected tenant contracts and installation service agreements./s/ pricewaterhouse coopers llp pittsburgh, pennsylvania february 22, 2022we have served as the company’s auditor since 2011. | 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) 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 a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. allowance for loan losses – qualitative factors – refer to notes 1 and 4 to the consolidated financial statements critical audit matter description management’s estimate of the general portion of the allowance relates to non-impaired loans and is based on historical loss experience adjusted for qualitative factors. these qualitative factors include: (1) changes in the nature, volume and 47table of contentsterms of loans, (2) changes in lending personnel, (3) changes in the quality of the loan review function, (4) changes in nature and volume of past-due, nonaccrual and/or classified loans, (5) changes in concentration of credit risk, (6) changes in economic and industry conditions, (7) changes in legal and regulatory requirements, (8) unemployment and inflation statistics, (9) underlying collateral values, and (10) estimated impact of the covid-19 pandemic not already reflected in other factors. management periodically evaluates the qualitative factors based on known and inherent risks in the portfolio, composition of the portfolio, current economic conditions, and other factors. given the significant estimates and assumptions management makes in establishing qualitative factor adjustments within the allowance for loan losses and the sensitivity of the corporation’s operations to changes in certain market conditions, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the inherent risks in the portfolio, current economic conditions, and the selection of weighting of these qualitative factors required a high degree of auditor judgement and an increased extent of effort. how the critical audit matter was addressed in the audit our audit procedures related to the qualitative factors used in the estimate of the allowance for loan losses included the following, among others: ●we assessed management’s determination of qualitative factor adjustments to the allowance for loan losses, which included a comparison of factors considered by management to other sources to evaluate reasonableness and completeness of factors considered. ●we gained an understanding of management’s basis for the application and weighting of the qualitative factors. ●we reviewed the overall trends in credit quality to understand the known and inherent risks in the portfolio and the portfolio composition. this included reviewing changes year-over-year in the qualitative factors and management’s commentary on the rationale for the weighting applied to each factor for reasonableness. goodwill – impairment assessment – refer to notes 1 and 8 to the consolidated financial statements critical audit matter description the corporation, in accordance with gaap, evaluates goodwill annually for impairment. as a result of the economic uncertainty and volatility surrounding covid-19 during the year, the corporation assessed whether there were triggering events during the interim periods between the annual goodwill assessment during 2020. the corporation determined that there is currently no impairment of its goodwill. in the assessment of goodwill for impairment, management considers fair value inputs such as discounted future earnings and observations from recent bank mergers and acquisitions. given the significant estimates and assumptions management makes to assess goodwill for impairment, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions required a high degree of auditor judgement and an increased extent of effort. how the critical audit matter was addressed in the audit our audit procedures related to management’s assessment of goodwill for impairment included the following, among others: ●we reviewed management’s evaluation on whether a triggering event occurred during the interim periods between the annual goodwill impairment assessment.●we tested the effectiveness of controls over management’s goodwill impairment assessment. ●we evaluated the reasonableness of management’s assumptions regarding future earnings by comparing the assumptions to (1) historical results (2) internal communications to management and the board of directors, and (3) external information.●we evaluated the reasonableness of management’s selection of a discount rate by comparing inputs to external sources.●we independently obtained statistics from bank mergers and acquisitions to test the completeness and accuracy of the population obtained by management, and we assessed the reasonableness of the comparable transactions 48table of contentsby comparing statistical information of the targets selected by management to statistical information of the corporation. /s/plante & moran, pllc 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.recognition of incentive fee revenue description of the matter for the year ended march 31, 2021, the company recognized $52.2 million of incentive fee revenue. as explained in note 2 to the consolidated financial statements, the company considers incentive fees from specialized funds and customized separate accounts to be variable consideration which is constrained and recognized when it is probable that a significant reversal in the cumulative amount of incentive fee revenue will not occur. as incentive fees are generally payable after all contributed capital and the preferred return thereon has been distributed to investors, the company estimates the amount and probability of additional future capital contributions that it will call from investors in specialized funds and customized separate accounts related to unfunded commitments or follow on investment opportunities in investees. these estimates could impact the probability of a significant reversal in the cumulative amount of incentive fee revenue occurring. auditing management’s assessment of whether it is probable that a significant reversal in the cumulative amount of incentive fee revenue will not occur is subjective and requires significant judgment, as the estimates described above are affected by future economic, market and investee-specific conditions. 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 risk of material misstatement relating to the recognition of incentive fee revenue. this included controls over management’s review of the estimates of the amount and probability of additional future capital contributions from investors in specialized funds and customized separate accounts.to test the recognition of incentive fee revenue, our audit procedures included, among others, evaluating the company’s estimates of the amount and probability of additional future capital contributions described above. for example, we compared management’s assumptions about the probability that the investees will need additional capital to historical trends and financial information available from the investees, evaluated the change in the assumptions from the prior year and assessed the historical accuracy of management’s assumptions. we performed sensitivity analyses of management’s estimate of additional future capital contributions to evaluate the changes in the amount of incentive fee revenue recognized that would result from changes in the assumptions. in addition, we searched for and evaluated information that corroborated or contradicted management’s assumptions.93recognition of net deferred tax asset from equity offering and unit exchange description of the matter as further discussed in note 11 to the consolidated financial statements, in connection with the company’s equity offerings and unit exchanges during the current year (the “transactions”), the company recorded a net deferred tax asset of $121.1 million. as further discussed in note 2 to the consolidated financial statements, the resulting basis differences arising from the transactions represent a temporary difference for which the company records a deferred tax asset if it is more likely than not the deferred tax asset will be realized. realization of this deferred tax asset is dependent upon, among other things, the future tax deductions of tax basis step-ups related to the transactions. auditing the company’s recognition of the net deferred tax asset related to the transactions is especially challenging, as the company’s determination of the tax basis step-ups and related future tax deductions requires the application of complex tax laws and regulations for partnerships and the identification of historical basis differences. 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 net deferred tax asset recognition process, including controls over management’s review of the determination of the tax basis step-ups and related future tax deductions and the identified historical basis differences described above. to test the recognition of the net deferred tax asset resulting from the transactions, we involved a specialist and performed procedures that included, among others, evaluating the technical merit of the company’s determination of the tax basis step-ups and the related future tax deductions based on relevant tax law and regulations. we also used available tax-related information to evaluate the historical basis differences the company used in its determination./s/ ernst & young llp we have served as the company’s auditor since 2008. | 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.52valuation of acquired intangible assets description of the matter as described in note 3 to the consolidated financial statements, during the year ended march 31, 2020, the company completed the acquisitions of east creek corporation (d/b/a stainless drains.com) and just manufacturing company for cash purchase prices of $24.8 million, and $59.4 million, respectively. the company’s accounting for these acquisitions included determining the fair value of the intangible assets acquired, which primarily included customer relationships, with residual value recorded as goodwill.auditing the company's accounting for its acquisitions of stainless drains.com and just manufacturing company was complex due to the significant estimation uncertainty in the company’s determination of the fair value of identified intangible assets of $40.9 million, which principally consisted of customer relationships. the significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to underlying assumptions about the future performance of the acquired businesses. the company used a discounted cash flow model to measure the customer relationship assets. the significant assumptions used to estimate the value of the intangible assets included discount rates and certain other assumptions that form the basis of the forecasted results (e.g., revenue growth rates and estimated future 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 accounting for acquisitions. for example, our tests included controls over the estimation process supporting the recognition and measurement of consideration transferred and customer relationships. we also tested management’s review of the valuation models and significant assumptions used in the valuations.to test the estimated fair value of the customer relationship intangible assets, we performed audit procedures that included, among others, evaluating the company's selection of the valuation methodology, evaluating the methods and significant assumptions used by management, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. we involved our valuation specialists to assist with our evaluation of the methodology used by the company and significant assumptions included in the fair value estimates. we evaluated the reasonableness of management’s forecasts of future cash flows by comparing the projections to historical results and certain peer companies. we also performed sensitivity analyses of significant assumptions to evaluate the changes in fair value of the acquired customer relationship intangible assets that would result from changes in the assumptions.53valuation allowances and uncertain tax positions description of the matter as described in notes 2 and 17 to the consolidated financial statements, at march 31, 2020, the company had gross deferred tax assets of $145.8 million, $45.9 million of which relate to net operating losses, capital losses and credit carryforwards, reduced by a $39.4 million valuation allowance. deferred tax assets are reduced by a valuation allowance if, based upon the consideration of all positive and negative evidence, the company determines that it is more-likely-than-not that a portion or all of the deferred tax assets will ultimately not be realized in future tax periods.as further described in note 17, at march 31, 2020, the company had a liability for uncertain tax positions of $14.8 million. the company’s uncertain tax positions are subject to audit by federal, state and foreign taxing authorities, and the resolution of such audits may span multiple years.management’s analysis of the realizability of its net operating loss, capital loss and credit carryforward deferred tax assets and of the extent to which its tax positions in certain jurisdictions are more-likely-than-not to be sustained was significant to our audit because the amounts are material to the financial statements and the related assessment process is complex and involves significant judgments. such judgments included anticipated future earnings, the time period over which the temporary differences and carryforwards are anticipated to reverse and evaluation of feasible, prudent tax planning strategies and interpretation of laws, regulations, and tax rulings related to uncertain tax positions.how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the realizability of deferred tax assets. for example, we tested controls over management’s review of projections of future earnings, the time period over which temporary differences and carryforwards are anticipated to reverse, and management’s identification and evaluation of feasible, prudent tax planning strategies. we also obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the company’s process to assess whether tax positions are more-likely-than-not to be sustained upon examination. for example, we tested controls over management’s identification of uncertain tax positions and its application of the recognition and measurement principles, including management’s review of the inputs and calculations of unrecognized tax benefits resulting from uncertain tax positions. to test management’s assessment of the realizability of its deferred tax assets related to net operating losses, capital losses and credit carryforwards, our audit procedures included, among others, evaluation of the assumptions used by the company to develop tax planning strategies and projections of anticipated future earnings by jurisdiction and testing the completeness and accuracy of the underlying data used in those projections. we assessed the historical accuracy of management’s projections and compared the projections of future earnings with other forecasted financial information prepared by the company. we also evaluated the company’s considerations related to the reversal of temporary differences. to test management’s recognition and measurement of liabilities associated with uncertain tax positions, our audit procedures included, among others, evaluation of the status of open income tax examinations and the potential implications of those examinations on the current year income tax provision based on the application of domestic and international income tax laws. we also tested the technical merits of existing positions, including an evaluation of whether the positions are more-likely-than-not to be sustained in an examination and the statute of limitations assumptions related to the company’s calculation of liabilities for uncertain tax positions. we involved our tax professionals to assist in the evaluation of tax law relative to the company’s available tax planning strategies, projections of future taxable income and open income tax examinations./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 & risk management committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective or complex judgments. the communication of the 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 a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.64goodwill impairment description of the matter as described in note 1 of the consolidated financial statements, a goodwill impairment test is required at least annually at the reporting unit level.the estimation of the fair value of the reporting units is contingent on future cash flows and market expectations and there is a risk that, if these cash flows and market outcomes do not meet the company’s expectations, the goodwill might be impaired. the fair value of the reporting units was determined using multiple approaches including discounted future cash flows analysis and a market-based approach we identified the valuation of goodwill for certain reporting units as a critical audit matter because auditing the impairment analysis was complex due to the significant estimation uncertainty and judgment applied by management in determining their fair value. the significant estimation uncertainty was primarily due to the sensitivity of the underlying key assumptions to the future cash flows and the significant effect that changes in these assumptions would have on the fair value of these reporting units. furthermore, for certain reporting units, there is limited information on which to base those assumptions given the emerging nature of both the business model and industry. the significant assumptions used to estimate the fair value of these reporting units included discount rates and certain forward-looking assumptions (e.g., revenue growth rates, terminal growth rates, and profitability metrics) that could be affected by future economic and market conditions.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of the company’s controls relating to the determination of the fair value of the reporting units, including controls over management’s review of the significant assumptions described above.to test the fair value of the reporting units, we involved our valuation specialists to review the valuation methodology used by management and to assist in our evaluation of the discount rate used in the fair value estimate. we also performed audit procedures that included, among others, testing the significant assumptions discussed above and the underlying data used by the company in its analysis. we compared the significant assumptions used by management to available industry and historical trends and evaluated whether changes to the significant assumptions would impact the impairment conclusion. in addition, we tested management’s reconciliation of the fair value of the reporting units to the market capitalization of the company and reviewed the related disclosure in the consolidated financial statements.revenue recognition – licensing revenues description of the matter as described in note 1 of the consolidated financial statements, licensing revenues relate primarily to intellectual property (“ip”) licensing. revenue recognition on ip licensing arrangements is assessed on a case-by-case basis taking into consideration the relevant contractual terms in each agreement. revenue related to ip licensing agreements for the fiscal year ended february 29, 2020 is included within licensing as set out in note 13 of the consolidated financial statements.we identified revenue related to ip licensing agreements as a critical audit matter because of the multiple areas of complexity, including identifying the customer, assessing performance obligations, assessing any constraints on variable consideration and determining if control of the license has transferred. auditing the revenue recognition was complex due to the significant judgment applied by management in assessing the agreements against the provisions of asc 606, revenue from contracts with customers, in relation to the specific judgmental areas listed above. the application of these judgments can materially impact the amount and timing of revenue recognition.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of the company’s controls relating to the accounting for ip licensing arrangements, including those controls related to management’s review of the accounting analyses for the significant judgmental areas described above.to test the revenue recognition of the company’s ip licensing arrangements, we obtained and analyzed management’s accounting analyses by reference to the relevant accounting literature. we assessed the appropriateness of the accounting treatments by discussing with management to understand the facts and substance of the arrangements and inspecting the written agreements. in addition, we also reviewed the related financial statement disclosure.65we have served as the company’s auditor since 1997. | 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 a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.f-1 revenue recognition as described in notes 2 and 21 to the consolidated financial statements, the company’s consolidated revenue balance was $33.8 million for the year ended january 2, 2021. the company recognizes revenue at the point in time when control is transferred to the end user, when the company’s performance obligations are satisfied, which typically occurs upon delivery from the company’s center facility and installation at the end user’s home.we identified revenue recognition as a critical audit matter. auditing revenue recognition involved especially challenging, subjective or complex auditor judgment due to the nature and extent of audit effort required to address this matter.the primary procedures we performed to address this critical audit matter included: •evaluating the company’s revenue recognition policy for conformity with accounting principles generally accepted in the united states of america. •inspected executed contracts to identify the relevant performance obligations and evaluated the accounting treatment for each performance obligation. •testing individual revenue transactions for proper revenue recognition in accordance with the company’s revenue recognition policy. •assessing the company’s disclosures related to revenue recognition for conformity with accounting principles generally accepted in the united states of america.intangible asset impairment assessment as described in notes 2 and 8 to the consolidated financial statements, the company’s intangible assets balance was $14 million as of january 2, 2021. intangible assets are tested for recoverability annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. the determination of the recoverability of intangible assets requires management to make significant estimates and assumptions related to forecasts of expected cash flows to be derived from the asset group for the remaining useful life of the asset group’s primary asset.we identified the intangible asset impairment assessment as a critical audit matter based on the materiality of the amounts involved together with the inherent subjectivity related to the principal assumptions, which are dependent on current and future economic factors, including uncertainties arising from the covid-19 pandemic; hence the assessment of the carrying value of intangible assets is considered to be complex and determined to be a critical audit matter in our current period audit. auditing management’s judgments regarding forecasts of future cash flows from the intangible assets involved a high degree of subjectivity.the primary procedures we performed to address this critical audit matter included: •obtaining an understanding of management’s process for its impairment assessment and analysis for the intangible assets. •evaluating management’s ability to accurately forecast by comparing actual and budgeted results with historical performance, understanding changes to the company’s business model, and determining whether assumptions used in the forecast were consistent with evidence obtained in other areas of the audit. •evaluated the appropriateness of judgments applied by management while assessing the future potential impact of the covid-19 pandemic. •obtaining third-party evidence in support of management’s assumptions used in developing the forecasted cash flows from the intangible assets.f-2 •performing independent sensitivity analysis of key assumptions, including the timing and amount of forecasted cash flows to assess the effect of possible variations on the current estimated value for the intangible assets. /s/ wsrp llp we have served as the company's auditor since 2019. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. accrued clinical trial and manufacturing activities description of the matter as discussed in note 1 to the consolidated financial statements, the company has recorded $72.7 million of accrued expenses which includes costs for clinical trial and manufacturing activities (together, clinical related activities) based upon estimates of expenses incurred through the balance sheet date that have yet to be invoiced by the contract research organizations (cr os), clinical study sites, contract manufacturing organizations, or other vendors (together, clinical vendors). this accrual process involves identifying services that have been performed and estimating the level of service performed and the associated cost when the company has not yet been invoiced or otherwise notified of actual cost. auditing the company’s accruals for costs associated with in-process clinical related activities may include judgment because the timing and pattern of vendor invoicing may not correspond to the level of services provided and the estimate can incorporate significant assumptions such as expected patient enrollment, site activation, and estimated project duration. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls that addressed the information used in and the identified risks related to the company’s process for recording accrued costs for clinical related activities. to evaluate the accrual for clinical related expenses, our audit procedures included, among others, inspecting the company’s contracts with clinical vendors (including pending change orders), testing the completeness and accuracy of the underlying data used in the estimate of the level of service provided including evaluating the significant assumptions as discussed above for the applicable in process contracts with clinical vendors. to assess the significant assumptions, we corroborated the progress of clinical related activities through inquiry with the company’s clinical team and with information obtained directly from third party clinical vendors, as well as tested invoices received from clinical vendors subsequent to the balance sheet date. 83 royalty financing obligations description of the matter as described in note 8 to the consolidated financial statements, the company entered into royalty purchase agreements (“rpa’s”) with third parties. pursuant to the rpa’s, the company received proceeds of approximately $425 million in exchange for the right to receive royalty payments based on future net revenues of the company’s drug, orladeyo, and the drug candidates within the bcrx 9930 program. the company recorded the rpa’s as non-current liability instruments (royalty financing obligations) on the balance sheet at their carrying value of $449.4 million as of december 31, 2021 and imputed interest expense associated with these liabilities using the effective interest rate method. the effective interest rate is calculated based on the rate that would enable the liability to be repaid in full over the anticipated life of the arrangement. the interest rate on this liability may vary during the term of the agreement depending on a number of factors, including the level and timing of forecasted net revenues which affects the repayment timing and ultimate amount of repayment. in order to amortize the royalty financing obligations, the company utilizes the prospective method to estimate the future royalties to be paid by the company to the third parties over the life of the arrangements. under the prospective method, a new effective interest rate is determined based on the revised estimate of remaining cash flows. the company periodically assesses the amount and timing of expected royalty payments using a combination of internal projections and forecasts from external sources. auditing the royalty financing obligations was complex and highly judgmental due to the estimation uncertainty in determining the effective interest rate. the company’s effective interest rate models includes actual revenues recorded and royalties paid to-date, as well as revenue projections for which future royalties will be paid, which are sensitive to significant assumptions (including population, penetration, probability of success, and sales price, among others) that are affected by expectations about future 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 processes to account for the royalty financing obligations, including controls over management’s review of the revenue projections within the models. to evaluate the royalty financing obligations, our audit procedures included, among others, assessing the underlying data and assumptions used by the company in its effective interest rate models. we compared the significant assumptions in the revenue projections to current industry, market and economic trends. we recalculated the current year interest expense based on the amortization schedules and estimates of royalties using the effective interest method, and performed sensitivity analyses to evaluate the changes in the effective interest rates, and associated interest expense, that would result from changes in the assumptions. product sales, net description of the matter as discussed in note 1, when recognizing revenue, the company makes an estimate of the net selling price (transaction price), which includes estimates of variable consideration. for the year ended december 31, 2021, the company recorded net product sales of $136.4 million. product sales are recorded net of adjustments for variable consideration including estimated government rebates, managed care rebates, chargebacks, costs of co-payment for assistance programs, and product returns at the time revenue is recorded. limited historical data is available for use in developing such estimates which are periodically reviewed and adjusted as necessary. auditing the company’s net product sales was complex due to the company’s limited history of product sales. the company’s estimates of variable consideration depend on the identification of key customer contract terms and conditions, as well as estimates of sales volumes to different classes of payors. the revenue recognition process can be complex and can involve judgment related to these estimates as well as to identify and assess the terms and conditions of customer agreements and related government regulations that could affect revenue recognition, as the company’s revenue expands with new customers and new markets. 84 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 recording product sales and related rebates, chargebacks and returns. we also tested management’s controls related to the identification and assessment of the terms and conditions of customer agreements and the completeness and accuracy of data utilized in the controls, and the calculations supporting management’s estimates. to test product sales, our audit procedures included, among others, tracing a sample of revenue transactions recognized during the year to source documentation. we also confirmed a sample of outstanding receivable balances directly with the company’s customers. to test management’s estimates of variable consideration, we obtained management’s calculations for the respective estimates and performed one or more of the following procedures: tested management’s estimation process to assess whether the recorded reserve balances are within a reasonable range of estimate, performed retrospective reviews, assessed subsequent events, and tested a sample of credits issued throughout the year. we have served as the company’s auditor since 1993. | 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 of southern company's board of directors 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.impact of rate regulation on the financial statements – refer to note 1 (summary of significant accounting policies – regulatory assets and liabilities) and note 2 (regulatory matters) to the financial statements critical audit matter description southern company's traditional electric operating companies and natural gas distribution utilities (the "regulated utility subsidiaries"), which represent approximately 89% of southern company's consolidated operating revenues for the year ended december 31, 2020 and 85% of its consolidated total assets at december 31, 2020, are subject to rate regulation by their respective state public service commissions or other applicable state regulatory agencies and wholesale regulation by the federal energy regulatory commission (collectively, the "commissions"). management has determined that the regulated utility subsidiaries meet the requirements under accounting principles generally accepted in the united states of america to utilize specialized rules to account for the effects of rate regulation in the preparation of its financial statements. accounting for the economics of rate regulation impacts multiple financial statement line items and disclosures, including, but not limited to, property, plant, and equipment; other regulatory assets; other regulatory liabilities; other cost of removal obligations; deferred charges and credits related to income taxes; under and over recovered regulatory clause revenues; operating revenues; operations and maintenance expenses; and depreciation and amortization.the commissions set the rates the regulated utility subsidiaries are permitted to charge customers. rates are determined and approved in regulatory proceedings based on an analysis of the applicable regulated utility subsidiary's costs to provide utility service and a return on, and recovery of, its investment in the utility business. current and future regulatory decisions can have an impact on the recovery of costs, the rate of return earned on investments, and the timing and amount of assets to be recovered by rates. the commissions' regulation of rates is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital. while southern company's regulated utility subsidiaries expect to recover costs from customers through regulated rates, there is a risk that the commissions will not approve: (1) full recovery of the costs of providing utility service, or (2) full recovery of all amounts invested in the utility business and a reasonable return on that investment.we identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management to support its assertions about impacted account balances and disclosures (e.g., asset retirement costs, property damage reserves, and net book value of retired assets) and the high degree of subjectivity involved in assessing the potential impact of future regulatory orders on the financial statements. management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs, (2) a disallowance of part of the cost of recently completed plant or plant under construction, and/or (3) a refund to customers. given that management's accounting judgments are based on assumptions about the outcome of future decisions by the commissions, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities and significant auditor judgment to evaluate management estimates and the subjectivity of audit evidence.how the critical audit matter was addressed in the audit our audit procedures related to the uncertainty of future decisions by the commissions included the following, among others:•we tested the effectiveness of management's controls over the evaluation of the likelihood of (1) the recovery in future rates of costs incurred as property, plant, and equipment and deferred as regulatory assets, and (2) a refund or a future reduction in rates that should be reported as regulatory liabilities. we also tested the effectiveness of management's controls over the initial recognition of amounts as property, plant, and equipment; regulatory assets or liabilities; and the monitoring and evaluation of regulatory developments that may affect the likelihood of recovering costs in future rates or of a future reduction in rates.•we read relevant regulatory orders issued by the commissions for the regulated utility subsidiaries, regulatory statutes, interpretations, procedural memorandums, filings made by intervenors, and other publicly available information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the commissions' treatment of similar costs under similar circumstances. we evaluated the external information and compared it to management's recorded regulatory asset and liability balances for completeness.ii-78 table of contents index to financial statements•for regulatory matters in process, we inspected filings with the commissions by southern company's regulated utility subsidiaries and other interested parties that may impact the regulated utility subsidiaries' future rates for any evidence that might contradict management's assertions.•we evaluated regulatory filings for any evidence that intervenors are challenging full recovery of the cost of any capital projects. we tested selected costs included in the capitalized project costs for completeness and accuracy.•we obtained representation from management regarding probability of recovery for regulatory assets or refund or future reduction in rates for regulatory liabilities to assess management's assertion that amounts are probable of recovery, refund, or a future reduction in rates.•we evaluated southern company's disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments.disclosure of uncertainties – plant vogtle units 3 and 4 construction – refer to note 2 (regulatory matters – georgia power – nuclear construction) to the financial statements critical audit matter description as discussed in note 2 to the financial statements, the ultimate recovery of georgia power company's (georgia power) investment in the construction of plant vogtle units 3 and 4 is subject to multiple uncertainties. such uncertainties include the potential impact of future decisions by georgia power's regulators (particularly the georgia public service commission), actions by the co-owners of the vogtle project, and litigation or other legal proceedings involving the project. in addition, georgia power's ability to meet its cost and schedule forecasts could impact its capacity to fully recover its investment in the project. while the project is not subject to a cost cap, georgia power's cost and schedule forecasts are subject to numerous uncertainties which could impact cost recovery, including challenges with management of contractors and vendors; subcontractor performance; supervision of craft labor and related craft labor productivity, particularly in the installation of electrical, mechanical, and instrumentation and controls commodities, ability to attract and retain craft labor, and/or related cost escalation; procurement, fabrication, delivery, assembly, installation, system turnover, and the initial testing and start-up, including any required engineering changes or any remediation related thereto, of plant systems, structures, or components (some of which are based on new technology that only within the last few years began initial operation in the global nuclear industry at this scale), any of which may require additional labor and/or materials; or other issues that could arise and change the projected schedule and estimated cost. in addition, the continuing effects of the covid-19 pandemic could further disrupt or delay construction, testing, supervisory, and support activities at plant vogtle units 3 and 4. the ultimate recovery of georgia power's investment in plant vogtle units 3 and 4 is subject to the outcome of future assessments by management as well as georgia public service commission decisions in future regulatory proceedings.management has recorded charges to income, including a total of $325 million in 2020, when it has determined that it is likely to incur costs for which it will not seek recovery or which it has concluded are probable of disallowance for ratemaking purposes. in addition, management has disclosed the status, risks, and uncertainties associated with plant vogtle units 3 and 4, including (1) the status of construction; (2) the status of regulatory proceedings; (3) the status of legal actions or issues involving the co-owners of the project; and (4) other matters which could impact the ultimate recoverability of georgia power's investment in the project. we identified as a critical audit matter the evaluation of georgia power's identification and disclosure of events and uncertainties that could impact the ultimate cost recovery of its investment in the construction of plant vogtle units 3 and 4. this critical audit matter involved significant audit effort requiring specialized industry and construction expertise, extensive knowledge of rate regulation, and difficult and subjective judgments.how the critical audit matter was addressed in the audit our audit procedures related to georgia power's identification and disclosure of events and uncertainties that could impact the ultimate cost recovery of its investment in the construction of plant vogtle units 3 and 4 included the following, among others:•we tested the effectiveness of internal controls over the on-going evaluation, monitoring, and disclosure of matters related to the construction and ultimate cost recovery of plant vogtle units 3 and 4.•we involved construction specialists to assist in our evaluation of georgia power's processes for on-going evaluation and monitoring of the construction schedule and to assess the disclosures of the uncertainties impacting the ultimate cost recovery of its investment in the construction of plant vogtle units 3 and 4.•we attended meetings with georgia power and southern company officials, project managers (including contractors), independent regulatory monitors, and co-owners of the project to evaluate and monitor construction status and identify cost and schedule challenges.ii-79 table of contents index to financial statements•we read reports of external independent monitors employed by the georgia public service commission to monitor the status of construction at plant vogtle units 3 and 4 to evaluate the completeness of georgia power's disclosure of the uncertainties impacting the ultimate cost recovery of its investment in the construction of plant vogtle units 3 and 4.•we inquired of georgia power and southern company officials and project managers regarding the status of construction, the construction schedule, and cost forecasts to assess the financial statement disclosures with respect to project status and potential risks and uncertainties to the achievement of such forecasts.•we inspected regulatory filings and transcripts of georgia public service commission hearings regarding the construction of plant vogtle units 3 and 4 to identify potential challenges to the recovery of georgia power's construction costs and to evaluate the disclosures with respect to such uncertainties.•we inquired of georgia power and southern company management and internal and external legal counsel regarding any potential legal actions or issues arising from project construction or issues involving the co-owners of the project.•we monitored the status of reviews by the nuclear regulatory commission to identify potential impediments to the licensing and commercial operation of the project.•we compared the financial statement disclosures relating to this matter to the information gathered through the conduct of all our procedures to evaluate whether there were omissions relating to significant facts or uncertainties regarding the status of construction or other factors which could impact the ultimate cost recovery of plant vogtle units 3 and 4.•we obtained representation from management regarding disclosure of all matters related to the cost and/or status of the construction of plant vogtle units 3 and 4, including matters related to a co-owner or regulatory development, that could impact the recovery of the related costs./s/ deloitte & touche llp atlanta, georgia february 17, 2021we have served as southern company's auditor since 2002. | 5 |
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.52table of contents impairment review — refer to note 2 to the financial statements the company’s investments in real estate is reviewed for impairment quarterly or if events or changes in circumstances indicate that the carrying amount of the investments in real estate may not be recoverable, which is referred to as a "triggering event" or an "impairment indicator". the carrying amount of long-lived assets to be held and used is deemed not recoverable if it exceeds the sum of undiscounted cash flows expected to result from the use and eventual disposition of the asset. triggering events or impairment indicators for long-lived assets to be held and used are assessed by property and include significant fluctuations in estimated net operating income, changes in occupancy, significant near-term lease expirations, current and historical operating and/or cash flow losses, rental rates, and other market factors. the impact of the covid -19 pandemic on economic and market conditions, together with many of the company's tenants working from home, was deemed to be a triggering event during the year ended december 31, 2020.due to the presence of impairment indicators, the company assessed the expected undiscounted cash flows based on numerous factors, including the impact of the pandemic. these factors include, but are not limited to, the credit quality of our tenants, available market information, known trends, current market/economic conditions that may affect the asset, and historical and forecasted financial and operating information relating to the property, such as net operating income, occupancy statistics, vacancy projections, renewal percentage, and rent collection rates. if the undiscounted cash flows expected to be generated by an asset are less than its’ carrying amount, an impairment provision would be recorded to write down the carrying amount of such asset to its fair value. for the year ended december 31, 2020, no impairment loss has been recognized on real estate assets.the assessment as to whether the company's investments in real estate are impaired is highly subjective. the calculations involve management's best estimate of the holding period, market comparable properties, future occupancy levels, rental rates, capitalization rates, lease-up periods and capital requirements for each property. a change in any one of more of these factors could materially impact whether a property is impaired as of any given valuation date.given the company’s evaluation of possible impairment indications of it’s investments in real estate requires management to make significant assumptions, performing audit procedures to evaluate whether management appropriately identified events or changes in circumstances indicating that the carrying amounts of investments in real estate may not be recoverable required a high degree of auditor judgment.our audit procedures related to the evaluation of investments in real estate for possible indications of impairment included the following, among others: •we evaluated the company’s assessment of impairment indicators and estimate of future operating performance of the assets by evaluating the following:•inquired with management, read minutes of executive committee and board of directors meetings and identified any indicators that it is likely a long-lived investments in real estate will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. •tested investments in real estate for possible indications of impairment, including searching for adverse real-estate-specific and/or market conditions. 53table of contents•compared the carrying value of the assets to their respective fair values to assess whether any properties had a carrying value in excess of the fair value which could be an indication of impairment. further, we evaluated the reasonableness of the cash flow assumptions utilized in the fair value analysis by testing management’s ability to forecast future cashflows by comparing actual results to management’s historical forecasts.•with the assistance of our fair value specialists, we evaluated certain key assumptions utilized by management to fair value of the investments in real estate such as the (1) valuation methodology utilized by management; (2) and the discount rate, rental rates, growth rates, and capitalization rates ; and (3) mathematical accuracy of the calculation by developing a range of independent estimates and comparing our estimates to those used by management./s/ deloitte & touche llp new york, ny march 25, 2021 we 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 consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.valuation of goodwill description of the matter at december 31, 2021, the company’s goodwill was $2,999.4 million. as discussed in note 1 of the consolidated financial statements, goodwill is not amortized but rather is tested for impairment at least annually at the reporting unit level. the company’s goodwill is initially assigned to its reporting units as of the acquisition date.auditing management’s goodwill impairment tests was complex and highly judgmental due to the significant measurement uncertainty in determining the fair value of the reporting units. in particular, the fair value estimates were sensitive to significant assumptions such as revenue growth, operating margins, and discount rate, which are affected by expected future market or economic conditions.79perrigo company plc - item 8how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s goodwill impairment assessment process. for example, we tested controls over the company’s forecast process as well as controls over management’s review of the significant assumptions discussed above in estimating the fair values of the reporting units.to test the fair value of the company’s reporting units, our audit procedures included, among others, assessing methodologies used and testing the significant assumptions discussed above as well as the completeness and accuracy of the underlying data used by the company. for example, we compared the significant assumptions used by management to current industry and economic trends, changes in the company’s business model, customer base or product mix and other relevant factors. we performed sensitivity analyses of the significant assumptions to evaluate the change in the fair value of the reporting unit resulting from changes in the assumptions. we also reviewed the reconciliation of the fair value of the reporting units to the market capitalization of the company and evaluated the implied control premium. we also assessed the historical accuracy of the significant assumptions used by management to determine the fair value of its reporting units. the evaluation of the company’s methodology and significant assumptions was performed with the assistance of our valuation specialists.uncertain tax positions description of the matter as described in note 17 to the consolidated financial statements, the company operates in multiple jurisdictions with complex tax policy and regulatory environments and establishes reserves for uncertain tax positions in accordance with the accounting guidance governing uncertainty in income taxes. uncertainty in a tax position may arise because tax laws are subject to interpretation. the company uses significant judgment to (1) determine whether, based on the technical merits, a tax position is more likely than not to be sustained and (2) measure the amount of tax benefit that qualifies for recognition. at december 31, 2021, the company had liabilities of $347.2 million, excluding interest and penalties, relating to uncertain tax positions.auditing the measurement of the company’s uncertain tax positions was challenging because the evaluation of whether a tax position is more likely than not to be sustained and the measurement of the benefit of various tax positions can be complex, involves significant judgment, and is based on interpretations of tax laws and legal rulings.80perrigo company plc - item 8how 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 process for uncertain tax positions. for example, we tested controls over management’s identification of uncertain tax positions and its application of the recognition and measurement principles for uncertain tax positions.our audit procedures included, among others, assessing the company’s correspondence with the relevant tax authorities and evaluating income tax opinions or other third-party advice obtained by the company. to test the company’s assessment and measurement of uncertain tax positions, we involved our tax professionals to assess whether the uncertain tax positions identified by the company are more-likely-than-not to be sustained upon audit and, if so, to assist in testing the assumptions made by the company in measuring the amount of tax benefit that qualifies for recognition. we also used our knowledge of, and experience with, the application of domestic and international income tax laws by the relevant income tax authorities to evaluate the company’s assessments of whether the uncertain tax position is more-likely-than-not to be sustained and, if so, the potential outcomes that could occur upon an audit by a taxing authority. we tested the completeness and accuracy of the data and calculations used to determine the amount of tax benefit to recognize. we also evaluated the adequacy of the company’s disclosures to the consolidated financial statements in relation to these matters./s/ ernst & young llp we have served as the company’s auditor since 2008. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate. 44table of contents going concern as described in notes 1 and 11 of the company’s consolidated financial statements, the company’s primary sources of working capital are cash flows from operations and borrowings under its credit facility. the company’s cash flows from operations are primarily impacted by the company’s sales, which are seasonal, and any change in timing or amount of sales may impact the company’s operating cash flows. the company owes $124.5 million on its term loan and has borrowing capacity under its credit facility of $37.3 million as of december 31, 2020. during 2020, the company reached an agreement with its holders of its term loan and the holder of its revolving credit facility, to amend the new term loan agreement and defer the company’s ebitda covenant requirement until march 31, 2022 and reduced the trailing 12-month ebitda requirement to $25.0 million. based on the company’s operating plan, management believes that the current working capital combined with expected operating and financing cashflows to be sufficient to fund the company’s operations and satisfy the company’s obligations as they come due for at least one year from the financial statement issuance date. we identified management’s assessment of the company’s ability to continue as a going concern as a critical audit matter. the going concern assessment requires management judgment to critically evaluate its forecasts and liquidity projections, incorporating the significant and unusual impacts of the covid-19 pandemic. auditing management’s going concern assessment involved especially challenging auditor judgment and audit effort due to the nature and extent of effort required to address these matters.the primary procedure we performed to address this critical audit matter included: ●evaluating the reasonableness of management’s revised forecasts and liquidity projections, which included: (i) obtaining an understanding of management’s process for developing cashflow forecasts, (ii) comparing prior period forecasts to actual results, and (iii) assessing the company’s ability to meet its trailing twelve months ebitda covenant for the twelve months from the date of issuance. ●assessing management’s projections in the context of other audit evidence obtained during the audit and historical performance to determine whether it was contradictory to the conclusion reached by management. (signed bdo usa, llp) we have served as the company's auditor since 2006. | 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. inventory valuation – write-down for excess or obsolete inventories as described in note 1 to the consolidated financial statements, inventories are stated at the lower of cost and net realizable value. as of december 31, 2020, the company’s consolidated inventories balance was $111.4 million. inventories are reduced for write-downs based on periodic reviews for evidence of slow-moving or obsolete parts. management’s write-down is based on the comparison between inventory on hand and forecasted customer demand for each specific product. inventory write-downs are also established when conditions indicate the net realizable value is less than cost due to technological obsolescence, changes in price level or other causes. as disclosed by management, the calculation of inventory valuation, specifically the write-down for excess or obsolete inventories, requires management to make assumptions and to apply judgment regarding forecasted customer demand and technological obsolescence. the principal considerations for our determination that performing procedures relating to inventory valuation, specifically the write-down for excess or obsolete inventories, is a critical audit matter are (i) the significant judgment by management when estimating the write-down related to the technological obsolescence assumption, which in turn led to (ii) significant auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to the technological obsolescence assumption. 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 inventory valuation, including controls over management’s write-down for excess or obsolete inventories. these procedures also included, among others, testing management’s process for the write-down for excess or obsolete inventories. testing management’s process included (i) evaluating the appropriateness of management’s process, (ii) testing the completeness and accuracy of the underlying data used by management, and (iii) evaluating the reasonableness of management’s technological obsolescence assumption. evaluating management’s assumption related to technological obsolescence involved evaluating whether the assumption was reasonable considering (i) historical customer purchasing patterns, (ii) customer contracts, (iii) industry trends, and (iv) whether the assumption was consistent with evidence obtained in other areas of the audit. valuation of developed technology and contract manufacturing rights intangible assets acquired in the e silicon corporation acquisition as described in note 2 to the consolidated financial statements, on january 10, 2020, the company completed the acquisition of e silicon corporation for total consideration of approximately $214.6 million, including $33.6 million of developed technology and $105.2 million of contract manufacturing rights intangible assets being recorded. the developed technology and the contract manufacturing rights intangible assets were valued using the multi-period excess earnings method under the income approach, which involved discounting the direct cash flows expected to be generated by the developed technology and contract manufacturing rights over their remaining economic lives, net of returns on contributory assets. management applied significant judgment in estimating the fair values of the developed technology and the contract manufacturing rights intangible assets acquired, which involved the use of significant estimates and assumptions with respect to the timing and amounts of the future revenue cash flows and revenue growth rates. the principal considerations for our determination that performing procedures relating to valuation of the developed technology and the contract manufacturing rights intangible assets acquired in the e silicon corporation acquisition is a critical audit matter are (i) the significant judgment by management when determining these estimates, which in turn led to (ii) significant auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to the significant assumptions related to future revenue cash flows and revenue growth rates. 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 management’s valuation of the developed technology and the contract manufacturing rights intangible assets and controls over development of the significant assumptions, including future revenue cash flows and revenue growth rates. these procedures also included, among others (i) reading the purchase agreement and (ii) testing management’s process for determining the fair values of the developed technology and the contract manufacturing rights intangible assets. testing management’s process included (i) evaluating the appropriateness of the valuation method, (ii) testing the completeness and accuracy of the underlying data used by management, and (iii) evaluating the reasonableness of the significant assumptions used by management related to future revenue cash flows and revenue growth rates. evaluating management’s assumptions related to future revenue cash flows and revenue growth rates involved evaluating whether the assumptions were reasonable considering (i) the past performance of the acquired business, (ii) existing customer contracts, and (iii) relevant peer company data. /s/ pricewaterhouse coopers llp los angeles, california february 25, 2021 we have served as the company’s auditor since 2002. | 3 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. valuation of contingent consideration as described in note 3 to the company’s consolidated financial statements, the company has recorded a contingent consideration liability of approximately $6.5 million related to the acquisition of cap inno vet, inc. a contingent consideration liability is recorded based on its estimated fair value as of the date of the acquisition and remeasured as of each balance sheet date. we have identified the valuation of the contingent consideration liability as of the acquisition date as a critical audit matter. the contingent consideration liability is measured using a monte-carlo simulation utilizing significant unobservable inputs that considers the probability of achieving each of the potential milestones, including revenue volatility and an estimated discount rate associated with the risks of the expected cash flows. due to the inherent uncertainty involved in estimating long-range revenue forecasts and the complexity of the monte-carlo simulation utilized by management, auditing the contingent consideration liability required increased auditor effort including the use of personnel with specialized knowledge and skills in valuation. f-2 table of contents the primary procedures we performed to address this critical audit matter included: • testing the design and operating effectiveness of certain controls over the development of the significant assumptions used in the valuation model selected, including controls over assumptions related to: (i) long-range revenue forecasts and (ii) discount rates applied to the forecasts. • assessing management’s estimated timing of milestone achievement and probabilities of success by corroborating with personnel knowledgeable of the current progression of the product candidates and reviewed filings with the applicable regulatory agencies. • assessing management’s ability to forecast long-range revenue by analyzing historical accuracy of management’s forecasts related to business combinations and comparing to industry data to validate the reasonableness of the growth assumption. • utilizing professionals with specialized knowledge and skills in valuation to assist in evaluating the valuation methodology selected by management as well as assessing the reasonableness of key inputs including the discount rate and revenue volatility. /s/ bdo usa, llp we have served as the company’s auditor since 2014. | 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 the 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 a separate opinion on the critical audit matters or on the account or disclosure to which they relate.54description of the matter acquisition of pfenex inc.as disclosed in note 4 to the consolidated financial statements, during 2020, the company completed the acquisition of pfenex inc. for total aggregate consideration of $465.1 million. the transaction was accounted for as a business combination. in connection with the acquisition, the company recognized identified intangible assets which totaled $385 million and principally consisted of contractual relationships and developed technology, and recognized the contingent value right (cvr) liability for acquisition consideration that is payable based on a predefined regulatory milestone if achieved by december 31, 2021 for which there is a maximum earnout of $77.8 million. the company determines the fair value of the cvr both as part of the initial purchase price allocation, and on an ongoing basis each reporting period until the cvr is settled. as of december 31, 2020, the liability related to the cvr is $37.6 million.auditing the company’s accounting for its acquisition of pfenex inc. was complex due to the significant judgement required by management to determine the fair value of identified intangible assets, and to determine the fair value of the cvr arrangement. the company used an income approach to measure the value of the contractual relationship and technology-related intangible assets and a discounted cash flow model to value the cvr. determination of the fair value of the acquired intangible assets was sensitive to the underlying assumptions including the estimated revenue growth rates and timing and the probability of technical and regulatory success. the fair value of cvr was sensitive to the significant underlying assumptions including the probability and timing of achieving the predefined regulatory milestone. 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 the controls over the company’s accounting for acquisitions. for example, we tested controls over management’s review of the valuation of intangible assets acquired and cvr, including the valuation models used and the underlying assumptions used to develop such estimates, and management’s review of the completeness and accuracy of the data used to develop the estimates.to test the estimated fair value of the intangible assets and cvr, our audit procedures included, among others, evaluating the company's use of valuation methodologies, evaluating the prospective financial information and testing the completeness and accuracy of underlying data. we compared the significant assumptions to current industry, market and economic trends and historical results of the acquired business. we also involved internal valuation specialists to assist in our evaluation of the valuation methodology and certain significant assumptions used by the company. our internal valuation specialists’ procedures included, among others, developing a range of independent estimates for the discount rates and comparing those to the discount rates selected by management.impairment assessment of finite-lived intangibles description of the matter at december 31, 2020, the company’s finite-lived intangible assets totaled $595.3 million. as discussed in note 1 to the consolidated financial statements, the company reviews finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the finite-lived intangibles are not expected to be recovered through future undiscounted cash flows. the company did not identify indicators of impairment for its finite-lived intangibles at december 31, 2020. auditing management’s assessment of impairment is challenging due to the high degree of subjective auditor judgment necessary in evaluating management’s identification of indicators of potential impairment and the related 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 asset. a high degree of auditor judgment was required to evaluate the significant inputs used in the assessment for potential triggering events which included market conditions, industry and economic trends, changes in regulations, clinical success and historical and forecasted financial results. these possible triggering events could have a significant effect on the company’s impairment assessment and the determination of whether further quantitative analysis of finite-lived intangible impairment was required.55how we addressed the matter in our audit we obtained an understanding of management’s process to identify indicators of impairment, including the qualitative analysis and related inputs and assumptions used in performing the analyses. we evaluated the design and tested the operating effectiveness of the controls that address the identification of indicators of impairment. for example, we tested controls over management’s assessment of indicators of impairment. to test the company’s evaluation of indicators of impairment for finite-lived intangibles, our audit procedures included, among others, assessing the methodologies and testing the completeness and accuracy of the company’s analysis of events or changes in circumstances. as part of our evaluation, we considered market conditions, industry and economic trends, changes in regulations, clinical success and historical and forecasted financial results, in assessing whether an indicator of impairments exists. /s/ ernst & young llp we have served as the company's auditor 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.annual indefinite-lived intangible asset impairment assessment – certain trade names and trademarks as described in notes 2, 6 and 8 to the consolidated financial statements, the company’s consolidated indefinite-lived intangible assets balance, which includes trade names and trademarks, was $233 million as of december 31, 2021. management conducts an impairment assessment annually during the fourth quarter, or more frequently if impairment indicators exist. an impairment exists when a trade name and trademark’s carrying value exceeds its fair value. the fair values of these assets are based upon the prospective stream of hypothetical after-tax royalty cost savings discounted at rates that reflect the rates of return appropriate for these intangible assets. the primary inputs used in the impairment assessment of the trade names and trademarks are projected branded product sales, the revenue growth rate, the royalty rate, and the discount rate. no impairment expense was recognized for the year ended december 31, 2021 as a result of the company’s annual impairment assessment over the indefinite-lived intangible assets.the principal considerations for our determination that performing procedures relating to the annual indefinite-lived intangible asset impairment assessment for certain trade names and trademarks is a critical audit matter are (i) the significant judgment by management when developing the fair value of the indefinite-lived intangible assets; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumption related to the royalty 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 annual valuation of trade names and trademarks. these procedures also included, among others (i) testing management’s process for determining the fair value of certain indefinite-lived trade names and trademarks; (ii) evaluating the appropriateness of the valuation method; and (iii) testing the completeness and accuracy of underlying data used in the valuation method. professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the valuation method and (ii) the reasonableness of the royalty rate significant assumption./s/ pricewaterhouse coopers llp milwaukee, wisconsin february 24, 2022we have served as the company’s auditor since 2010. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.assessment of the realizability of the u.s. deferred tax assets as described in note 8 to the consolidated financial statements, the company determined sufficient positive evidence existed to reverse a portion of the valuation allowance attributable to the deferred tax assets associated with its operations in the u.s. this reversal resulted in a non-cash deferred tax benefit of $909 million in 2020. management’s analysis to assess the realizability of the u.s. deferred tax assets considered positive and negative evidence, including (i) three years of cumulative income for its u.s. subsidiaries, (ii) continuing and improved profitability over the last twelve months in the u.s. jurisdiction, (iii) estimates of continued profitability based on updates to the company’s forecasts, (iv) changes in the factors that drove losses in the past, primarily interest expenses incurred in the u.s., and (v) risk that certain deferred tax assets may be subject to limitation under irc section 382. the principal considerations for our determination that performing procedures relating to the assessment of the realizability of the u.s. deferred tax assets is a critical audit matter are the significant judgment by management in determining the amount and period when the valuation allowance is to be released, which in turn led to a high degree of auditor judgement, subjectivity and effort in performing procedures and evaluating audit evidence relating to management’s assessment of the realizability of deferred tax assets, and management’s significant assumptions relating to estimates of continued profitability and expected utilization of deferred tax assets considering the risk they may be subject to limitation under irc section 382.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 the realizability of the u.s. deferred tax assets, including controls over the determination of projected taxable income and expected utilization of deferred tax assets. these procedures also included, among others (i) testing the completeness and accuracy of underlying data used by management, (ii) evaluating management’s assessment of the realizability of deferred tax assets in the u.s., and (iii) evaluating the reasonableness of management’s significant assumptions related to estimates of continued profitability and expected utilization of deferred tax assets. evaluating management’s significant assumptions involved evaluating whether the assumptions were reasonable considering the current and past performance of the company’s u.s. subsidiaries and whether the assumptions were consistent with evidence obtained in other areas of the audit. /s/ pricewaterhouse coopers llp stamford, connecticut february 23, 2021we have served as the company’s auditor since 2014. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the 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. annual goodwill impairment analysis as described further in note 1 to the financial statements, the company’s consolidated goodwill balance was $9,262,000 as of july 31, 2021 and the goodwill assigned to the retail and wholesale products group and business to business products group was $5,497,000 and $3,765,000, respectively. goodwill is tested annually for impairment in the fourth quarter of the fiscal year or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. we identified the company’s annual goodwill impairment analysis of both of the company’s reporting units as a critical audit matter. the principal considerations for our determination that the annual goodwill impairment analysis is a critical audit matter are that the significant estimates and assumptions made by management involve subjectivity and judgment in determining the fair value of the reporting units using the discounted future cash flows valuation technique. the reporting unit discounted future cash flows include certain management assumptions that are complex and have a higher degree of estimation uncertainty and changes in these assumptions could have a significant impact on the results of the impairment analysis. these assumptions include forward-looking projections related to volume, revenue, and expenses as well as certain allocations between reporting units and determination of discount rates. performing audit procedures to evaluate management’s assumptions required a high degree of auditor judgement and an increased extent of effort, including the need to involve valuation specialists. our audit procedures related to the annual goodwill impairment analysis included the following, among others:•we tested the design and operating effectiveness of controls relating to management’s goodwill impairment test, including the controls over the determination of key inputs such as the forecasting of future cash flows and determination of the discount rate; •we tested the reasonableness of management’s forecasts of future revenues and operating margin by comparing to third-party industry projections and historical operating results;•we performed sensitivity analysis on the company’s future revenue, operating margins, and expense allocations to evaluate the reasonableness of management’s forecasts; •we utilized a valuation specialist to assist in recalculating the company’s discounted future cash flows model and in evaluating the reasonableness of significant assumptions including the discount rate; and •we evaluated the competency and objectivity of management’s specialists who assisted with preparing the discounted cash flow analysis. /s/ grant thornton llp we have served as the company’s auditor since 2014. | 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 that (1) relates to accounts or disclosures that are material to the financial statements and (2) involves 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. •estimation of proved crude oil and natural gas reserves as it relates to the recognition of depletion expense, assessment / measurement of potential impairment and certain required supplemental disclosures as described in note 1 to the consolidated financial statements, the company accounts for its crude oil and natural gas properties using the successful efforts method of accounting, which requires management to make estimates of proved crude oil and natural gas reserve volumes and future cash flows to record depletion expense, assess its oil and gas properties for potential impairment and certain required supplemental crude oil and gas information. to estimate the proved crude oil and natural gas reserves and future cash flows, management makes significant estimates and assumptions including forecasting the production decline rate of producing crude oil and natural gas properties and forecasting the timing and volume of production associated with the company’s development plan for proved undeveloped properties. in addition, the estimation of proved crude oil and natural gas reserves is also impacted by management’s judgments and estimates regarding the financial performance of wells associated with proved crude oil and natural gas reserves to determine if wells are expected with reasonable certainty to be economical under the appropriate pricing assumptions required in the estimation of depletion expense and potential impairment assessments / measurements. we identified the 59estimation of proved crude oil and natural gas reserves as it relates to the recognition of depletion expense, assessment / measurement of potential impairment and certain required supplemental disclosures as a critical audit matter. the principal considerations for our determination that the estimation of proved crude oil and natural gas reserves as it relates to the recognition of depletion expense, assessment / measurement of potential impairment and certain required supplemental disclosures is a critical audit matter is that relatively minor changes in certain inputs and assumptions, which require a high degree of subjectivity, necessary to estimate the volume and future cash flows of the company’s proved crude oil and natural gas reserves could have a significant impact on the measurement of depletion expense or assessment / measurement of potential impairment expense. our audit procedures related to the estimation of proved crude oil and natural gas reserves as it relates to the recognition of depletion expense, assessment / measurement of potential impairment and certain required supplemental disclosures included the following, among others.•tested the design and operating effectiveness of controls relating to management’s estimation of proved crude oil and natural gas reserves for the purpose of estimating depletion expense, assessing / measuring the company’s proved crude oil and gas properties for potential impairment and preparation of certain required disclosures of supplemental crude oil and natural gas information. •assessed the independence, objectivity, and professional qualifications of the company’s reservoir engineer specialists, made inquiries of these specialists (internal and external) regarding the process followed and judgments used to make significant estimates, including but not limited to proved crude oil and natural gas reserve volumes, decline rates, and economically recoverable proved crude oil and natural gas reserves and reviewed the reserve estimates prepared by the company’s specialists. •to the extent key inputs and assumptions used to determine proved crude oil and natural gas reserve volumes and other cash flow inputs and assumptions are derived from the company’s accounting records, including, but not limited to: historical pricing differentials, operating costs, estimated capital costs, and ownership interests, we tested management’s process for determining the assumptions, including examining underlying support on a sample basis. specifically, our audit procedures involved testing management’s assumptions by:◦compared the estimated pricing differentials used in the reserve report to realized prices related to revenue transactions recorded in the current year and examined contractual support for the pricing differentials◦evaluated the models used to estimate the operating costs at year-end and compared to historical operating costs ◦compared the models used to determine the future capital expenditures and compared estimated future capital expenditures used in the reserve report to amounts expended for recently drilled and completed wells◦evaluated the working and net revenue interests used in the reserve report by inspecting land and division order records◦evaluated the company’s evidence supporting the amount of proved undeveloped properties reflected in the reserve report by examining historical conversion rates and support for the company’s ability to fund and intent to develop the proved undeveloped properties; and◦applied analytical procedures to the reserve report by comparing to historical actual results and to the prior year reserve report./s/ grant thornton llp we have served as the company’s auditor since 2004. | 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 especially challenging, subjective, or complex judgments. the communication of the 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 a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. allowance for loan losses – exogenous factors related to commercial, commercial real estate, and commercial construction loan segments the allowance for loan losses represents management’s estimate of probable incurred credit losses inherent in the loan portfolio. as described in notes 1 and 5 to the consolidated financial statements, the company’s consolidated allowance for loan losses was $38,293,000 at december 31, 2019, which consisted of the allowance for loans losses allocated to 1) loans individually evaluated for impairment, representing $1,267,000, 2) loans collectively evaluated for impairment (“general component”), representing $35,685,000, and 3) loans acquired, representing $1,242,000, as well as an unallocated allowance for loan losses of $99,000. the general component can be further broken down as the general component related to the commercial, commercial real estate, and commercial construction loan segments of $34,020,000 and the general component related to the residential real estate and consumer segments of $1,665,000. the general component is based on historical loss experience adjusted for current factors. this actual loss experience is supplemented with exogenous factor adjustments based on the risks present for each loan category. changes in these exogenous factor adjustments related to the commercial, commercial real estate, and commercial construction loan segments could have a material impact on the company’s financial results. - 47 - table of contents the general component of the company’s allowance for loan losses involves consideration of the following exogenous factors: concentrations of credit; delinquency and nonaccrual trends; economic and business conditions including evaluation of the national and regional economies and industries with significant loan concentrations; external factors including legal, regulatory or competitive pressures that may impact the loan portfolio; changes in the experience, ability, or size of the lending staff, management, or board of directors that may impact the loan portfolio; changes in underwriting standards, collection procedures, charge-off practices, or other changes in lending policies and procedures that may impact the loan portfolio; loss and recovery trends; changes in portfolio size and mix; and trends in problem loans. the consideration of these factors contributes significantly to the general component of the allowance for loan losses for the commercial, commercial real estate, and commercial construction loan segments. management’s analysis of these exogenous factors requires significant judgment, and management’s allocation of exogenous factors relies on a qualitative analysis to determine the quantitative impact the exogenous factors have on the general component for the commercial, commercial real estate, and commercial construction loan segments. we identified auditing management’s analysis and allocation of the exogenous factors to the general component of the allowance for loan losses for the commercial, commercial real estate, and commercial construction loan segments as a critical audit matter as it involved especially subjective auditor judgment. the primary audit procedures we performed to address this critical audit matter included: •testing the effectiveness of controls over the evaluation of the exogenous factors used to estimate the general component for the commercial, commercial real estate, and commercial construction loan segments, including controls addressing:◦management’s review of the completeness and accuracy of data used as the basis for the adjustments relating to exogenous factors; ◦management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of qualitative reserve factors and the resulting allocation to the allowance allocated to loans collectively evaluated for impairment; and, ◦management’s review of the exogenous factor reserve for mathematical accuracy. •substantively testing management’s process, including evaluating their judgments and assumptions, for developing the exogenous factors used to estimate the general component for the commercial, commercial real estate, and commercial construction loan segments which included:◦ evaluation of the completeness and accuracy of data used as a basis for the adjustments relating to exogenous factors; ◦evaluation of the reasonableness of management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of exogenous factors and the resulting allocation to the allowance allocated to loans collectively evaluated for impairment. among other procedures, our evaluation considered actual charge offs, loan portfolio performance and third-party data, and whether such assumptions were applied consistently period over period; ◦analytically evaluating the exogenous factor allocation year over year for reasonableness; and, ◦recalculation of the exogenous factor reserve. - 48 - table of contents business combinations – fair value of acquired non-credit-impaired loans as described in note 2 to the consolidated financial statements, on january 2, 2019 the company completed its acquisition of greater hudson bank. the business combination was accounted under the acquisition method of accounting, with assets acquired and liabilities assumed recorded at fair value as of the acquisition date. the fair value of loans acquired in the acquisition totaled $362,914,000, which included $356,493,000 of non-credit-impaired loans and $6,421,000 of credit-impaired loans. the fair values of loans acquired were estimated based on the value of the expected cash flows, which were projected based on the contractual terms of loans, including both maturity and contractual amortization. projected cash flows were adjusted for expected losses and prepayments, where appropriate. expected losses assumptions were developed using peer group loss data. projected cash flows were then discounted to present value using a discount rate developed based on the relative risk of the cash flows, considering the loan type, liquidity risk, the maturity of the loans, servicing costs and a required return on capital. changes in these estimates and assumptions could have a significant impact on the fair values of the acquired non-credit-impaired loans. we identified auditing the fair value of acquired non-credit-impaired loans as a critical audit matter as it involved especially subjective auditor judgment. the primary audit procedures we performed to address this critical audit matter included: •testing the effectiveness of controls over the judgments, assumptions and data used to estimate the fair value of acquired non-credit-impaired loans, including controls addressing: ◦management’s evaluation of the reasonableness of the judgments and assumptions used to estimate fair value; and, ◦management’s review of the completeness and accuracy of the data used. •substantively testing management’s process, including evaluating their judgments and assumptions, for estimating the fair value of acquired non-credit-impaired loans which included:◦evaluation of the reasonableness of judgments and assumptions used by management; ◦evaluation of the completeness and accuracy of the data used; and, ◦utilization of a valuation specialist to evaluate the appropriateness of the judgments, assumptions and data used and overall reasonableness of the fair values. /s/ crowe llp we have served as the company’s auditor since 2014. | 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.revenue from contracts with customers – determination of distinct performance obligations relating to service revenues – refer to note 1 of the financial statements critical audit matter description the company’s service revenues within the consulting solutions (“cs”) and application and cloud solutions (“acs”) revenue streams, primarily derive revenue from long-term engineering and consulting services and software as a service (“saa s”). the company accounts for individual services separately if they are distinct performance obligations, which often requires significant judgment based upon knowledge of the services, the solution provided, and the structure of the sales contract. during the year ended march 31, 2022, the company recognized service revenues from contracts with customers of $64.8 million.we identified the determination of distinct performance obligations in contracts with customers relating to service revenues as a critical audit matter. significant judgment is required to determine whether the performance obligations in these sales contracts are distinct; that is, if a service is separately identifiable from other items in the sales contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer. auditing these aspects include especially challenging auditor judgment due to the nature and extent of audit effort required to address this matter.how the critical audit matter was addressed in the audit37table of contents our audit procedures related to the company’s determination of distinct performance obligations relating to service revenues for these contracts included the following, among others:• we tested the effectiveness of controls related to management’s identification and assessment of distinct performance obligations in contracts with customers.• we selected a sample of customer contracts to evaluate the appropriateness of management’s determination of distinct performance obligations.• we selected a sample of invoices from the accounts receivable detail and determined whether amounts invoiced were in accordance with the related contract terms. further, we inspected line items on the invoice to verify that all line items were included in management's evaluation of performance obligations.• we selected a sample of customer contracts and investigated all changes in current forecasted cost to original forecasted cost to evaluate if changes in estimate are indicative of existing services known by operations personnel, but not previously considered as distinct performance obligations by management.• we investigated offsets to revenue to determine that they represent a valid purpose, and a service was not previously identified. • we selected a sample of expenditures and determined whether the good/service represented by the selected transaction was properly identified and evaluated by management as a distinct performance obligation./s/ deloitte & touche llp costa mesa, ca june 1, 2022we 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 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 103communication 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 over the estimation of costs to complete on select long-term contracts in the defense segments as discussed in note c to the consolidated financial statements, accounting for long-term contracts involves estimation of the costs to complete a contract in order to accurately recognize the associated revenue and profit. the estimated cost to complete each contract is required to assess the proportion of revenues to recognize based upon the costs incurred-to-date in comparison to the total estimate of costs to complete the contract. the estimated cost to complete each contract incorporates assumptions of labor productivity and availability based on the complexity of the work to be performed, the cost of materials, and the performance of subcontractors. we identified the evaluation over the estimation of costs to complete a select group of long-term contracts in the defense segments as a critical audit matter. the assumptions, included above, may have been used in estimating the costs to complete and required a high-level of subjectivity. specifically, changes to those assumptions may have a significant impact on the estimated revenue and profit recorded during the period under audit. the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s cost accumulation and estimation processes. this included transactional controls over the accumulation of costs incurred, and contract level controls over the estimated cost assumptions. we compared the company’s historical estimates of costs to actual costs incurred to assess the company’s ability to estimate accurately. we inquired of financial and operational personnel of the company to identify factors that should be considered within the cost to complete estimates or indications of management bias. we evaluated the assumptions within the company’s estimation of costs to complete by: –reading the underlying contract and related amendments to obtain an understanding of the contractual requirements and related performance obligations,–considering costs incurred to-date and considering the relative progress towards completion of the contract,–considering, if relevant, the estimated costs to complete on similar or predecessor programs,–inspecting correspondence, if any, between the company and the customer regarding actual to date and expected performance, and–focusing on the company’s assessment of contract performance risks included within the estimated costs to complete. evaluation over the measurement of the pension projected benefit obligation as discussed in note r to the consolidated financial statements, the company’s estimated pension projected benefit obligation and the associated plan assets were $18.1 billion and $13.2 billion, respectively, on december 31, 2019. these balances resulted in a net liability of $4.9 billion. the pension projected benefit obligation is the present value of future pension benefits attributed to employee services rendered to date, including assumptions about future compensation levels.104we identified the evaluation over the measurement of the pension projected benefit obligation to be a critical audit matter. this is due to the specialized skills required to assess the company’s actuarial models and the key assumptions, including the interest rates used to discount estimated future liabilities, salary increases, and retirement and mortality rates. in addition, the actuarial models were sensitive to changes in the key assumptions.the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s pension projected benefit obligation estimation process, including controls related to the determination and use of the actuarial models and the key assumptions. we involved an actuarial professional with specialized skills and knowledge, who assisted in the assessment of certain actuarial models used by the company for consistency with generally accepted actuarial standards. in addition, the actuarial professional assisted in the evaluation of the company’s analysis of the key assumptions. this was done by comparing the key assumptions to amounts independently developed using publicly available market data and historical experience.we have served as the company’s auditor since 2002. | 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.67iron mountain 2021 form 10-k table of contents part ivgoodwill - global data center reporting unit - refer to note 2.k. to the financial statements critical audit matter description the company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. the company determined the fair value of the global data center reporting unit using a combined approach based on the present value of future cash flows (the “discounted cash flow model”) and market multiples (the “market approach”). the determination of the fair value using the discounted cash flow model requires management to make significant assumptions related to future revenue growth rates, operating margins, discount rates and capital expenditures. the determination of the fair value using the market approach requires management to make significant assumptions related to adjusted earnings before interest, taxes, depreciation and amortization (“adjusted ebitda”) multiples. changes in economic and operating conditions impacting these assumptions or changes in multiples could result in goodwill impairments in future periods. the goodwill balance allocated to the global data center reporting unit was $429 million as of october 1, 2021 (goodwill impairment testing date). the fair value of the global data center reporting unit exceeded its carrying value as of the measurement date and, therefore, no impairment was recognized.the global data center reporting unit’s fair value exceeded its carrying value by less than 25%, accordingly, auditing the assumptions used in the goodwill impairment analysis for this reporting unit involved especially subjective judgment.how the critical audit matter was addressed in the audit our audit procedures related to future revenue growth rates, operating margins and capital expenditures (collectively, the “forecast”), the selection of discount rates, and adjusted ebitda multiples for the global data center reporting unit included the following, among others: •we evaluated management’s ability to accurately forecast by comparing actual results to management’s historical forecasts. •we evaluated the reasonableness of management’s forecast by comparing it to (1) historical results, (2) internal communications to management and the board of directors, and (3) forecasted information included in company press releases and industry reports of the company and companies in its peer group.•with the assistance of our fair value specialists, we evaluated the discount rates, including testing the underlying source information and the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rates selected by management.•with the assistance of our fair value specialists, we evaluated the adjusted ebitda multiples, including testing the underlying source information and mathematical accuracy of the calculations and comparing the multiples selected by management to its guideline companies.•we tested the effectiveness of controls over the evaluation of goodwill for impairment, including those over the forecast and the selection of the adjusted ebitda multiples and discount rates. /s/ deloitte & touche llp boston, massachusetts february 24, 2022we have served as the company’s auditor since 2002. | 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 86 table of contents 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. claim and claim adjustment expense reserves – property & casualty — refer to notes 1 and 8 to the consolidated financial statements. critical audit matter description the estimation of property and casualty claim and claim adjustment expense reserves (“p&c claim and claim adjustment expense reserves”), including those claims that are incurred but not reported, requires significant judgment. estimating p&c claim and claim adjustment expense reserves is subject to a high degree of variability as it involves complex estimates that are generally derived using a variety of actuarial estimation techniques and numerous assumptions and expectations about future events, many of which are highly uncertain. modest changes in judgments and assumptions can materially impact the valuation of these liabilities, particularly for claims with longer-tailed exposures such as workers’ compensation, general liability and professional liability claims. given the significant judgments made by management in estimating p&c claim and claim adjustment expense reserves, auditing p&c claim and claim adjustment expense reserves required a high degree of auditor judgment and an increased extent of effort, including the involvement of our actuarial specialists. how the critical audit matter was addressed in the audit our audit procedures related to p&c claim and claim adjustment expense reserves included the following, among others: · we tested the effectiveness of controls related to the determination of p&c claim and claim adjustment expense reserves, including those controls related to the estimation of and management’s review of p&c claim and claim adjustment expense reserves. · we tested the underlying data, including historical claims, that served as the basis for the actuarial analyses, to test that the inputs to the actuarial estimates were accurate and complete. · with the assistance of our actuarial specialists: ○we developed a range of independent estimates of p&c claim and claim adjustment expense reserves and compared our estimates to the recorded reserves. ○we compared our prior year estimates of expected incurred losses to actual experience during the most recent year to identify potential bias in the company’s determination of p&c claim and claim adjustment expense reserves. future policy benefit reserves – long term care — refer to notes 1 and 8 to the consolidated financial statements. critical audit matter description the estimation of long term care future policy benefit reserves (“ltc future policy benefit reserves”) requires significant judgment in the selection of key assumptions, including morbidity, persistency (inclusive of mortality), discount rate and future premium rate increases. 87 table of contents a gross premium valuation (“gpv”) is performed annually to assess the adequacy of the ltc future policy benefit reserves. the actuarial assumptions underlying the recorded ltc future policy benefit reserves are “locked-in” absent an indicated premium deficiency. if the gpv indicates the recorded ltc future policy benefit reserves are not adequate (i.e. a premium deficiency exists), the assumptions are “unlocked” and the recorded ltc future policy benefit reserves are increased to eliminate the premium deficiency. estimating future experience for long term care policies is subject to significant estimation risk because the required projection period spans several decades. morbidity and persistency experience can be volatile while discount rates and premium rate increases can be difficult to predict. modest changes in each of these assumptions can materially impact the valuation of these liabilities. given the significant judgments made by management in estimating ltc future policy benefit reserves, auditing ltc future policy benefit reserves required a high degree of auditor judgment and an increased extent of effort, including the involvement of our actuarial specialists. how the critical audit matter was addressed in the audit our audit procedures related to ltc future policy benefit reserves included the following, among others: · we tested the effectiveness of controls related to the determination of ltc future policy benefit reserves, including those controls related to the estimation of and management’s review of ltc future policy benefit reserves. · we tested the underlying data, including demographic and historical claims data, that served as the basis for the actuarial analyses, to test that the inputs to the actuarial estimates were accurate and complete. · with the assistance of our actuarial specialists: ○we independently recalculated a sample of ltc future policy benefit reserves and compared our estimates to the recorded reserves. ○we evaluated the key assumptions applied in the gpv analysis, including comparing those assumptions to the company’s historical experience, the underlying investment portfolio yield and market data. ○we assessed the company’s projection of future cash flows to evaluate the reasonableness of the 2019 charge related to unlocking ltc future policy benefit reserves to recognize a premium deficiency as a result of the most recently completed gpv. impairment of long-lived assets– refer to notes 1 and 6 to the financial statements critical audit matter description the evaluation of offshore drilling equipment, specifically drilling rigs, for impairment occurs whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. when the company determines that the carrying value of a drilling rig may not be recoverable, they prepare an undiscounted probability-weighted cash flow analysis to determine if there is a potential impairment. this analysis utilizes certain assumptions for each drilling rig under evaluation and considers multiple probability-weighted utilization and dayrate scenarios. the company’s development of the dayrate assumption involves judgments relative to the current and expected market for the drilling rigs and expectations of future oil and gas prices. 88 table of contents given 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, auditing impairment analyses 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 assumptions used in the undiscounted probability-weighted cash flow analysis. how the critical audit matter was addressed in the audit our audit procedures related to (i) the identification of indicators of impairment and (ii) the evaluation of the company’s undiscounted probability-weighted cash flow analysis for those drilling rigs with factors that indicated potential impairment included the following, among others: · we tested the effectiveness of relevant controls related to the company’s identification of impairment indicators and the company’s review of the undiscounted probability-weighted cash flow analyses. · we evaluated the company’s identification of impairment indicators by: ○corroborating information used to identify impairment indicators through independent inquiries of offshore drilling 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. ○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. ○comparing the timing of impairments recorded by the company with the timing of impairments recorded by the company’s peers. · with the assistance of our fair value specialists, we evaluated the company’s undiscounted probability-weighted cash flow analysis for those drilling rigs with factors that had indicators of potential impairment by: ○evaluating the reasonableness of the dayrate assumptions utilized in the company’s probability-weighted undiscounted cash flow analyses by evaluating potential drilling rig opportunities and considering industry reports and data. ○comparing the assumptions used in the company’s previous undiscounted probability-weighted cash flow analyses to the assumptions used in the current undiscounted probability-weighted cash flow analyses to assess for management bias. /s/ deloitte & touche llp new york, ny february 11, 2020 we have served as the company’s auditor since 1969. | 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 5 to the company's consolidated financial statements, the company maintains an allowance for loan losses at a level sufficient to absorb estimated credit losses in the loan portfolio as of the date of the financial statements. the company’s allowance for loan losses (all) related to loans collectively evaluated for impairment was $13.5 million of a total allowance for loan losses of $15.6 million at december 31, 2020. the all estimate consists of both quantitative and qualitative factors. significant judgment is used by management to determine the effect of the qualitative factors on the estimation of inherent losses for loans that are collectively evaluated for impairment. we identified the qualitative factors used to estimate the all for loans that are collectively evaluated for impairment as a critical audit matter. the estimate of the all for these loans was sensitive to certain qualitative factors, including local and national economic trends, which include covid-19 considerations. auditing these qualitative factors required a high degree of auditor judgment and an increased extent of audit effort due to uncertainty caused by the inherent uncertainties related to the state of the economy.79the primary procedures we performed to address this critical audit matter included:•assessing the design and testing the operating effectiveness of controls over company’s estimate of the all for loans that are collectively evaluated for impairment, including controls over management’s review of the significant assumptions and the completeness and accuracy of data used to develop the qualitative factors described above. •assessing the reasonableness of the company’s assumptions about credit quality due to changes in local and national economic trends, including the impact of covid-19, by (i) assessing whether the assumptions reflected relevant considerations and were reasonable for the purpose used and (ii) verifying the accuracy and relevance of the data used in developing the assumptions.•evaluating data used in developing the qualitative factors by comparing the data to other third-party data available in the company’s geography, and evaluating any contradictory evidence identified.goodwill impairment assessment as described in notes 1 and 9 to the company’s consolidated financial statements, the company’s goodwill balance was $34.7 million as of december 31, 2020, which is allocated to the company’s single reporting unit. goodwill is tested for impairment on an annual basis, or more often if events and circumstances indicate that there may be impairment. during each of the periods ended march 31, 2020 and june 30, 2020, the company concluded that a triggering event occurred due to a decline in the company’s stock price and market capitalization as a result of the covid-19 pandemic. at september 30, 2020, the company performed its annual goodwill impairment test. no impairment charges were recorded as a result of the company’s interim and annual impairment tests. the company estimates the fair value of its reporting unit using an income approach. we identified the estimate of the fair value of the company’s reporting unit as part of the interim and annual impairment assessments as a critical audit matter. the principal considerations for our determination are: (i) the fair value estimate was sensitive to changes in the significant assumptions, including those used to develop the projected cash flows, the discount rate and the terminal growth rate and (ii) the audit effort involved the use of personnel with specialized skill and knowledge. the significant assumptions which reflect expectations about future economic conditions were especially challenging to test and required significant auditor judgment due to the inherent uncertainties related to the covid-19 pandemic.the primary procedures we performed to address this critical audit matter included:•assessing the design and testing the operating effectiveness of controls over the company’s estimate of the fair value of its reporting unit, including controls over management’s review of the significant assumptions described above.•evaluating the reasonableness of the significant assumptions used in the projected cash flows by comparing them to historical results and market data and considering the effect of covid-19. •utilizing personnel with specialized skill and knowledge in valuation to assist in (i) assessing the appropriateness of the valuation method and implied control premium and (ii) evaluating the reasonableness of the discount rate and terminal growth rate. /s/ bdo usa, llp we have served as the company's auditor since 2013. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.convertible debt and derivative liabilities – april 2020 note purchase agreement – refer to “note 2 – summary of significant accounting policies” and “note 7 – borrowings” to the financial statements critical audit matter description in april 2020, the company entered into a senior convertible note purchase agreement pursuant to which it issued and sold $10.0 million aggregate principal amount of 6.0% convertible senior notes (the “april 2020 notes”), each of which are convertible into shares of the company’s common stock. upon issuance of the april 2020 notes, the company bifurcated the fair value of the embedded conversion option from the april 2020 notes and recorded it as a derivative liability in accordance with asc 815, derivatives and hedging. both the april 2020 notes and the derivative liability have been classified as long-term and presented as “convertible debt and derivative liabilities” in the company’s consolidated balance sheet. prospectively, the convertible debt is required to be carried at amortized cost, while the derivative liability component is remeasured at each reporting period with changes in fair value recorded in the company’s consolidated statements of operations as other (income) expense. the calculation of the fair value of the derivative liability includes items subject to management’s judgment including the valuation model used in determining the fair value, as well as individual inputs to the valuation model.52 we identified the initial accounting for and valuation of the april 2020 notes as a critical audit matter because of the complexity in applying the accounting framework for the april 2020 notes and the significant estimates and judgments made by management in the determination of the fair value of the derivative liability component. this required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the appropriateness of the accounting framework and to assess the reasonableness of the fair value estimates and assumptions, including the involvement of our fair value specialists.how the critical audit matter was addressed in the audit our audit procedures related to the accounting for and valuation of the april 2020 notes included the following, among others:• with the assistance of professionals in our firm having expertise in the accounting treatment for financial instruments, we evaluated the company’s conclusions regarding the accounting treatment applied to the april 2020 notes including the bifurcation of the embedded conversion option.• with the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology and the significant assumptions used to determine the fair value of the derivative liability by: o testing the source information underlying the fair value of the derivative liability and the mathematical accuracy of the calculation. o developing a range of independent estimates and comparing those to the fair value of the derivative liability determined by management. /s/ deloitte & touche llp parsippany, new jersey march 29, 2021we have served as the company's auditor since 2000. | 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) 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 a separate opinion on the critical audit matter or on the accounts ordisclosures to which they relate. debtand equity transactions asdiscussed in notes 7, 8 and 10 to the consolidated financial statements, the company has entered into debt and equity agreementswhich include stock-based compensation, debt modification and derivative liabilities. these agreements include transactions, includingthe issuance of warrants and stock options, that are required to be recorded at estimated fair value. these transactions resultedin recording of stock-based compensation expense of $276,641 and a gain on debt extinguishment of $379,200 for the year ended december 31, 2020, and the recording of a derivative liability of $41,475 as of december 31, 2020. the company’s determination of the estimated fair value involves the identification of related financial instruments and a clearunderstanding of the terms of the agreements. auditing management’s estimates of fair value requires a high degree of auditorjudgment and an increased extent of effort, including the need to carefully examine to understand the true nature of the relatedagreements. ouraudit procedures related to determination of the estimated fair values of these debt and equity transactions included the following,among others: ●we gained an understanding of management’s process and methodology to develop the estimates ●we examined signed contracts and amendments. ●we evaluated the reasonableness of the inputs and assumptions used by management in developing the estimates. ●we evaluated the adequacy of the disclosures related to these fair value measurements. /s/eide bailly llp wehave served as barfresh food group inc.’s auditor since 2012. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.evaluation of the sufficiency of audit evidence over certain subscriber and advertising revenue streams as disclosed in the consolidated statements of operations, the company generated $10,294 million of revenue, of which $5,644 million was sirius xm subscriber revenue and $1,131 million was pandora (pandora media, llc and subsidiaries, the successor to pandora media, inc. and subsidiaries) advertising revenue, for the year ended december 31, 2019. the company’s accounting for these subscriber and advertising revenue streams involve multiple information technology (it) systems. we identified the evaluation of the sufficiency of audit evidence related to these subscriber and advertising revenue streams as a critical audit matter. evaluating the sufficiency of audit evidence required our subjective judgment regarding, among other things, the nature and extent of the evidence relating to each revenue stream, due principally to the number of it applications utilized in the revenue recognition process to capture and aggregate the data. the primary procedures we performed to address this critical audit matter included the following. we used our judgment to determine the nature and extent of audit procedures to be performed regarding these subscriber and advertising revenue streams. we tested certain internal controls over the sirius xm subscriber revenue and pandora advertising revenue recognition processes. we involved it professionals with specialized skills and knowledge, who assisted in testing certain it applications and controls used by the company in its revenue recognition processes and testing the interface of relevant revenue data between different it systems used in the revenue recognition processes. for each revenue stream within sirius xm subscriber revenue where procedures were performed, we developed an estimate of subscriber revenue. these estimates were based on a combination of internal data and publicly available external data and the estimates were compared to the company’s recorded amounts. in addition, we evaluated the relevance and reliability of the internal and external data used to develop those estimates. on a sample basis, we tested pandora advertising revenue by tracing the recorded amounts to underlying documents and to data executed and tracked by third parties. in addition, we evaluated the overall sufficiency of audit evidence obtained over sirius xm subscriber and pandora advertising revenue. assessment of the initial fair value measurement of certain intangible assets acquired in the pandora acquisition as discussed in note 5 to the consolidated financial statements, sirius xm holdings, inc. (sirius xm holdings), a consolidated subsidiary, acquired pandora in february 2019 for total consideration of $2,879 million. this acquisition resulted in sirius xm holdings recording customer relationships, trademark, and software and technology intangible assets in the consolidated balance sheets. the fair value of these intangible assets was $1,131 million as of the acquisition date. the determination of the acquisition date fair value of certain of these intangible assets required sirius xm holdings to make key assumptions regarding projected revenue and related growth rates; the trademark, software and technology royalty rates; the estimated advertising customer attrition rate; the discount rates; and the remaining useful life of the software and technology intangible asset. we identified the assessment of the initial fair value measurement of certain intangible assets acquired in the pandora acquisition as a critical audit matter. testing the key assumptions, which were used to estimate the ii-35table of contentsfair values, involved a high degree of auditor judgment. the estimated fair values were also sensitive to changes in these key assumptions. the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over sirius xm holdings' acquisition-date valuation process, including controls related to the development of the key assumptions. we performed sensitivity analyses to assess the impact of possible changes to the key assumptions on the acquisition-date fair value of these intangible assets. we evaluated the growth rates used by sirius xm holdings to determine projected revenue by comparing them to industry benchmarks and publicly available data, as well as third-party market studies. we assessed the advertising customer attrition rate and the remaining useful life of the software and technology intangible asset based on historical data of pandora. we involved a valuation professional with specialized skills and knowledge, who assisted in: •evaluating the discount rates by comparing them to an independently developed range using publicly available market data for comparable entities; •evaluating the royalty rates for trademark, software and technology acquired by comparing them to royalty rates for similar companies; •developing an estimated range of fair values of the advertising customer relationships acquired using sirius xm holdings' cash flow assumptions and an independently developed range of discount rates, and comparing it to sirius xm holdings' fair value estimate; and •developing an estimated range of fair values of the trademark, software and technology acquired using sirius xm holdings' revenue assumptions and an independently developed range of discount rates and royalty rates, and comparing them to sirius xm holdings' fair value estimates./s/ kpmg llp we have served as the company’s auditor since 2010. | 2 |
critical audit matters in the auditor’s report on the financial statements; •progressively adding to the number of years of audited financial statements required to be included in our periodic reports; and •exemptions from the requirements of holding a nonbinding advisory vote on executive compensation, stockholder approval of any golden parachute payments not previously approved and having to disclose the ratio of the compensation of our chief executive officer to the median compensation of our employees. •in addition, the jobs act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. this allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. we have elected to use the extended transition period for complying with new or revised accounting standards; and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. we are also a smaller reporting company, and we will remain a smaller reporting company until the fiscal year following the determination that our voting and non-voting common stock held by non-affiliates is more than $250 million measured on the last business day of our second fiscal quarter, or our annual revenues are more than $100 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is more than $700 million measured on the last business day of our second fiscal quarter. similar to emerging growth companies, smaller reporting companies are able to provide simplified executive compensation disclosure, are exempt from the auditor attestation requirements of section 404, and have certain other reduced disclosure obligations, including, among other things, being required to provide only two years of audited financial statements and not being required to provide selected financial data, supplemental financial information or risk factors. we may choose to take advantage of some, but not all, of the available exemptions for emerging growth companies and smaller reporting companies. we cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. if some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our shares price may be more volatile. provisions in our restated certificate of incorporation and our amended and restated bylaws or delaware law may discourage, delay or prevent a merger, acquisition or other change in control of our company that our shareholders may consider favorable, including transactions in which our shareholders might otherwise receive a premium for their shares. our restated certificate of incorporation and our amended and restated bylaws include certain anti-takeover provisions, including those establishing: •a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors; •no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates; 73 •the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents shareholders from filling vacancies on our board of directors; •the ability of our board of directors to authorize the issuance of shares of preferred stock and to determine the terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer; •the ability of our board of directors to alter our bylaws without obtaining stockholder approval; •the required approval of the holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or repeal the provisions of our restated certificate of incorporation regarding the election and removal of directors: •a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; •the requirement that a special meeting of stockholders may be called only by the chairman of the board of directors, the chief executive officer, the president, or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors: and •advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a shareholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us. these provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. in addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. in addition, because we are incorporated in delaware, we are governed by the provisions of section 203 of the general corporation law of the state of delaware, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. our restated certificate of incorporation designates specific courts as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us. our restated certificate of incorporation specifies that, unless we consent in writing to the selection of an alternative forum to the fullest extent permitted by law, the court of chancery of the state of delaware will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim for breach of a fiduciary duty owed by any of our directors, officers, or other employees to us or our stockholders, (3) any action asserting a claim arising pursuant to any provision of the general corporation law of the state of delaware, our restated certificate of incorporation, or our amended and restated bylaws, (4) any action to interpret, apply, enforce, or determine the validity of our restated certificate of incorporation or our amended and restated bylaws, or (5) any action asserting a claim governed by the internal affairs doctrine. under our restated certificate of incorporation, this exclusive forum provision will not apply to claims which are vested in the exclusive jurisdiction of a court or forum other than the court of chancery of the state of delaware, or for which the court of chancery of the state of delaware does not have subject matter jurisdiction. for instance, the provision would not apply to actions arising under federal securities laws, including suits brought to enforce any liability or duty created by the securities exchange act of 1934, as amended, or the rules and regulations thereunder. this exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. for example, stockholders who do bring a claim in the court of chancery could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near the state of delaware. the court of chancery may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments or results may be more favorable to us than to our stockholders. the enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that, in connection with any applicable action brought against us, a court could find the choice of forum provisions contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in such action. if a court were to find the choice of forum provisions contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business, financial condition, or results of operations.74item 1b. unresolved staff comments. none item 2. properties. our principal office is located at 19 presidential way, woburn, massachusetts 01801, where we lease approximately 17,000 square feet of office and laboratory space. we lease this space under a lease that terminates on february 24, 2025. we also lease approximately 2,133 square feet of office and laboratory space at 400 farmington avenue, farmington, connecticut 06030. this lease is set to terminate on july 31, 2020. on january 7, 2020, we entered into an indenture of lease for the lease of approximately 61,307 square feet of office and laboratory space located at 75 hayden avenue, lexington, massachusetts 02421, which, once occupied, we expect will be our new principal office. we expect to move to this new location in early 2021.item 3. legal proceedings. we are not subject to any material legal proceedings. item 4. mine safety disclosures.not applicable management executive officers and directors the following table sets forth information regarding our executive officers and directors as of the date of this annual report on form 10-k. name age position executive officers david l. lucchino 51 president, chief executive officer, and director carl p. le bel, ph.d. 61 chief development officer christopher r. loose, ph.d. 39 chief scientific officer dana hilt, m.d. 67 chief medical officer wendy s. arnold 48 chief people officer richard mitrano 49 vice president of finance and operations non-employee directors marc a. cohen 56 executive chairman and director timothy j. barberich 72 director michael huang 46 director robert s. langer, sc.d. 71 director joel s. marcus 72 director 75executive officers david l. lucchino has served as our president and chief executive officer and a member of our board of directors since november 2014 and was a co-founder of our company with dr. robert s. langer and dr. christopher r. loose. from december 2014 until june 2016, mr. lucchino served as the president and chief executive officer of entrega bio, a pure tech health-founded biotechnology company focused on oral drug delivery technology. prior to that, mr. lucchino co-founded semprus bio sciences, or semprus, a biotechnology company, and served as its president and chief executive officer from june 2007 to june 2012. mr. lucchino oversaw the development of the company’s lead medical product, which received fda clearance in 2012. semprus was acquired by teleflex, inc., or teleflex, in june 2012. prior to semprus, mr. lucchino worked at the investment firm polaris partners. mr. lucchino is the chairman of the board of directors of mass bio, a non-profit organization that represents and provides services and support for the biotechnology industry in massachusetts. he is a member of the college of fellows of the american institute for medical and biological engineering and was appointed by governor charlie baker as a member of the commonwealth’s economic planning council. mr. lucchino also serves as a trustee of mt. auburn hospital, a harvard medical school facility, a trustee of the multiple myeloma research foundation, and a member of the board of advisors of life science cares. mr. lucchino holds an mba from the massachusetts institute of technology’s, or mit’s, sloan school of management, an m.s. from the newhouse school of journalism at syracuse university, and a b.a. in philosophy and religious studies from denison university. carl p. le bel, ph.d. has served as our chief development officer since march 2018. in 2017, dr. le bel founded le bel consulting, llc, a biopharmaceutical consulting company. prior to joining our company, from february 2009 until november 2016, dr. le bel served as the chief scientific officer of otonomy, inc., or otonomy, a biopharmaceutical company where he was responsible for all research and development activities. from 2008 to 2009, he served as the president and chief executive officer of akesis pharmaceuticals, inc., or akesis, a virtual metabolic disorders company. prior to akesis, dr. le bel served as an executive director in a variety of research and development management positions for amgen, inc., or amgen, a biopharmaceutical company. before joining amgen, dr. le bel served as a research scientist at alkermes, inc. dr. le bel is a scientific fellow of the american academy of otolaryngology and a full member of the american association for the advancement of science and the society of toxicology. dr. le bel is a co-inventor on numerous patents in the field of drug delivery for otology-related disorders. he was a national institute of environmental health sciences post-doctoral fellow in molecular neurotoxicology at the university of california irvine. dr. le bel holds a ph.d. in biomedical sciences and toxicology from northeastern university and a b.s. in chemistry from the university of detroit.christopher r. loose, ph.d. co-founded our company and has served as our chief scientific officer since january 2016. prior to our company, dr. loose co-founded semprus with mr. lucchino and dr. langer and served as its chief technology officer from june 2007 until its acquisition by teleflex in june 2012. at semprus, he led the technology team in the development through regulatory clearance of medical products designed to reduce infection and clotting. prior to semprus, dr. loose worked as a chemical engineer at merck research labs. in 2011, dr. loose was awarded the inaugural peter strauss entrepreneurial award from the hertz foundation. since 2014, dr. loose has served as an associate professor adjunct of urology at the yale school of medicine. dr. loose is also the executive director of yale university’s center for biomedical and interventional technology. dr. loose holds a ph.d. in chemical engineering from mit and a bse in chemical engineering summa cum laude from princeton university.dana hilt, m.d. has served as our chief medical officer since august 2019. from october 2016 to august 2019, dr. hilt served as chief medical officer for lysosomal therapeutics, inc., or lysosomal, a life sciences drug development company in the field of neurodegeneration, where he was responsible for all clinical development activity for a product candidate for the treatment of parkinson’s disease. prior to lysosomal, beginning in 2006, dr. hilt served in the roles of senior vice president of drug development and chief medical officer for forum pharmaceuticals, inc., or forum, where he oversaw the clinical, chemistry manufacture controls, regulatory and quality control activities for therapies focused on the treatment of cognitive impairment in schizophrenia and alzheimer’s disease. prior to forum, dr. hilt served as the chief medical officer and senior vice president of clinical research, medical affairs, and development for ascend therapeutics us, llc, or ascend, a specialty pharmaceutical company concentrating on women’s health and transdermal drug delivery. before joining ascend, dr. hilt served as the vice president of clinical research at guilford pharmaceuticals inc., or guilford, a biopharmaceutical company engaged in the research, development, and commercialization of drugs that target the acute care market and neurological indications including parkinson’s disease and brain cancer. prior to guilford, he served as a director of clinical development at amgen, where he established its clinical neuroscience group. prior to that, dr. hilt served on the staff of the national institute of health. he holds an m.d. from tufts university school of medicine and a b.s. from the university of maine.76wendy s. arnold has served as our chief people officer since february 2020. ms. arnold previously served as senior vice president, human resources at kaleido biosciences where she oversaw the hr infrastructure, compensation, performance and development programs. prior to kaleido biosciences, ms. arnold was the head of the hr business partnership function at moderna therapeutics, where she oversaw the hr organization. prior to moderna, ms. arnold was at celgene avilomics research (formerly avila therapeutics), where she was responsible for building and developing the hr infrastructure for the company’s early research and development division. ms. arnold has also held senior hr positions at inotek pharmaceuticals and amylin pharmaceuticals. ms. arnold holds a b.s. from colorado state university.richard mitrano has served as our vice president of finance and operations since july 2016. from 2012 to 2015, mr. mitrano served as the director of finance and operations of semprus, where he oversaw all accounting and finance operations and provided strategic direction and oversight. prior to semprus, mr. mitrano was a contract accounting manager for predictive biosciences, inc., or predictive, a diagnostics company, from 2010 to 2012. prior to predictive, from 2008 to 2010, mr. mitrano served as corporate controller of pioneer behavioral health, a company providing behavioral health services. mr. mitrano holds a b.a. in accounting from bentley university.non-employee directors marc a. cohen has served as a member of our board of directors and as executive chairman since september 2016. since 2012, mr. cohen has served as the chief executive officer of bublup, inc., an online knowledge-sharing platform, as well as co bro ventures, inc., an investment management company. mr. cohen is also executive chairman of c4 therapeutics and mana therapeutics. mr. cohen holds an m.s. in electrical engineering from stanford university and a bachelor’s degree in engineering science from harvard university. timothy j. barberich has served as a member of our board of directors since september 2016. mr. barberich also serves on the board of directors of gi dynamics, inc., verastem, inc., and t scan therapeutics, inc. mr. barberich previously served as a director for tokai pharmaceuticals, inc. from 2009 to 2017, for heart ware international, inc. from 2008 to 2016, for inotek pharmaceuticals corporation from 2016 to 2017, and for neurovance, inc. from 2010 to 2016. mr. barberich is co-founder, and served as the ceo and chairman of sepracor inc. from 1984 to 2009. he holds a b.s. in chemistry from kings college. michael huang has served as a member of our board of directors since october 2018. mr. huang serves as managing partner at taiwania capital management corporation, a venture capital firm. from 2014 to 2017, mr. huang served as chief executive officer of neuro vive pharmaceutical asia, inc., a biopharmaceutical company. mr. huang holds an mba from rice university, a m.a. in chemistry from the university of texas, arlington, and a b.s. from university of texas, austin. robert s. langer, sc.d., has served as a member of our board of directors since september 2016. dr. langer has served as a david h. koch institute professor at the massachusetts institute of technology since 2005. dr. langer currently serves on the board of directors of rubius therapeutics, inc., moderna, inc., and puretech health plc, abpro-korea, and previously served on the board of directors of momenta pharmaceuticals, inc., kala pharmaceuticals, inc., and rubius. dr. langer holds a sc.d. in chemical engineering from mit and a b.s. in chemical engineering from cornell university. joel s. marcus has served as a member of our board of directors since december 2018. mr. marcus currently serves as executive chairman of alexandria real estate equities, inc., or alexandria, a real estate investment and development company, and served as the chief executive officer of alexandria from march 1997 to april 2018. mr. marcus also currently serves on the boards of directors of intra-cellular therapies, inc., meira gtx holdings plc, and applied therapeutics, inc. mr. marcus holds a b.a. and j.d. from the university of california, los angeles. 77part ii item 5. market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities. market information our common stock is traded under the symbol “freq” on the nasdaq global select market. on march 20, 2020, there were approximately 228 registered holders of record of our common stock. the actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. the number of holders of record also does not include stockholders whose shares may be held in trust by other entities.dividend policy we have never declared or paid any dividends on our capital stock. we currently intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. any future determination to pay dividends will be made at the discretion of our board of directors. investors should not purchase our common stock with the expectation of receiving cash dividends.equity compensation plan information the following table provides information on our equity compensation plans as of december 31, 2019. number of securities available for future number of securities to be issuance under equity issued upon exercise of weighted-average exercise compensation plans outstanding options, price of outstanding options,(excludes securities plan category warrants and rights warrants, and rights reflected in first column) (1)equity compensation plans approved by security holders (2) 5,968,672(3)$ 5.20(4) 2,167,633(5) equity compensation plans not approved by security holders— ——total 5,968,672 $5.20 2,167,633 (1)pursuant to the terms of the 2019 incentive award plan, or the 2019 plan, the number of shares of common stock available for issuance under the 2019 plan automatically increases on each january 1 until and including january 1, 2029, by an amount equal to the lesser of: (a) 4% of the shares of common stock outstanding on the final day of the immediately preceding calendar year and (b) such smaller number of shares as is determined by our board of directors. pursuant to the terms of the 2019 employee stock purchase plan, or the 2019 espp, the number of shares of common stock available for issuance under the 2019 espp automatically increases on each january 1 until and including january 1, 2029, by an amount equal to the lesser of: (a) 1% of the shares of common stock outstanding on the final day of the immediately preceding calendar year and (b) such smaller number of shares as is determined by our board of directors. (2)consists of the 2014 stock incentive plan, or the 2014 plan, the 2019 plan, and the 2019 espp. (3)includes 4,721,334 outstanding options to purchase shares of common stock under the 2014 plan and 1,247,337 outstanding options to purchase stock under the 2019 plan. (4)as of december 31, 2019, the weighted-average exercise price of outstanding options under the 2014 plan was $2.85 and the weighted-average exercise price per share of outstanding options under the 2019 plan was $14.09. (5)as of december 31, 2019, a total of 2,167,663 shares of common stock were available for issuance, consisting of (a) 315,000 shares of common stock available for future issuance under the 2019 espp, none of which shares were subject to outstanding purchase rights under the 2019 espp and (b) 1,852,663 shares of common stock available for future issuance under the 2019 plan. unregistered sales of equity securities and use of proceeds recent sales of unregistered equity securities during the period covered by this annual report on form 10-k, we have issued the following securities which were not registered under the securities act:from january 2019 through october 2019, we issued stock options to purchase an aggregate of 3,015,381 shares of our common stock, with a weighted – average exercise price of $4.17, to our employees, directors and consultants pursuant to our 782014 stock incentive plan. these securities were issued under section 4(a)(2) and rule 701 of the securities act in transactions not involving a public offering.from january 2019 through october 2019, we issued an aggregate of 297,620 shares of common stock to employees, directors and consultants for cash consideration in the aggregate amount of approximately $0.33 million upon the exercise of stock options and stock awards pursuant to our 2014 stock incentive plan. these securities were issued under section 4(a)(2) and rule 701 of the securities act in transactions not involving a public offering.in january and february 2019, we issued 288,911 shares of series b convertible preferred stock, or the series b shares, at a price of $0.920439 per share for aggregate proceeds of approximately $0.27 million to three accredited investors. on october 7, 2020, upon the closing of the initial public offering of our common stock, or the ipo, we issued 42,890 shares of our common stock upon conversion of the series b shares. these securities were issued under section 4(a)(2) of the securities act in transactions not involving a public offering.in july 2019, we issued 39,392,960 shares of series c convertible preferred stock, or the series c shares, at a price of $1.569884 per share for aggregate proceeds of approximately $62.0 million to seventy-five accredited investors. on october 7, 2020, upon the closing of the ipo, we issued 5,848,482 shares of our common stock upon conversion of the series c shares. these securities were issued under section 4(a)(2) of the securities act in transactions not involving a public offering.use of proceeds in october 2019, we issued and sold 6,325,000 shares of our common stock in our ipo at a public offering price of $14.00 per share. the offer and sale of all the shares in the ipo were registered under the securities act pursuant to a registration statement on form s-1 (file no. 333-233652), as amended, which was declared effective by the sec on october 2, 2019. the $79.7 million in net proceeds we received from the ipo have been invested in cash and cash equivalents. there has been no material change in the expected use of the net proceeds from our ipo as described in our final prospectus, dated october 2, 2019, filed with the sec pursuant to rule 424(b) relating to our registration statement on form s-1 on october 4, 2019.purchases of equity securities by the issuer and affiliated purchasers none. 79item 6. selected financial data. you should read the following selected consolidated financial data together with our consolidated financial statements and the related notes included elsewhere in this annual report on form 10-k and the section titled “management’s discussion and analysis of financial condition and results of operations.” we have derived the consolidated statement of operations data for the years ended december 31, 2019, 2018 and 2017 and the consolidated balance sheet data as of december 31, 2019 and 2018 from our audited consolidated financial statements included elsewhere in this annual report on form 10-k. our historical results are not necessarily indicative of results that may be expected in any future period, and our results for any interim period are not necessarily indicative of results that may be expected for any full year. year ended december 31, (in thousands, except share and per share amounts) 2019 2018 2017 consolidated statements of operations data: revenue $28,947 $— $— operating expenses: royalty 16,000 — — research and development 18,784 11,880 11,966 general and administrative 14,838 7,064 4,340 total operating expenses 49,622 18,944 16,306 loss from operations (20,675) (18,944) (16,306)interest income (expense) 1,784 (106) (174)loss on extinguishment of debt — (269) (3,749)realized gain on investments 138 — — foreign exchange gain (loss) 7 151 (8) net loss (18,746) (19,168) (20,237)cumulative series c preferred stock dividends (1,054) — — net loss attributable to common stockholders (19,800) (19,168) (20,237)net loss per share attributable to common stockholders, basic and diluted(1) $(2.29) $(12.53) $(28.79)weighted-average shares of common stock outstanding, basic and diluted(1) 8,649,245 1,530,218 702,918 (1)see note 2 within the notes to our consolidated financial statements included elsewhere in this annual report on form 10-k for an explanation and details of the method used to calculate the basic and diluted net loss per share of common stock. as of december 31,(in thousands) 2019 2018 consolidated balance sheet data: cash, cash equivalents and short-term investments $217,355 $42,189 working capital(1) 168,575 39,164 total assets 223,218 44,548 total liabilities 55,860 4,122 convertible preferred stock and non-controlling interest — 88,708 accumulated deficit (68,888) (49,088) total stockholders’ (deficit) equity 167,358 (48,282) (1)we define working capital as current assets less current liabilities. see our consolidated financial statements included elsewhere in this annual report on form 10-k for further details regarding our current assets and current liabilities. 80item 7. management’s discussion and analysis of financial condition and results of operations. you should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this annual report on form 10-k. some of the information contained in this discussion and analysis contains forward-looking statements that involve risks and uncertainties. you should review the section titled “risk factors” in this annual report on form 10-k for a discussion of important factors that could cause actual results to differ materially from the results described below. overview we are a clinical-stage biotechnology company focused on harnessing the body’s innate biology to repair or reverse damage caused by a broad range of degenerative diseases and an industry leader in the science and development of medicines for inner-ear cellular regeneration and hearing restoration. our initial focus is on advancing our lead product candidate, fx-322, through clinical studies with the goal of developing and commercializing a medicine to help millions of patients with the most common form of hearing loss and build upon the potential of regenerative therapeutics for hearing.our initial therapeutic focus is sensorineural hearing loss, or snhl, which is the most prevalent type of hearing loss. we are developing fx-322 to treat the underlying cause of snhl, which is the loss of hair cells. fx-322 is designed to regenerate hair cells through the activation of progenitor cells already present in the ear. in our phase 1/2 clinical trial evaluating fx-322 in 23 patients with stable snhl, we observed a statistically significant and clinically meaningful improvement in ke | 4 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.recoverability of regulatory assets that do not have an order for recovery as described in note 1 to the consolidated financial statements, the company accounts for the effects of regulation through the application of regulatory accounting to its regulated distribution and transmission subsidiaries as their rates are established by a third-party regulator with the authority to set rates that bind customers, are cost-based and can be charged to and collected from customers. this ratemaking process results in the recording of regulatory assets and liabilities based on anticipated future cash inflows and outflows. management assesses the probability of recovery of regulatory assets at each balance sheet date and whenever new events occur. factors that may affect probability relate to changes in the regulatory environment, issuance of a regulatory commission order or passage of new legislation. management applies judgment in evaluating the evidence available to assess the probability of recovery of regulatory assets from customers and certain of these assets, totaling approximately $117 million as of december 31, 2020, have been recorded based on precedent and rate making premises without a specific order. the principal considerations for our determination that performing procedures relating to the recoverability of regulatory assets that do not have an order for recovery is a critical audit matter are (i) the significant judgment by management when assessing the probability of recovery of these regulatory assets from customers, which in turn led to (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to the recoverability of these regulatory assets.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 regulatory accounting process, including controls over management’s assessment of the recoverability of regulatory assets that do not have an order for recovery. these procedures also included, among others, evaluating the reasonableness of management’s assessment of recoverability of regulatory assets. testing the recoverability of regulatory assets involved evaluating evidence related to precedent for similar items at the company and information on comparable companies within similar regulatory jurisdictions as well as assessing progress of communications between management and regulators./s/ pricewaterhouse coopers llp cleveland, ohio february 18, 2021we have served as the company’s auditor since 2002. | 3 |
critical audit matters the critical audit matters communicatedbelow are matters arising from the current period audit of the consolidated 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 consolidatedfinancial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of criticalaudit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not,by communication of the critical audit matters below, providing separate opinions on the critical audit matters or on the accountsor disclosures to which they relate.impairment assessment for goodwilland intangible assets – refer to notes 2 & 4 to the consolidated financial statements critical audit matter description as reflected in the company’s consolidatedfinancial statements, at december 31, 2020, the company’s goodwill was $1,020,314 and intangible assets were $1,324,870,excluding the distribution rights intangible asset acquired in 2020 as discussed below. as disclosed in notes 2 and 4 to the consolidatedfinancial statements, goodwill and intangible assets are tested for impairment at least annually or more frequently if indicatorsof impairment require the performance of an interim impairment assessment. as a result of these assessments, the company concludedthat there was no impairment to goodwill or the company’s intangible assets during the year ended december 31, 2020.auditing management’s impairmenttests of goodwill and intangible assets was complex and highly judgmental due to the significant measurement uncertainty in determiningthe fair values. in particular, the fair value estimates were sensitive to changes in significant assumptions such as discountrates, revenue growth rates, operating margins, estimated spend on capital expenditures, terminal growth rates and market multiples.these assumptions are affected by expected future market or economic conditions, including the impact of covid-19.how the critical audit matter was addressed in the audit we obtained an understanding of the relevantcontrols over the company’s goodwill and intangible assets and management’s process to assess impairment. additionally,we obtained a copy of an appraisal prepared by an independent valuation specialist obtained by management as part of their processto evaluate goodwill and intangible assets.to test the fair values of the goodwilland intangible assets, our audit procedures included assessing valuation methodologies and testing the reasonableness of significantassumptions and underlying data used by the company including forecasted revenue. we compared the significant assumptions usedin the company’s long range plan, including forecasted revenue and operating margins, to current industry and economic trends,giving consideration to the impact of covid-19, while also considering changes in the company’s business model, customerbase and product mix. we assessed the historical accuracy of management’s estimates by comparing past projections to actualperformance and assessed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the goodwilland intangible assets resulting from changes in the assumptions. we evaluated management’s reconciliation of the fair valueof the reporting unit to the market capitalization of the company and concurred with management that there was no impairment ofgoodwill or intangible assets as of the december 31, 2020 evaluation date.acquisition of advanced container technologies, inc. – refer to note 4 to the consolidated financial statements critical audit matter description as described in note 4 to the consolidatedfinancial statements the company completed the acquisition of advanced container technologies, inc. (“act”) on october9, 2020 for 50,000,000 shares of the company’s common stock, issued to the previous shareholders of act on a pro-rata basis.the company applied the acquisition method of accounting for business combinations. accordingly, the assets acquired and liabilitiesassumed were recorded at their acquisition date fair values. any excess of the purchase price over amounts allocated to assetsacquired, including identifiable intangible assets, and liabilities assumed was recorded as goodwill. assets acquired includedcash and distribution rights intangibles. the fair value of assets acquired in the acquisition totaled $986,293, including $86,293in cash and $900,000 ascribed to distribution rights as an intangible asset value. the company estimated the fair value of thedistribution rights intangible asset using a discounted cash flow model. management determined multiple assumptions for which therewas limited observable market information and required significant estimates and judgment such as discount rates, revenue growthrates, operating margins, estimated spend on capital expenditures, terminal growth rates and market multiples.we have identified the valuation of thedistribution rights intangibles from the act acquisition as a critical audit matter because auditing the fair value involved significantauditor judgment and increased audit effort because of the estimation required by management.how the critical audit matter was addressed in the audit we obtained an understanding of the relevantcontrols over the company’s accounting for an acquisition. additionally, we obtained a copy of an appraisal prepared by anindependent valuation specialist obtained by management as part of their process to record the net assets acquired at fair value.to test the fair values of the net assetsacquired, our audit procedures included assessing valuation methodologies and testing the reasonableness of significant assumptionsand underlying data used by the company including forecasted revenue. we compared the significant assumptions used in the company’slong range plan, including forecasted revenue and operating margins, to current industry and economic trends, giving considerationto the impact of covid-19, while also considering changes in the company’s business model, customer base and product mix.additionally, we compared the fair value of the common stock shares exchanged in the transaction to the valuation of the net assetsacquired and determined the valuation to be reasonable./s/ haskell & white llp we have served as the company’s auditor since 2019. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. the percentage of completion of unbilled contract assets relating to work-in-progress (wip) inventory as described in notes 3 and 4 to the consolidated financial statements, the company recognizes revenue for custom manufacturing services over time as products are manufactured. as of january 3, 2021, the company has unbilled contract assets of $11.1 million relating to wip inventory of custom manufactured products. management is required to use significant judgment to estimate the percentage of completion of its unbilled contract assets relating to wip inventory using manufacturing inputs to determine the portion of the performance obligation that has been satisfied. the principal considerations for our determination that performing procedures relating to the percentage of completion of unbilled contract assets relating to wip inventory is a critical audit matter is the significant judgment applied by management when developing the estimated percentage of completion using manufacturing inputs for the unbilled contract assets relating to wip inventory. this led to significant auditor judgment and effort in performing procedures to evaluate the estimated percentage of completion. 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 process to record the unbilled contract assets, contract revenues, and the estimate of the percentage of completion of its unbilled contract assets relating to wip inventory using manufacturing inputs. these procedures also included, among others, (i) developing an independent estimate of the wip inventory percentage of completion by comparing average production times for a sample of contracts to actual shipments subsequent to year-end; (ii) comparing the independent estimate to management’s estimate; (iii) testing the completeness and accuracy of data provided by management; and (iv) testing the completeness and existence of the unbilled contract asset relating to wip inventory./s/pricewaterhouse coopers llp chartered professional accountants, licensed public accountants oakville, canada march 17, 2021we have served as the company’s auditor since 2014. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. goodwill impairment assessment as described in note 18 to the consolidated financial statements, as of december 31, 2019, goodwill is primarily reported in the health services segment ($33.7 billion), the integrated medical segment ($10.5 billion) and, to a lesser extent, the international markets segment ($0.4 billion). management evaluates goodwill for impairment at least annually during the third quarter at the reporting unit level and writes the goodwill balance down through shareholders’ net income if impaired. fair value of a reporting unit is generally estimated based on either a market approach or a discounted cash flow analysis using assumptions that management believes a hypothetical market participant would use to determine a current transaction price. the significant assumptions and estimates used in determining fair value include the discount rate and future cash flows. a discount rate is selected to correspond with each reporting unit's weighted average cost of capital, consistent with that used for investment decisions considering the specific and detailed operating plans and strategies within that reporting unit. projections of future cash flows for each reporting unit are consistent with management’s annual planning process for revenues, pharmacy costs, benefits expenses, operating expenses, taxes, capital levels and long-term growth rates. the principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are there was significant judgment by management when determining the fair value measurement of the reporting units. this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s estimate of the reporting units’ fair value including the assumptions for the discount rate and projection of future cash flows. in addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over management’s methodology, inputs and assumptions used in its goodwill impairment assessment. these procedures also included, among others, testing management’s process for determining the fair value estimate of the reporting units; evaluating the appropriateness of the discounted cash flow analysis; testing the completeness and accuracy of underlying data used in the discounted cash flow analysis; and evaluating the key inputs and significant assumptions, including the discount rate and the projections of future cash flows. the underlying inputs and assumptions used in the development of the discount rate and the projections of future cash flows that were evaluated included the weighted average cost of capital, revenues, pharmacy costs, benefits expenses, operating expenses, capital levels and long-term growth rates. evaluating the reasonableness of management’s inputs and assumptions involved considering (i) the current and past performance of the reporting unit, (ii) the consistency of the discount rate and long-term growth rates with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of certain significant assumptions, including the discount rate. valuation of long-term disability disabled life reserves as described in note 9 to the consolidated financial statements, the majority of the company's liability for disability claims consists of “disabled life reserves”, measured as the present value of estimated future benefit payments, including expected development, for each reported claim that is currently receiving benefit payments over the expected disability period or pending a decision on eligibility for benefits. as of december 31, 2019, the long-term disability disabled life reserves were $3.5 billion. management projects the expected disability period by using historical resolution rates combined with an analysis of current trends and operational factors to develop current estimates of resolution rates. expected claim resolution rates may vary based upon management’s experience for the anticipated disability period, the covered benefit period, the cause of disability, the benefit design and the claimant’s age, gender and income level. the gross monthly benefit is reduced (offset) by disability income received under other benefit programs, most commonly social security disability income, workers' compensation, statutory disability or other group benefit plans. management78table of contentsestimates the probability and amount of future offset awards and lapses based on management’s experience for certain offsets not yet finalized. the principal considerations for our determination that performing procedures relating to the valuation of long-term disability disabled life reserves is a critical audit matter are there was significant judgment by management when determining the reserves. this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the actuarial methodologies and assumptions including the discount rate, resolution rates, offset awards, and adequacy utilized to estimate the reserves. 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 the valuation of long-term disability disabled life reserves, including controls over management’s actuarial methodologies and the development of significant assumptions including the discount rate, resolution rates, offset awards, and adequacy. these procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in testing management’s process for determining the reserves which included evaluating the appropriateness of management’s actuarial methodologies and the reasonableness of the aforementioned assumptions utilized in determining the reserves balances and recalculating the reserves for a sample of long-term disability disabled life reserves utilizing management’s actuarial methodologies and assumptions. the professionals with specialized skill and knowledge also recalculated a sample of long-term disability disabled life reserves utilizing an independent model and management’s assumptions. performing these procedures involved testing the completeness and accuracy of the data provided by management. /s/ pricewaterhouse coopers llp hartford, connecticut february 27, 2020 we have served as the company’s auditor since 1983. | 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. revenue recognition – theater systems revenue as described in notes 3(n) and 21 to the consolidated financial statements, the company recognized revenue from imax systems related to the imax technology sales and maintenance category (theater systems) of $54.1 million for the year ended december 31, 2020. management evaluates whether a theater system arrangement involves either a sale or a lease of a theater system, and for those arrangements that are accounted for as a sale of a theater system, determines the transaction price and the allocation thereof to each separate performance obligation based on estimated standalone selling prices. for arrangements accounted for as a sale of a theater system, the transaction price allocated to the performance obligation is recognized when the conditions signifying transfer of control have been met. for theater system arrangements, management applied significant judgment in (i) determining whether the theater system arrangement related to either a sale or a lease by considering the terms of the arrangement including title to the theater system equipment and payment consideration; (ii) estimating the transaction price which may include the discounted present value of fixed ongoing payments and variable consideration (such as indexed minimum payment increases and additional payments owed by the customer if certain minimum box office receipt thresholds are exceeded); (iii) allocating the transaction price to each separate performance obligation based on estimated standalone selling prices; and (iv) determining the timing of revenue recognition based on when performance obligations are met. the principal considerations for our determination that performing procedures relating to the revenue recognition of theater systems revenue is a critical audit matter are that management identified the matter as a critical accounting estimate, and there was significant judgment required by management in (i) determining whether the theater system arrangement related to a sale or a lease; (ii) estimating the transaction price which may include the discounted present value of fixed ongoing payments and variable consideration; (iii) allocating the transaction price to each separate performance obligation; and (iv) determining the timing of revenue recognition. this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the revenue recognition of theater systems revenue. 73addressing 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 management’s review and approval of revenue recognition memorandums produced for each theater system arrangement which include the determination of the type of theater system arrangement, the estimate of the transaction price and allocation thereof and the timing of the related revenue recognition. these procedures also included, among others, evaluating the reasonableness of management’s assessment of whether the theater system arrangement related to either a sale or a lease by considering the contractual terms and conditions of the executed contracts. procedures were also performed to test management’s process for estimating the transaction price for a sample of contracts with customers, including (i) evaluating the appropriateness of management’s discounted present value method; (ii) testing the completeness, accuracy and relevance of the data used in estimating the transaction price; and (iii) evaluating the reasonableness of significant assumptions used by management, including the discount rate and expected future performance of underlying theaters associated with the arrangement. evaluating management’s assumption related to the discount rate involved evaluating whether the assumption was reasonable considering consistency with external market data. evaluating management’s assumption related to expected future performance of underlying theaters associated with the arrangement involved evaluating whether the assumption was reasonable considering the current and past performance of the underlying theaters. procedures were also performed to test management’s process for allocating the transaction price to each separate performance obligation, including (i) evaluating the appropriateness of management’s method of allocating the transaction price; (ii) testing the completeness, accuracy and relevance of the data used in allocating the transaction price; and (iii) evaluating the reasonableness of significant assumptions used by management, including estimated standalone selling prices. evaluating management’s assumption related to estimated standalone selling prices involved evaluating whether the assumption was reasonable by comparing the estimate to current and historical transactions. evaluating the appropriateness of management’s assessment of the timing of revenue recognition involved inspecting the customers’ certificates of acceptance and theater openings during the year. uncertain tax positions as described in notes 3(m) and 12 to the consolidated financial statements, the company had total tax reserves of $17.4 million as of december 31, 2020 related to uncertain tax positions. the company is subject to ongoing tax exposures, examinations and assessments in various jurisdictions. as disclosed by management, tax benefits are recognized only when it is more likely than not, based on the technical merits, that the benefits will be sustained on examination. tax benefits that meet the more-likely-than-not recognition threshold are measured using a probability weighting of the largest amount of tax benefit that has greater than 50% likelihood of being realized upon settlement. as disclosed by management, tax audits can result in subsequent assessments where the ultimate resolution may result in the company owing additional taxes above what was originally recognized. tax reserves for uncertain tax positions are adjusted by management to reflect their best estimate of the outcome of examinations and assessments and in light of changing facts and circumstances, such as the completion of a tax audit, expiration of a statute of limitations, the refinement of an estimate, and interest accruals associated with the uncertain tax positions until they are resolved. the estimate of the company’s tax reserves relating to uncertain tax positions required management to assess uncertainties and to make significant judgments about the application of complex tax laws. the principal considerations for our determination that performing procedures relating to uncertain tax positions is a critical audit matter are (i) the significant judgment by management in determining uncertain tax positions, including a high degree of estimation uncertainty relative to the numerous and complex tax laws, frequency of tax audits, and potential for significant adjustments as a result of such audits; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s timely identification, recognition and measurement of uncertain tax positions; (iii) the evaluation of audit evidence available to support the tax reserves for uncertain tax positions resulted in significant auditor judgment as the nature of the evidence is often subjective; and (iv) the audit effort involved the use of professionals with specialized skill and knowledge.74addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the identification and recognition of the tax reserves for uncertain tax positions, controls addressing completeness of the uncertain tax positions, and controls over measurement of the tax reserves. these procedures also included, among others (i) testing the information used in the calculation of the tax reserves for uncertain tax positions; (ii) testing the calculation of the tax reserves for uncertain tax positions by jurisdiction; and (iii) evaluating the status and results of income tax audits with the relevant tax authorities, as applicable. professionals with specialized skill and knowledge were used to assist in the evaluation of the completeness and measurement of the company’s uncertain tax positions, including evaluating the reasonableness of management’s assessment of whether tax positions are more-likely-than-not of being sustained and the amount of potential benefit to be realized, the application of relevant tax laws, and estimated interest and penalties. annual goodwill impairment assessment as described in notes 2 and 3(j) to the consolidated financial statements, the company’s goodwill balance was $39.0 million as of december 31, 2020, of which $19.1 million relates to the imax systems reporting unit, $13.5 million relates to the joint revenue sharing arrangement reporting unit, and $6.4 million relates to the imax maintenance reporting unit. management conducts an impairment test annually in the fourth quarter of the year and between annual tests if indicators of potential impairment exist. as a result of the negative effects of the covid-19 pandemic on revenue and earnings, management also performed quantitative goodwill impairment tests as of the reporting date of each of the first, second and third quarters of 2020 considering the latest available information and determined that its goodwill was not impaired. the impairment test was performed on a reporting unit level by comparing each unit’s carrying value, including goodwill, to its fair value. the fair value of each reporting unit was estimated using a discounted cash flow model based on management’s current short-term forecast and estimated long-term projections, against which various sensitivity analyses were performed. management applied significant judgment in estimating the fair value of each reporting unit, which included the use of significant assumptions relating to estimated long-term projections and discount rates. the principal considerations for our determination that performing procedures relating to the annual goodwill impairment assessment is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate 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 estimated long-term projections and 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 management’s goodwill impairment assessment, including controls over the valuation of the company’s reporting units. these procedures also included, among others, (i) testing management’s process for developing the fair value estimate of the reporting units; (ii) evaluating the appropriateness of the discounted cash flow models; (iii) testing the completeness and accuracy of underlying data used in the models; and (iv) evaluating the reasonableness of the significant assumptions used by management related to estimated long-term projections and discount rates. evaluating management’s assumptions related to estimated long-term projections 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 the appropriateness of the company’s discounted cash flow models and the reasonableness of the discount rate assumptions. 75allowance for credit losses on accounts receivable, financing receivables and variable consideration receivables as described in notes 2, 3(d) and 5 to the consolidated financial statements, the company’s allowance for credit losses related to accounts receivable was $14.3 million, the allowance for credit losses related to financing receivables was $7.8 million and the allowance for credit losses related to variable consideration receivables was $1.9 million as of december 31, 2020 (together allowance for credit losses on receivables). accounts receivable, financing receivables and variable consideration receivables are measured on the amortized cost basis and presented at the net amount expected to be collected. as disclosed by management, management increased its provision for current expected credit losses by $18.6 million for the year ended december 31, 2020, in part reflecting a reduction in the credit quality of its theater related accounts receivable, financing receivables and variable consideration receivables, which management believes is primarily related to the covid-19 pandemic. management develops its estimate of credit losses by class of receivable and customer type through a calculation that utilizes historical loss rates which are then adjusted for specific receivables that are judged to have a higher than normal risk profile after taking into account management’s internal credit quality classifications, as well as macro-economic and industry risk factors. management applied significant judgment in estimating the allowance for credit losses on receivables, which included assessing credit quality classifications, macro-economic and industry risk factors. the principal considerations for our determination that performing procedures relating to the allowance for credit losses on accounts receivable, financing receivables and variable consideration receivables is a critical audit matter are (i) the significant judgment by management in estimating the allowance for credit losses on receivables; and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s assessment of credit quality classifications, macro-economic and industry risk factors. 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 the allowance for credit losses on receivables, including controls related to management’s assessment of credit quality classifications, macro-economic and industry risk factors. these procedures also included, among others (i) testing management’s process for estimating the allowance for credit losses on receivables; (ii) evaluating the appropriateness of management’s method; (iii) testing the completeness and accuracy of underlying data used in the method; and (iv) evaluating the reasonableness of management’s assessment of credit quality classifications, macro-economic and industry risk factors. evaluating the reasonableness of management’s assessment of credit quality classifications, macro-economic and industry risk factors on a sample basis involved considering (i) recent payment patterns of customers; (ii) consistency with external market and industry data; (iii) inquiries with management regarding adjustments for forward-looking information on economic factors affecting the ability of customers to settle the receivables; (iv) recent correspondence with customers; (v) recent public filings by customers; and (vi) whether this assessment was consistent with evidence obtained in other areas of the audit. /s/ pricewaterhouse coopers llp chartered professional accountants, licensed public accountants toronto, canada march 4, 2021we have served as the company's auditor since 1987, | 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 software license revenue from arrangements with terms and conditions that are not standard as discussed in notes 2(p) and 4 to the consolidated financial statements, the company enters into arrangements containing software licenses. software license revenue typically relates to the company’s promise to provide the customer a right to use the company’s intellectual property and is typically part of an offering of multiple services. offerings that contain software license components often contain non-standard terms and conditions and vary with regards to the number and type of promises included and pricing. we identified the evaluation of software license revenue from arrangements with terms and conditions that are not standard as a critical audit matter. significant auditor judgment was required to evaluate the company's assessment of the impact on revenue recognition of certain terms and conditions that are unique to individual contracts. specifically, judgment was required to evaluate the company's identification of performance obligations and determination of the corresponding pattern of revenue recognition, particularly for new contracts or renewals with software license performance obligations.the primary procedures performed to address this critical audit matter included the following. we tested certain internal controls over the company's revenue recognition process, including controls over the company's assessment of contractual terms and conditions on software license revenue recognition. we tested certain arrangements containing software license components by reading the underlying contracts and evaluating the company's assessment of the contractual terms and conditions in accordance 54table of contentswith the revenue recognition requirements. specifically, this included an evaluation of the company's identification and assessment of terms and conditions that were not standard that could give rise to additional performance obligations or different patterns of revenue recognition. we obtained external confirmation directly from certain of the company's customers and compared the key terms and conditions relevant to the company's revenue recognition to the company's written customer agreement. additionally, we tested a sample of individual software license revenue, and obtained the underlying contract and accounting analysis to evaluate the identification of performance obligations and timing of software license revenue recognition.evaluation of the acquisition-date fair value of the customer relationship intangible assets and software assets acquired in the worldpay transaction as discussed in note 3 to the consolidated financial statements, on july 31, 2019, the company acquired worldpay in a business combination. as a result of the transaction, the company acquired customer relationship intangible assets associated with the generation of future income from worldpay's existing customers and software assets associated with worldpay's technology applications. the acquisition-date fair value for the customer relationship intangible assets and software assets was $13.7 billion and $1.3 billion, respectively. we identified the evaluation of the acquisition-date fair value of the customer relationship intangible assets and software assets acquired in the worldpay transaction as a critical audit matter. there was a high degree of subjectivity in evaluating the discounted cash flow model used to determine the acquisition-date fair value of the customer relationship intangible assets and software assets. the discounted cash flow model included the internally-developed assumptions for which there was limited observable market information, and the fair value of such assets could be sensitive to changes. the internally-developed assumptions for customer relationship intangible assets included 1) forecasted revenue attributable to existing customer contracts and relationships, 2) estimated annual attrition, 3) forecasted earnings before interest, taxes, depreciation and amortization (ebitda) margin, and 4) weighted-average cost of capital (wacc), including estimated discount rates. for software assets, the internally developed assumptions included 1) forecasted revenue attributable to software assets, including obsolescence rates, 2) estimated royalty rates, and 3) wacc, including estimated discount rates.the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company's acquisition-date valuation process, including controls over the development of the above assumptions. we compared the company's estimates of 1) forecasted revenue, including obsolescence rates on software assets, and forecasted ebitda margin to worldpay's historical actual results and to the company's peers and industry reports, 2) forecasted annual attrition to worldpay's historical customer attrition data and industry data and 3) royalty rates to third-party royalty rates of similar software licenses. we assessed the assumptions for comparison to those of a market participant, including consideration of recent similar market transactions. in addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:•evaluating the company's determined wacc by comparing relevant inputs to independent market data for the company's peers, •evaluating the company's discount rates, by comparing them against a discount rate range that was independently developed using publicly available market data for comparable entities, •evaluating the company's selected royalty rates, by comparing them against a royalty rate range that was independently developed using publicly available market data for comparable licensing activities, and•testing the company's model utilized to estimate the fair value of the customer relationship intangible assets and software assets using the company's cash flow forecasts and discount rates./s/ kpmg llp we have served as the company's auditor since 2004. | 4 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. acquisition of analog x inc. and plda group – valuation of existing technology and in-process research and development (ipr&d) intangible assets as described in notes 2 and 21 to the consolidated financial statements, on july 2, 2021, the company completed the acquisition of analog x inc. for total consideration of approximately $47.5 million, which resulted in recording $6.3 million of existing technology and $3.8 million of in-process research and development (ipr&d) intangible assets. the fair value of the existing technology and ipr&d acquired from the analog x inc. acquisition were estimated using the estimated current replacement cost method under the cost approach. management applied significant judgment in estimating the fair value of the existing technology and ipr&d intangible assets from the analog x inc. acquisition, which involved the use of significant assumptions related to cost of labor to recreate the intangible assets. on august 18, 2021, the company completed the acquisition of plda group for total consideration of approximately $85.6 million, which resulted in recording $20.4 million of existing technology and $7.4 million of ipr&d. the fair value of the existing technology and ipr&d intangible assets acquired from the plda acquisition were estimated using the multiple-period excess earnings method under the income approach. management applied significant judgment in estimating the fair value of the existing technology and ipr&d intangible assets from the plda group acquisition, which involved the use of significant assumptions related to revenue growth rates and discount rates.the principal considerations for our determination that performing procedures relating to the valuation of existing technology and ipr&d intangible assets acquired from the analog x inc. and plda group acquisitions is a critical audit matter are (i) the significant judgment by management in determining the fair value of the existing technology and ipr&d intangible assets, (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to cost of labor to recreate existing technology and ipr&d intangible assets from the analog x inc. acquisition, and revenue growth rates and discount rates related to the existing technology and ipr&d intangible assets from the plda group acquisition, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over management’s valuation of the existing technology and ipr&d intangible assets and controls over the development of significant assumptions related to cost of labor to recreate existing technology and ipr&d intangible assets from the analog x inc. acquisition, and revenue growth rates and discount rates related to the existing technology and ipr&d intangible assets from the plda group acquisition. these procedures also included, among others (i) reading the purchase agreements, (ii) testing management’s process for determining the fair value of the existing technology and ipr&d intangible assets from both acquisitions, (iii) evaluating the appropriateness of the estimated current replacement cost valuation methods and multi-period excess earnings valuation methods, (iv) testing the completeness and accuracy of the underlying data used in the valuation methods, and (v) evaluating the reasonableness of the significant assumptions used by management related to cost of labor to recreate the existing technology and ipr&d intangible assets from the analog x inc. acquisition, and revenue growth rates and discount rates related to the existing technology and ipr&d intangible assets from the plda group acquisition. evaluating management’s assumptions related to the cost to recreate the intangible assets involved considering the current and historical compensation paid to engineers to recreate the technology. evaluating the reasonableness of the revenue growth rates involved considering (i) the current and past performance of plda group, (ii) the consistency with external market and industry data, and (iii) whether these significant assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in evaluating the (i) the appropriateness of the estimated current replacement cost valuation methods and multi-period excess earnings valuation methods and (ii) the reasonableness of the discount rate significant assumptions.54table of contents revenue recognition – license and customization services revenue as described in note 2 to the consolidated financial statements, the company recognizes license and customization services revenue based on an over time model, measured using the input method. license and customization services revenue is reported as part of contract and other revenue, which was $7.5 million for the year ended december 31, 2021. due to the nature of the work performed in these arrangements, the estimation of the over time model is complex and involves significant judgment. the key factor reviewed by management to estimate costs to complete each contract is the estimated man-months necessary to complete the project. the principal considerations for our determination that performing procedures relating to revenue recognition for license and customization services revenue is a critical audit matter are (i) the significant judgment by management in determining the estimated man-months necessary for contract completion for each contract, and (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management’s estimate of man-months necessary to complete each project. 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 company’s license and customization services revenue recognition process, including controls over management’s determination of the estimate of man-months necessary to complete each contract. these procedures also included, among others, for a sample of contracts, testing management’s process for determining the estimate of man-months. evaluating the reasonableness of management’s assumption related to the estimate of man-months involved (i) performing a comparison of the estimated man-months to completed projects of similar size and (ii) evaluating the timely identification of circumstances which may warrant a modification to a previous cost estimate, including an assessment of total man-months./s/ pricewaterhouse coopers llp san jose, california february 28, 2022we have served as the company’s auditor since 1991. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.allowance for credit losses for certain commercial and consumer portfolios as described in notes 1 and 5 to the consolidated financial statements, the company’s allowance for credit losses (acl) represents management's best estimate of expected future credit losses related to loan and lease portfolios and off-balance sheet lending commitments at the balance sheet date. the consolidated acl balance was $6.2 billion as of december 31, 2020, including $2.9 billion for commercial portfolios and $2.6 billion for consumer portfolios. estimates of expected future credit losses are determined by management using quantitative models and by applying qualitative adjustments to the modeled results. the models are designed to forecast probability of default, exposure at default, and loss given default by correlating certain macroeconomic forecast data to historical experience. the models are applied to pools of loans with similar risk characteristics. the macroeconomic forecast data used in the quantitative models is based on forecasted variables for a reasonable and supportable period. the qualitative adjustments incorporate management judgment and are used to account for limitations in modeled results related to current economic conditions and other risks in the portfolios.the principal considerations for our determination that performing procedures relating to the acl for certain commercial and consumer portfolios is a critical audit matter are (i) the significant judgment by management in determining the acl quantitative model results and certain qualitative adjustments, (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating the audit evidence related to the quantitative model results and certain qualitative adjustments, 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 acl estimation process for certain commercial and consumer portfolios, which included controls related to the quantitative model results and certain qualitative adjustments. these procedures also included, among others, testing management’s process for determining the acl for certain commercial and consumer portfolios quantitative model results and certain qualitative adjustments, including evaluating the appropriateness of the quantitative models and management’s methodology, testing the data used in the estimate, and evaluating the reasonableness of judgments used by management in estimating certain qualitative adjustments. professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of these quantitative models and the reasonableness of judgments used by management relating to certain qualitative adjustments.86 truist financial corporation annual goodwill impairment assessment - cb&w and c&cb reporting units as described in notes 1 and 7 to the consolidated financial statements, the company’s consolidated goodwill balance was $24.4 billion as of december 31, 2020. the goodwill associated with the cb&w and c&cb reporting units was $15.8 billion and $6.2 billion as of december 31, 2020, respectively. management reviews the goodwill of each reporting unit for impairment on an annual basis as of october 1, or more often, if events or circumstances indicate that it is more-likely-than-not that the fair value of a reporting unit is below its carrying value. management determines the fair value of reporting units using the income approach and the market approach. for the income approach, management determines the fair value of the reporting units using a discounted cash flow analysis by utilizing a multi-year financial forecast for each reporting unit by considering several inputs and assumptions including net interest margin, expected credit losses, noninterest income, noninterest expense and required capital.the principal considerations for our determination that performing procedures relating to the annual goodwill impairment assessment for the cb&w and c&cb reporting units is a critical audit matter are (i) the significant judgment by management when determining the fair value of these reporting units using the income approach, (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating the audit evidence related to management’s discount rates and net interest margin assumptions used in the income approach, 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 annual goodwill impairment assessment, including controls over the valuation of the cb&w and c&cb reporting units. these procedures also included, among others, testing management’s process for determining the fair value of the cb&w and c&cb reporting units, evaluating the appropriateness of management’s income approach, testing the data used in the income approach, and evaluating the discount rates and net interest margin assumptions used by management in the income approach. evaluating management’s assumptions related to the discount rates and net interest margin involved evaluating whether the assumptions were reasonable considering the current and past performance of the reporting units and consistency with external market and industry data. professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the income approach and the discount rate assumption./s/ pricewaterhouse coopers llp charlotte, north carolina february 24, 2021we have served as the company's auditor since 2002. | 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 especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. allowance for loan and lease losses as discussed in notes 5 and 6 to the company’s consolidated financial statements, the company has a gross loan and lease portfolio of $4.5 billion and related allowance for loan and lease losses of $20.8 million as of december 31, 2019. the company’s allowance for loan and lease losses is a material and complex estimate requiring significant management’s judgment in the evaluation of the credit quality and the estimation of inherent losses within the loan and lease portfolio. the allowance for loan and lease losses includes a general reserve which is determined based on the results of a quantitative and a qualitative analysis of all loans not measured for impairment at the reporting date. the company’s general reserves cover non-impaired loans and leases and is based on historical loss rates for each portfolio. in calculating the allowance for loan and lease losses, the company considers relevant credit quality indicators for each loan and lease segment, stratifies loans and leases by risk rating, and estimates losses for each loan and lease type based upon their nature and risk profile. this process requires significant management judgment in the review of the loan and lease portfolio and assignment of risk ratings based upon the characteristics of loans and leases. in addition, estimation of losses inherent within the portfolio requires significant management judgment, particularly where the company has not incurred sufficient historical losses and has utilized industry data in forming its estimate. 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, including the extent of specialized skill or knowledge needed. the primary procedures we performed to address this critical audit matter included:60 •testing the design and operating effectiveness of controls relating to management’s timely identification of problem loans, appropriate application of loan rating policy, consistency of application of accounting policies and appropriateness of assumptions used in the allowance for loan and lease losses calculation. •evaluating the reasonableness of assumptions and sources of data used by management in forming the loss factors by performing retrospective review of historic loan and lease loss experience and analyzing historical data used in developing the assumptions. •evaluating the appropriateness of inputs and factors that the company used in forming the qualitative loss factors and assessing whether such inputs and factors were relevant, reliable, and reasonable for the purpose used. •testing the mathematical accuracy and computation of the allowance for loan and lease losses. •evaluated the period to period consistency with which qualitative loss factors are determined and applied. we have served as the company's auditor since 2019. | 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 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.33 accounting for the acquisition of storage facilities description of the matter as described in note 4 to the consolidated financial statements, during the year ended december 31, 2021, the parent company acquired 112 storage facilities for an aggregate purchase price of $1.7 billion. the transactions were accounted for as asset acquisitions and the purchase price was allocated to the assets acquired based on their relative fair value. auditing the parent company’s accounting for its storage facility acquisitions in 2021 involved a high degree of subjectivity due to the significant estimation required to determine the fair values of the acquired land and buildings. in particular, the fair value estimates were sensitive to assumptions such as prices per acre and current replacement cost estimates, including adjustments for the age, condition, turnkey factor, economic profit, and economic obsolescence associated with the acquired facilities.how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the parent company’s storage facility acquisition process. this included testing controls over management’s evaluation of the significant assumptions used to determine the fair values of the assets acquired. for the 2021 acquisitions of storage facilities described above, our audit procedures included, among others, evaluating the parent company’s valuation methodologies and testing the significant assumptions used to determine the fair value of the assets acquired. we tested the completeness and accuracy of the underlying data by, among other things, recalculating the current replacement cost of buildings and comparing the adjustments for the age, condition, turnkey factor, economic profit, and economic obsolescence associated with the acquired assets to industry publications on a test basis. we also compared significant assumptions, including prices per acre, to third-party sources such as recent land sales. for certain of these asset acquisitions, we involved our valuation specialists to assist in the assessment of the methodology utilized by the parent company, in addition to performing corroborative analyses to assess whether the conclusions in the valuation were supported by observable market data. for example, our valuation specialists used independently identified data sources to evaluate management's selected comparable land sales, replacement cost assumptions and the fair value of individual storage facilities acquired in portfolio acquisitions. /s/ ernst & young llp we have served as the parent company’s auditor since 1994. | 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.asbestos matters - refer to note 20 in the notes to the consolidated financial statements on june 30, 2021, itt inc. entered into a purchase agreement with a buyer that resulted in transferring 100% of the equity interests of in tel co, a subsidiary of itt inc., along with a cash contribution of $398 million. as in tel co was the obligor for the company's asbestos-related liabilities of $797 million and policyholder of the related insurance assets of $401.4 million, the rights and obligations related to these items transferred upon the sale. following the completion of the transfer, the company no longer has any obligation with respect to pending and future asbestos claims. as such, in tel co has been deconsolidated from the 2021 financial results, as the company no longer maintains control of the entity. therefore, all associated assets and liabilities are no longer reported on the consolidated balance sheet. the transaction resulted in a pre-tax gain of $88.8 million. auditing the company’s evaluation to deconsolidate in tel co required a high degree of auditor effort given the complexity of the accounting guidance, the purchase agreement, and the other related agreements. subsequent to the transaction, itt evaluated whether in tel co met the definition of a variable interest entity resulting from a controlling financial interest or the ability to control the subsidiary’s assets and liabilities, and if so would continue to 49be consolidated with the company. we identified the company’s evaluation to deconsolidate in tel co as a critical audit matter.our audit procedures to test the company’s evaluation to deconsolidate in tel co included the following, among others:•tested the operating effectiveness of controls over the company’s accounting evaluation to deconsolidate.▪read the purchase agreement and related agreements to evaluate the company’s ability to have power or control over in tel co’s assets and liabilities, if the company would be required to absorb any future losses, and if the company would be the primary beneficiary to in tel co upon the close of the transaction.▪read the third-party valuation regarding the solvency of the in tel co entity and the sufficiency of its equity to fund its activities without additional financial support from the company.▪evaluated the governance and management structure of in tel co to determine if any characteristics of a controlling financial interest continued to exist through voting rights, board seats, or continuing involvement in the management of asbestos and other product liability exposures./s/deloitte & touche llp stamford, connecticut february 16, 2022we have served as the company's auditor since 2002. | 2 |
critical audit matters the critical audit matters communicated beloware matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicatedto the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and(2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alterin any way our opinion on the consolidated 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-2 basis of presentation and going concern –disclosure the consolidated financial statements of the company are prepared on a going concern basis, which assumes that the company will continue in operation for the foreseeable future and,accordingly, will be able to realize its assets and discharge its liabilities in the normal course of operations. the company has a historyof recurring net losses, a significant accumulated deficit and currently has net working capital deficit. at december 31, 2020, the companyhad an accumulated deficit of $3,356,283. the company has contractual obligations such as commitments for purchases of equipment, payable,interest and short-term loan (collectively “obligations”). currently management’s forecasts and related assumptionsillustrate their ability to meet the obligations through management of expenditures and, if necessary, obtaining additional debt financing,loans from existing directors and shareholders and private placements of capital stock for additional funding to meet its operating needs.should there be constraints on the ability to access such financing, the company can manage cash outflows to meet the obligations throughreductions in capital expenditures and other operating expenditures. we identified management’s assessment ofthe company’s ability to continue as a going concern as a critical audit matter. management made judgments to conclude that itis probable that the company’s plans will be effectively implemented and will provide the necessary cash flows to fund the company’sobligations as they become due. specifically, the judgments with the highest degree of impact and subjectivity in determining it is probablethat the company’s plans will be effectively implemented included its ability to reduce capital expenditures and other operatingexpenditures, its ability to access funding from the capital market and its ability to obtaining loans from existing directors and shareholders.auditing the judgments made by management required a high degree of auditor judgment and an increased extent of audit effort. addressing the matter involved performing proceduresand evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these proceduresincluded the following, among others: (i) evaluating the probability that the company will be able to access funding from the capitalmarket; (ii) evaluating the probability that the company will be able to reduce capital expenditures and other operating expendituresif required and (iii) evaluating the probability that the company will be able to obtain loans from existing directors and shareholders. /s/ centurion zd cpa & co. centurion zd cpa & co. we have served as the company's auditor since 2017. | 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.goodwill and indefinite-lived intangible asset impairment assessments for reporting units and tradenames of certain product groups as described in notes 1, 5, and 6 to the consolidated financial statements, the company’s consolidated goodwill and indefinite-lived intangible asset balances were $579 million and $2,697 million, respectively, as of march 31, 2022. goodwill is classified as the excess of the purchase price over the fair market value of assets acquired and liabilities assumed in business combinations. intangible assets generally represent tradenames, brand names and patents. goodwill and indefinite-lived intangible assets are tested for impairment at least annually in the fourth fiscal quarter of each year, or more frequently if events or changes in circumstances indicate that the asset may be impaired. goodwill is tested for impairment at the reporting unit level, which is one level below the operating segment level, and indefinite-lived intangible assets are tested at the individual asset level. an impairment loss is recognized if the carrying amount of the reporting unit or asset exceeds its fair value. management utilized the discounted cash flow method to estimate the fair value of its reporting units and the excess earnings method to estimate the fair value of individual indefinite-lived intangible assets. assumptions subject to significant uncertainties in developing the fair value measurement of the reporting units and indefinite-lived intangible assets include future sales, gross margins, advertising and marketing expenses, and the discount rates.the principal considerations for our determination that performing procedures relating to goodwill and indefinite-lived intangible asset impairment assessments for reporting units and tradenames of certain product groups is a critical audit matter are (i) the significant judgment by management when developing the fair value measurements, (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to future sales, gross margins, advertising and marketing expenses, and the 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 management’s impairment assessments of goodwill and indefinite-lived intangible assets, including controls over the valuation of the company’s reporting units and individual indefinite-lived intangible assets. these procedures also included, among others, (i) testing management’s process for developing the fair value measurements of the reporting units and tradenames for certain product groups, (ii) evaluating the appropriateness of methods used in developing the fair value measurements, (iii) testing the completeness and accuracy of underlying data used, and (iv) evaluating the reasonableness of significant assumptions used by management related to future sales, gross margins, advertising and marketing expenses, and the discount rates. evaluating management’s assumptions related to future sales, gross margins, and advertising and marketing expenses involved evaluating whether the assumptions used by management were reasonable considering (i) current and historical performance, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of the company’s fair value methods and the discount rates./s/ pricewaterhouse coopers llp stamford, connecticut may 6, 2022we have served as the company’s auditor since at least 1999. | 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. inventories – refer to notes 1 and 2 to the financial statements critical audit matter description the company’s inventory includes costs to acquire and produce the goods and is stated at the lower of cost or net realizable value on a first-in, first-out method (fifo). the assessment of estimated obsolescence or unmarketable inventory involved judgment and is based upon assumptions about future sales and supply on-hand for certain inventory items. total inventory of approximately $48 million is in part composed of products which were deemed to be slow moving based on historical inventory turns and sales history. an excess and obsolete adjustment of approximately $3 million was recorded by the company. 32table of contents given the significant judgments made by management to evaluate the net realizable value of certain of its inventory products, performing audit procedures to evaluate the reasonableness of management’s assumptions related to those inventory adjustments 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 valuation of slow moving, excess and obsolete inventory included, among others: ·we tested the effectiveness of controls over management’s process to evaluate the need for adjustments for its slow-moving, obsolete or unusable inventory. ·we tested the mathematical accuracy of management’s estimates of the net realizable value for slow-moving, obsolete or unusable inventory. ·we evaluated management’s judgments as to the historical lookback period utilized in determining slow-moving, obsolete or unusable inventory. ·we evaluated the valuation of slow moving, excess and obsolete inventory in relation to: ○ historical results and actions ○ communications between management and the board of directors ○industry information related to the market for these products ○subsequent events /s/ deloitte & touche llp memphis, tennessee april 21, 2022 we have served as the company’s auditor since 2020. | 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.uncertain tax positions description of the matter as discussed in note 12 to the consolidated financial statements, the company’s operations are in certain taxing jurisdictions where uncertainties arise in the application of complex income tax regulations. the company has disclosed uncertain tax positions related to income tax assessments in indonesia and peru totaling $1.7 billion, including penalties and interest, which have not been recorded at december 31, 2020. the company recognizes a liability for income tax assessments when it is more likely than not that it will not sustain the benefit taken or expected to be taken in the tax return. 108table of contents because of the complexity of tax laws, regulations and contractual agreements with the applicable government, auditing the recognition and measurement of uncertain tax positions requires a high degree of auditor judgment and increased extent of effort, including the involvement of our tax professionals.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 process for uncertain tax positions. this included testing controls over management’s review of the technical merits of tax positions and disputed tax assessments, including the process to measure the financial statement impact of these tax matters.our audit procedures included, among others, evaluating the company’s accounting for these tax positions by using our knowledge of and experience with the application of respective tax laws by the relevant tax authorities, or our understanding of the contractual arrangements with the applicable government, if the position is governed by a contract. we analyzed the company’s assumptions and data used to determine the tax assessments and tested the accuracy of the calculations. we involved our tax professionals located in the respective jurisdictions to assess the technical merits of the company’s tax positions and to evaluate the application of relevant tax laws in the company’s recognition determination. we assessed the company’s correspondence with the relevant tax authorities and evaluated third-party tax or legal opinions obtained by the company. we also evaluated the adequacy of the company’s disclosures included in note 12 in relation to these tax matters.environmental obligations description of the matter as discussed in note 12 to the consolidated financial statements, the company is subject to national, state and local environmental laws and regulations governing the protection of the environment, including restoration and reclamation of environmental contamination. liabilities for environmental contingencies are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. at december 31, 2020, the company’s consolidated environmental obligations totaled $1.6 billion.auditing management’s accounting for environmental obligations was challenging, as significant judgment is required by the company to evaluate whether an environmental loss has been incurred and to estimate the future costs to remediate the environmental matters. the significant judgment was primarily due to the inherent estimation uncertainty relating to the amount of future costs. such uncertainties involve assumptions regarding the nature and extent of contamination at each site, the nature and extent of required cleanup efforts under existing environmental regulations, the duration and effectiveness of the chosen remedial strategy, and allocation of costs among other potentially responsible parties. actual costs incurred in future periods could differ from amounts estimated.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 identification and measurement of the environmental loss contingencies. for example, we tested controls over management’s review of the environmental loss contingency calculations and management’s assessment to evaluate key judgments and estimates affecting the environmental loss contingencies.to test the company’s identification and measurement of the environmental loss contingencies, among other procedures, we inspected correspondence with regulatory agencies, obtained external legal counsel confirmation letters, and inspected environmental studies. additionally, we assessed the appropriateness of the company’s models and tested the significant assumptions discussed above along with the underlying data used by the company in its analyses. we utilized our environmental specialists to search for new or contrary evidence related to the company’s sites and to assist in evaluating the reasonableness of estimated future costs by comparing the estimated future costs to environmental permits, third party observable data such as vendor quotes, and to historical costs incurred for similar activities./s/ ernst & young llp we have served as the company’s auditor since 2002. | 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.103hsbc usa inc.allowance for credit losses for commercial loans and the liability for off-balance sheet credit exposures as described in notes 2 and 8 to the consolidated financial statements, the company’s allowance for credit losses for commercial loans and the liability for off-balance sheet credit exposures is recognized based on lifetime expected credit losses and amounted to $420 million and $103 million, respectively, as of december 31, 2021. the recognition and measurement of lifetime expected credit losses for commercial loans and off-balance sheet exposures is highly complex and involves the use of significant judgment and estimation by management, including the assignment of credit ratings, the application of forward economic guidance and the determination of a management judgment allowance. in assigning the credit ratings to a particular obligor, among the risk factors considered by management are the obligor’s debt capacity and financial position, the level of earnings, the amount and sources of repayment, the level of contingencies, management strength and the industry or geography in which the obligor operates. in addition, multiple forward-looking economic scenarios are formulated and assigned a weighting in the application of forward economic guidance to reflect assumptions about future economic conditions, supplemented by the use of management judgment, which may result in using alternative or additional economic scenarios and/or management adjustments. lastly, the management judgment allowance reflects management's judgment of risk factors that may not be fully reflected in the lifetime expected credit loss generated by management's models.the principal considerations for our determination that performing procedures relating to the allowance for credit losses for commercial loans and the liability for off-balance sheet credit exposures is a critical audit matter are (i) the significant judgment by management in estimating lifetime expected credit losses, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the credit ratings for obligors, application of forward economic guidance and management judgment allowance, and (ii) 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 company’s process for estimating the allowance for credit losses for commercial loans and the liability for off-balance sheet credit exposures, including controls over the credit ratings, application of forward economic guidance and management judgment allowance. these procedures also included, among others, testing management’s process for estimating lifetime expected credit losses on commercial loans and off-balance sheet exposures, which included (i) evaluating the appropriateness of management's methodology; (ii) testing certain data utilized in the estimate; and (iii) evaluating the reasonableness of the credit ratings for obligors, application of forward economic guidance and management judgment allowance, which also involved the use of professionals with specialized skill and knowledge to assist in performing these procedures to test management's process./s/ pricewaterhouse coopers llp new york, new york february 22, 2022 we have served as the company's auditor since 2015. | 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. depletion expense, impairment evaluation and acquisition valuation of oil and gas properties as described in note 2 to the financial statements, the partnership accounts for its oil and gas properties using the full cost method of accounting which requires management to make estimates of proved reserve volumes and future revenues to record depletion expense and measure its oil and gas properties for potential impairment. additionally, as described in note 3 to the financial statements, the partnership acquired significant mineral and/or royalty interests throughout the year. to estimate the volume of proved reserves and future revenues, management makes significant estimates and assumptions including forecasting the production decline rate of producing properties, forecasting the timing and volume of production associated with the company’s development plan for proved undeveloped properties, and for acquisitions that included proved developed producing properties using an estimated fair value pricing model for the valuation of proved producing reserves. in addition, the estimation of proved reserves is also impacted by management’s judgments and estimates regarding the financial performance of wells associated with proved reserves to determine if wells are expected, with reasonable certainty, to be economical under the appropriate pricing assumptions required in the estimation of depletion expense and potential impairment measurements. the impairment evaluation f-1table of contentsfor the full cost method of accounting is the ceiling test, dependent upon the estimates of proved reserve volumes and future revenues, which we have identified as a critical audit matter.the principal consideration for our determination that the estimation of proved reserves is a critical audit matter is that relatively minor changes in certain inputs and assumptions, which require a high degree of subjectivity, necessary to estimate the volume and future revenues of the partnership’s proved reserves could have a significant impact on the measurement of depletion expense or impairment expense. in turn, auditing those inputs and assumptions required subjective and complex auditor judgment. our audit procedures related to the estimation of proved reserves included the following, among others. •we tested the design and operating effectiveness of key controls relating to the preparation of the ceiling test calculation, management’s estimation of proved reserves for the purpose of estimating depletion expense and assessing the partnership’s oil and gas properties for potential impairment, and management’s estimation of the fair value of acquired mineral and/or royalty interests. specifically, these controls related to the use of historical information in the estimation of proved reserves derived from the partnership’s accounting records and the management review controls on information provided to the reservoir engineering specialists and the management review controls on the final proved reserve report prepared by the partnership’s specialists.•we evaluated the level of knowledge, skill, and ability of the partnership’s reservoir engineering specialists and their relationship to the partnership, made inquiries of those reservoir engineers regarding the process followed and judgments made to estimate the partnership’s proved reserve volumes, and read the reserve report prepared by the partnership’s specialists.•for acquisitions of mineral interests during the year in which proved developed producing properties are significant and to the extent key, sensitive inputs and assumptions used to determine proved reserve volumes and other cash flow inputs and assumptions are derived from the partnership’s accounting records, such as historical pricing differentials and ownership interests, we tested management’s process for determining the assumptions, including examining the underlying support. specifically, our audit procedures involved testing management’s assumptions as follows:◦analyzed the appropriateness of fair value pricing used in the acquisition reserve report to published product pricing on the acquisition closing date; ◦evaluated the net revenue interests used in the acquisition reserve report by inspecting a sample of land and division order records;◦analyzed, on a sample basis, the appropriateness of management’s estimated future production volumes and the production decline curves; and◦utilized valuation specialists to compare the acreage value allocated, on a per acre basis, to other recent acquisitions in the same or similar locations.•to the extent key, sensitive inputs and assumptions used to determine proved reserve volumes and other cash flow inputs and assumptions are derived from the partnership’s accounting records, such as historical pricing differentials and ownership interests, we tested management’s process for determining the assumptions, including examining the underlying support, on a sample basis. specifically, our audit procedures involved testing management’s assumptions as follows:◦compared the estimated pricing differentials used in the reserve report to realized prices related to revenue transactions recorded in the current year and examined contractual support for the pricing differentials; ◦evaluated the net revenue interests used in the reserve report by inspecting a sample of land and division order records; ◦evaluated the partnership’s evidence supporting the amount of proved undeveloped properties reflected in the reserve report by examining historical conversion rates and support for the operator’s intent to develop the proved undeveloped properties; f-2table of contents◦evaluated the estimated ultimate recovery of proved undeveloped properties to the estimated ultimate recovery of comparable proved developed producing properties; and◦applied analytical procedures to the reserve report by comparing to historical actual results and to the prior year reserve report./s/ grant thornton llp we have served as the partnership’s auditor since 2013. | 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.revenue recognition - cost and revenue estimates for development contracts - refer to note 1 to the financial statements critical audit matter description as more fully described in note 1 to the financial statements, the company recognizes substantially all revenue as control is transferred to the customer on their long-term contracts over time using the cost-to-cost method (cost incurred relative to total cost estimated at completion). use of the cost-to-cost-method requires the company to make reasonably dependable estimates regarding the revenue and costs associated with the design, manufacture and -45-northrop grumman corporation delivery of their products or services. the company estimates profit on these contracts as the difference between total estimated sales and total estimated costs at completion and recognizes that profit as costs are incurred. cost estimates on contracts requiring development work are inherently more uncertain as to future events than production contracts, and, as a result, there is typically more variability in those estimates. certain of these contracts are fixed price in nature, which results in greater financial risk associated with unanticipated cost growth. alternatively, cost-type contracts may have award or incentive fees that are subject to uncertainty and may be earned over extended periods or towards the end of the contract. as a result, the estimation of costs required to complete these contracts and the expected revenues that will be earned is complex and requires significant judgment. given the judgment necessary to make reasonably dependable estimates regarding the revenue and costs associated with such contracts, auditing these estimates required extensive audit effort due to the complexity of the underlying programs and a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures. how the critical audit matter was addressed in the audit our auditing procedures related to the cost and revenue estimates for these development contracts included the following, among others: •we tested the effectiveness of controls over the estimates of total costs and revenues on such contracts, including development costs and any related award or incentive fee estimates for the relevant performance obligations.•we selected certain long-term contracts for testing and performed the following procedures:–evaluated whether the recognition of revenue over time on such contracts was appropriate based on the terms and conditions of each contract, including whether continuous transfer of control to the customer occurred as progress was made toward fulfilling the performance obligation.–tested management’s identification of distinct performance obligations by evaluating whether the underlying goods and services were highly interdependent and interrelated.–tested management’s determination of the transaction price, including any award or incentive fees, based on the consideration expected to be received in accordance with the rights and obligations established under the contracts and any contractual modifications. –evaluated the estimates of total cost and revenue for the performance obligation by:▪conducting inquiries at the relevant program locations, or virtually, (as a result of the covid-19 pandemic and remote working environment) regarding any challenges related to the program. ▪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 revenue by performing corroborating inquiries with the company’s program and business management, and testing management’s process used to develop the estimates based on their work plans, engineering specifications, program labor, and supplier contracts. this includes management’s process to identify covid-19 impacts to programs, which could include forecasted cost impacts and assumptions on the ability to recover those costs.▪comparing management’s estimates for the selected contracts to costs and revenues of similar performance obligations, when applicable. –tested the mathematical accuracy of management’s calculation of revenue recognized during the period for the performance obligations. income taxes - uncertain tax positions - refer to notes 1 and 7 to the financial statements critical audit matter description the company files income tax returns in the u.s. federal jurisdiction and in various state and foreign jurisdictions. uncertain tax positions reflect the company’s expected treatment of tax positions taken in a filed tax return, or planned to be taken in a future tax return or claim, which have not been reflected in measuring income tax expense or taxes payable for financial reporting purposes. until these positions are sustained by the taxing authorities or the statute of limitations concerning such issues lapses, the company does not generally recognize the tax benefits -46-northrop grumman corporation resulting from such positions and reports the tax effects as a liability for uncertain tax positions in its consolidated statements of financial position. the company has recognized increased uncertain tax positions in recent years principally related to state apportionment, the methods of accounting associated with the timing of revenue recognition and related costs, and the 2017 tax act. until the matters are resolved, the outcome is inherently uncertain and the company discloses a summary of changes in their uncertain tax positions within the notes to their financial statements. auditing the assumptions associated with the company’s uncertain tax positions involves especially challenging judgments given the complexity and inherent subjectivity involved in evaluating the potential outcomes of these matters.how the critical audit matter was addressed in the audit our audit procedures related to the assumptions used in determining uncertain tax positions included the following, among others:•we tested the effectiveness of internal controls relating to the identification and completeness of, and recognition for, uncertain tax positions, including management’s controls over the underlying key assumptions and inputs used to derive the estimates.•with the assistance of our income tax specialists, we selected specific uncertain tax positions for testing and performed the following procedures:–inquired both in-person and virtually (as a result of the covid-19 pandemic and the remote working environment) of the company’s tax department, financial reporting department, and other personnel directly involved in the development of the estimates. –obtained supporting documentation and evaluated how the company supported the position, including the assumptions and estimates used for measurement, and how the taxing authorities have historically challenged the tax position, if applicable.–obtained and read opinions provided by external counsel, as applicable, regarding the tax position taken by the company.–evaluated whether the uncertain tax position met the “more likely than not” recognition threshold.–evaluated the appropriateness and consistency of the methodologies and assumptions used by management when developing these estimates.•we tested the mathematical accuracy of management’s calculations. /s/deloitte & touche llp mclean, virginia january 27, 2021we have served as the company’s auditor since 1975. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.as described in notes 2 and 4 to the company's consolidated financial statements, on february 19, 2020, the company completed the acquisition of alucal pursuant to the terms of the termination and settlement agreement entered on that date with the former shareholders of such entity. the transaction was accounted for as a business combination. as a result of the acquisition, the company obtained the effective control of alucal, which until the transaction date was accounted for under the equity method. the purchase price was allocated based on the fair values of the assets acquired, which principally consisted of land, buildings and machinery and equipment, and the liabilities assumed, including a gain on a bargain purchase of $192 million.auditing the company's accounting for its acquisition of alucal was complex due to the significant estimation required by management to determine the fair value of the previously held interest in alucal and of the assets acquired. determining the fair value of the previously held interest in alucal required judgment to assess the fair value methodology utilized and the related significant assumptions, such as future cash flows and the weighted average cost of capital. there was also significant judgment involved in determining the fair value of the assets acquired applying the cost approach by estimating the amount that would be required currently to substitute an asset of comparable utility and use condition. the estimate takes into account the condition of the asset and the environment in which it operates, including physical deterioration, functional and economic obsolescence, as well as installation costs.the primary 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 professionals with specialized 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 described above, and (iii) performing sensitivity analyses of certain significant assumptions used to determine fair values.•testing the completeness and accuracy of the underlying data.castillo miranda y compañía, s.c. /s/ jose luis villalobos zuazua jose luis villalobos zuazua we have served as the company’s auditor since 2018. | 1 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial 90table of contentsstatements, 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.clinical trial accruals as described in notes 2 and 7 to the consolidated financial statements, the company recorded $4.0 million in clinical trial accruals as of december 31, 2021. management applies significant judgment in developing estimates for clinical trial accruals based on assumptions related to the vendors’ progress towards completion. management estimates the vendors’ progress towards completion using data such as clinical site activations, patient enrollment or information provided to the company by its vendors regarding actual costs incurred. management determines accrual estimates through reports from and discussions with applicable personnel and outside service providers as to the progress or stage of completion, or the services completed. the principal considerations for our determination that performing procedures relating to clinical trial accruals is a critical audit matter are (i) the significant judgment by management in estimating the clinical trial accruals and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumption related to the vendors’ progress towards completion of clinical trials.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included, among others (i) testing management’s process for estimating the clinical trial accruals; (ii) evaluating the appropriateness of the method used by management to develop the estimate; (iii) testing the completeness and accuracy of data used to develop the estimate; and (iv) evaluating the reasonableness of the significant assumption related to the vendors’ progress towards completion of clinical trials. evaluating management’s assumption related to the vendors’ progress towards completion of clinical trials involved (i) confirming patient visits on a test basis; (ii) obtaining and examining contract terms on a test basis to evaluate the completeness and consistency of the costs in the contract with the costs used in developing the estimate; and (iii) considering whether this assumption was consistent with evidence obtained in other areas of the audit./s/ pricewaterhouse coopers llp san jose, california march 10, 2022we have served as the company’s auditor since 2015 | 4 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.consumer finance receivables allowance for credit losses as described in note 4 to the consolidated financial statements, the company had consumer finance receivables of $73,545 million, for which a consumer allowance for credit losses of $903 million was recorded as of december 31, 2021. the consumer allowance for credit losses represents management’s estimate of the lifetime expected credit losses inherent in the consumer finance receivables as of the balance sheet date. for consumer receivables that share similar risk characteristics, management estimates the lifetime expected credit losses based on a collective assessment using measurement models and management judgment. the lifetime expected credit losses for the receivables is determined by applying probability of default and loss given default assumptions to monthly expected exposures, then discounting these cash flows to present value using the receivable’s original effective interest rate or the current effective interest rate for a variable rate receivable. if management does not believe the models reflect lifetime expected credit losses for the portfolio, an adjustment is made to reflect management judgment regarding qualitative factors including economic uncertainty, observable changes in portfolio performance, and other relevant factors.the principal considerations for our determination that performing procedures relating to the consumer finance receivables allowance for credit losses is a critical audit matter are (i) the significant judgment by management in determining the consumer finance receivables allowance for credit losses; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the probability of default and loss given default assumptions and management’s judgment regarding qualitative factors; 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 company’s determination of the consumer finance receivables allowance for credit losses. these procedures also included, among others (i) testing management’s process for determining the consumer finance receivables allowance for credit losses; (ii) evaluating the appropriateness of the models used to determine the allowance; (iii) evaluating the reasonableness of the probability of default and loss given default assumptions; (iv) testing the data used in the models; and (v) evaluating the reasonableness of management’s judgment regarding qualitative factors related to economic uncertainty, observable changes in portfolio performance, and other relevant factors. professionals with specialized skill and knowledge were used to assist in performing the procedures described in (i) through (v). /s/ pricewaterhouse coopers llp detroit, michigan february 3, 2022we have served as the company’s auditor since 1959. | 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 the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. allowance for loan losses as described in notes 1 and 6 to the financial statements, the company’s allowance for loan losses is a valuation account that reflects the company’s estimate of incurred losses in its loan portfolio to the extent they are both probable and reasonable to estimate. the allowance for loan losses was $10.7 million at december 31, 2020, which consists of two components (i) specific reserves based on probable losses on specific loans (specific reserves), representing $0.2 million, 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), representing $10.5 million. the general component of the allowance for loan losses 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, risk ratings, collateral values, known information about individual loans and other factors. qualitative factors include various considerations regarding the general economic environment in the company’s market area and national economic factors. the qualitative adjustment for the general reserve includes management’s consideration of industry concentrations; specific credit risks; credit loss experience; current loan portfolio quality; present economic, political and regulatory conditions; and unidentified losses inherent in the current loan portfolio. 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 adjustment 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, including: o 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. o assessing the accuracy of management’s risk ratings for commercial real estate and commercial business loans. our evaluation considered evidence from management’s credit presentations and annual reviews, including review of borrower financial information, collateral values, payment history, and other credit specific information. 58 o 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. o 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. o analytically evaluating the qualitative adjustment in the current year compared to prior year for directional consistency and reasonableness. o testing the calculations used by management to translate the assumptions and key factors into the calculation. clifton larson allen llp we have served as the company’s auditor since 2014. | 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) 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 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 separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. classification of series g warrants as described in note 8 and 11 to the company’s consolidated financial statement, between march and december 2020, the company issued 6,400,000 series g warrants. the warrants were issued to the lender in conjunction with amendments made to the credit agreement and are classified within stockholders’ equity. we identified the assessment of the classification of the warrants as equity or liability as a critical audit matter due to the complexity in assessing warrant features, and the impact of those features on the accounting of the series g warrants as equity or liability. auditing the classification of these warrants required challenging and complex auditor judgment to 47table of contentsanalyze the warrant features and increased audit effort involving the use of professionals with specialized skill and knowledge to assist in evaluating warrant features. the primary procedures we performed to address this critical audit matter included: ●utilizing personnel with specialized skill and knowledge to assist in assessing management’s analysis over the classification of the warrants issued by i) evaluating the underlying terms of the agreements that affect the recognition in the consolidated financial statements and ii) assessing the appropriateness of conclusions reached by management. /s/ bdo usa, llp we have served as the company's auditor since 2019c | 5 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.evaluation of events or changes in circumstances that indicate rental properties may be impaired as discussed in note 2 to the consolidated financial statements, the company had $10.3 billion in rental properties as of december 31, 2019. the company evaluates the carrying amount of rental properties for impairment whenever events or changes in circumstances indicate that the carrying amount of a rental property may not be fully recoverable. f- 1table of contents we identified the evaluation of events or changes in circumstances that indicate rental properties may be impaired as a critical audit matter. specifically, a high degree of subjective and complex auditor judgment was required to evaluate the intent regarding the expected period the company will receive cash flows from the rental property. changes to shorten the expected period the company will receive cash flows from the rental property could indicate a potential impairment.the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s process to evaluate events or changes in circumstances that would indicate rental properties may be impaired including controls over the process for determining the expected period the company will receive cash flows from the rental property. we evaluated the company’s assessment by 1) inquiring with the company about events or changes in circumstances considered by the company, 2) considering the current economic environment, and 3) reading board of director’s minutes and external communications with investors and analysts. in addition, we visited and inspected certain rental property sites to observe the property conditions and inquired of property management personnel regarding events or changes in circumstances that indicate the rental properties may be impaired. evaluation of the value allocated to land and buildings in certain asset acquisitions as discussed in notes 2 and 3 to the consolidated financial statements, the company acquired $373.3 million of real estate properties recorded as asset acquisitions for the year ended december 31, 2019. in asset acquisitions, the company determines the value allocated to land and buildings using their relative estimated fair values. we identified the evaluation of the value allocated to land and buildings in certain asset acquisitions as a critical audit matter. there was a high degree of subjective and complex auditor judgment in evaluating the fair value amounts used in the allocation of the purchase price to land and building. specifically, the relevance and reliability of market information including comparable land sales identified and replacement costs used to determine the building value.the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s land and building value estimation process in asset acquisitions including controls over the identification of publicly available and comparable land sales and key inputs used to estimate the replacement cost of the building. for certain asset acquisitions, with the assistance of valuation professionals with specialized skills and knowledge, we 1) compared the company’s determination of the fair value of land to independently developed ranges of estimates based on publicly available land sales, and 2) compared the key inputs in the company’s replacement building cost value to ranges of estimates of market data such as industry guides used for developing replacement building values. /s/ kpmg llp we have served as the company’s auditor since 1994. | 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 board of directors 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 expected credit losses on retail loans as discussed in note 1 to the consolidated financial statements, the company adopted asu 2016-13, financial instruments – credit losses (asc topic 326), as of april 1, 2020. the total allowance for credit losses as of april 1, 2020 was $471 million, of which $462 million related to the allowance for credit losses on retail loans evaluated on a collective basis (the april 1, 2020 collective acl). as discussed in note 2 to the consolidated financial statements, the company’s total allowance for credit losses as of march 31, 2021 was $288 million, of which $280 million related to the allowance for credit losses on retail loans evaluated on a collective basis (the march 31, 2021 collective acl). the april 1, 2020 collective acl and march 31, 2021 collective acl are measured by grouping retail receivables into pools with similar risk characteristics such as origination quarter, internal credit grade at origination, product type, and original term. in addition, the collective acl is measured using econometric regression models that correlate vintage age, credit f-2quality, economic, and other variables to historical vintage-level credit loss performance. current and forecasted economic conditions are applied in the model to project monthly loss rates in terms of origination dollars and recovery rates in terms of cumulative loss dollars for the remaining contractual life of each vintage. the contractual term is the estimated lifetime of retail loans and is considered to be a reasonable and supportable forecast period of future economic conditions. economic forecasts and macroeconomic variables are obtained from a third-party economic research firm that extend through the lifetime of retail loans and converge to long-run equilibrium trends. a baseline forecast that reflects the most likely economic outcome is the single forecasted economic scenario applied in the model. qualitative adjustments may also be applied if management believes the quantitative models do not reflect the best estimate of lifetime expected credit losses.we identified the assessment of the april 1, 2020 collective acl and the march 31, 2021 collective acl 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 due to measurement uncertainty. specifically, the assessment encompassed the evaluation of the collective acl methodology and model, including the selection of the forecasted economic scenario assumption and macroeconomic variables. in addition, auditor judgement 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 acl estimates, including controls related to the:–development of the collective acl methodology and model, including the selection of the forecasted economic scenario assumption and macroeconomic variables–re-evaluation of the model used to estimate the collective acl–analysis of the collective acl model results as compared to actual loss performance.we evaluated the company’s process to develop the collective acl estimates 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 experience, who assisted in:–evaluating the company’s collective acl methodology for compliance with u.s. generally accepted accounting principles–assessing the conceptual soundness and performance testing of the model by inspecting model documentation to determine whether the model is consistent with the model methodology and are suitable for its intended use–evaluating model back-testing results to verify model output is consistent with actual loss performance–assessing the selection of the forecasted economic scenario assumption and macroeconomic variables by comparing the scenario to the company’s business environment and publicly available forecasts.we also assessed the sufficiency of the audit evidence obtained by evaluating the:–cumulative results of the audit procedures–qualitative aspects of the company’s accounting practices–potential bias in the accounting estimates.estimated early termination losses on operating receivables as discussed in note 1 to the consolidated financial statements, a portion of the company’s operating leases is expected to terminate prior to their scheduled maturities when lessees default on their contractual obligations. in such circumstances, losses are generally realized upon the disposition of the repossessed operating lease vehicles as a reduction to the carrying value of operating lease assets. the company’s investment in operating leases, net as of march 31, 2021 was $35,345 million. the estimate of early termination losses on operating lease assets is measured using econometric regression models that correlate vintage age, credit quality, economic and other variables to historical vintage-level credit loss performance. current and forecasted economic conditions are applied in the model to project monthly loss rates in terms of origination dollars and recovery rates in terms of cumulative loss dollars for the remaining contractual life of each vintage. a baseline forecast that reflects the most likely economic outcome is the single forecasted economic scenario applied in the model.f-3we identified the assessment of estimated early termination losses on operating lease assets as a critical audit matter. a high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved due to measurement uncertainty. specifically, the assessment encompassed the evaluation of the collective methodology and model used to estimate the early termination losses on operating lease assets, including the selection of the forecasted economic scenario assumption and macroeconomic variables. in addition, auditor judgement 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 estimated early termination losses on operating lease assets, including controls related to the:–development of the methodology and model used to estimate early termination losses on operating lease assets, including the selection of the forecasted economic scenario assumption and macroeconomic variables–re- evaluation of the model used to estimate early termination losses on operating lease assets–analysis of model results as compared to actual loss performance.we evaluated the company’s process to develop the estimated early termination losses on operating lease assets 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 experience, who assisted in:–evaluating the company’s methodology for compliance with u.s. generally accepted accounting principles–assessing the conceptual soundness and performance testing of the model by inspecting model documentation to determine whether the model is consistent with the model methodology and is suitable for their intended use–evaluating model back-testing results to verify model output is consistent with actual loss performance–assessing the selection of the forecasted economic scenario assumption and macroeconomic variables by comparing the scenario to the company’s business environment and publicly available forecasts.we also assessed the sufficiency of the audit evidence obtained by evaluating the:–cumulative results of the audit procedures–qualitative aspects of the company’s accounting practices–potential bias in the accounting estimates.estimated end of term residual values of lease vehicles as discussed in note 1 to the consolidated financial statements, depreciation of lease vehicles on operating leases is calculated on the straight-line method over the lease term. the depreciable amount is the cost of the leased vehicle less its estimated end of term residual value. the company's investment in operating leases, net as of march 31, 2021 was $35,345 million. the company assesses estimated end of term residual values of lease vehicles, taking into consideration external industry data and the company’s historical experience. estimates for end of term market values of lease vehicles are evaluated by the company on a quarterly basis at a minimum, and adjustments to estimated end of term residual values are made on a straight-line basis over the remaining term of the lease and are recognized within accumulated depreciation on investment in operating leases. the primary factors that affect estimated end of term residual values of lease vehicles are the percentage of leased vehicles expected to be returned by the lessee at the end of the lease term and expected loss severities based on end of term market values of lease vehicles.we identified the assessment of estimated end of term residual values of lease vehicles as a critical audit matter. a high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgement was involved in the assessment due to measurement uncertainty. specifically, complex auditor judgment was required to assess the residual value methodology, the model used to estimate the percentage of leased vehicles expected to be returned by the lessee at the end of the lease term and the expected loss severities based on the end of term market values of lease vehicles. in addition, auditor judgement was required to evaluate the sufficiency of audit evidence obtained.f-4the 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 end of term residual values of lease vehicles estimate, including controls related to the:–development of the residual value methodology, including identification and determination of the expected loss severities based on the end of term market values of lease vehicles assumption–development of the model used to estimate the percentage of leased vehicles expected to be returned–evaluation of the percentage of leased vehicles expected to be returned by the lessees as compared to actual vehicles returned –analysis of the actual gain or loss recorded on the disposition of leased vehicles.we evaluated the company’s process to develop the estimated end of term residual values of lease vehicles 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 valuation professionals with specialized skills and knowledge, who assisted in:–evaluating the company’s residual value methodology for compliance with u.s. generally accepted accounting principles –assessing the conceptual soundness and performance testing of the model by inspecting model documentation to determine whether the model is consistent with the model methodology and is suitable for their intended use –evaluating the company’s expected loss severities based on the end of term market values of lease vehicles assumption by comparing it to specific portfolio risk characteristics and trends.we also assessed the sufficiency of the audit evidence obtained by evaluating the:–cumulative results of the audit procedures–qualitative aspects of the company’s accounting practices–potential bias in the accounting estimates./s/ kpmg llp we have served as the company’s auditor since 1989. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. revenue recognition under fixed price contracts as described in note 4 to the consolidated financial statements, the majority of the company’s revenue was recognized from fixed price contracts. fixed price contracts recognize revenues over time using an input method described as the cost-to-cost approach to determine the extent of progress towards completion of performance obligations and an estimate of total contract revenues. under the cost-to-cost approach, the determination of the progress towards completion requires management to prepare estimates of the costs to complete. these estimates are subject to considerable judgment and could be impacted by such items as changes to the project schedule and scope; the cost of labor, material, and subcontractors; and productivity. in addition, the company’s contracts may include estimated amounts of variable consideration, which includes increases to transaction prices for approved and unapproved change orders, claims, incentives and bonuses, and reductions to transaction prices for approved and unapproved change orders, liquidated damages or penalties. management - 60 -table of contentsmust estimate amounts of variable consideration in order to determine the amount of revenue recognized for each customer contract.the principal consideration for our determination that revenue recognition under fixed price contracts is a critical audit matter is that auditing management’s estimate of total contract revenues and costs on fixed price contracts was complex and subjective. considerable judgment was required in evaluating management’s determination of the forecasted costs to complete the related performance obligations as future results may vary significantly from past estimates due to changes in facts and circumstances. auditing the company’s measurement of variable consideration was also complex and required substantial judgment by management in estimating the various possible outcomes as approved and unapproved change orders, claims, incentives and bonuses, liquidated damages or penalties could have a material effect on the amount of revenue recognized. this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate significant assumptions reflected in management’s estimated total cost at completion for fixed price contracts, including the availability and cost volatility of materials, subcontractors and vendor performance and schedule and performance delays. our audit procedures related to the auditing of fixed price contract revenues included, among others: understanding and evaluating the design and testing the operating effectiveness of controls over the estimation process that affect revenue recognized on fixed price contracts, including key controls related to monitoring projected project costs, profit estimates, and variable consideration. we evaluated the appropriate application of the cost-to-cost method, tested the significant assumptions discussed above which were used to develop the estimated to complete, and tested the completeness and accuracy of the underlying data. additionally, we performed audit procedures that included agreeing the estimates to supporting documentation, conducting interviews with project personnel, attending selected project review meetings, analyzing trends of productivity, reviewing support for estimates of project contingencies, and performing lookback analyses to historical actual costs to assess management’s ability to estimate. to test the estimated variable consideration, we performed audit procedures that included, among other things, obtaining and reviewing executed contracts including any significant amendments, change orders or claims, and evaluating management’s estimates related to pending change orders, claims, liquidated damages or penalties by obtaining management’s probability assessments, corroborating key data points to contractual language, and considering the relationship between the company and its customer to assess management’s judgment.assessment of carrying value of goodwill for the roberts company at january 31, 2021, the company's goodwill associated with the roberts company (“trc”) reporting unit was $9.5 million. as described in note 7 to the consolidated financial statements, the company performed a valuation of the trc reporting unit which indicated that the fair value of the reporting unit exceeded the carrying value. the company used a weighted average combination of the income and market-based approaches to determine the fair value of the trc reporting unit.the principal consideration for our determination that the assessment of the carrying value of trc is a critical audit matter is that its goodwill impairment test is complex and highly judgmental due to the significant estimation required in determining the fair value of the trc reporting unit. fair value was estimated by management based on a weighted average of income and market approaches. these fair value estimates were sensitive to significant assumptions such as the weighted average cost of capital, including company specific risk premiums, revenue and gross margin projections, terminal values, and benchmarks utilized to determine value including peer group companies, which reflect management’s expectations about future market or economic conditions. our audit procedures related to the auditing of goodwill impairment included, among others: obtaining an understanding and evaluating the design and testing the operating effectiveness of controls over the company’s goodwill impairment analysis processes, including management’s selection of the significant assumptions used to determine the estimates of fair value of the trc reporting unit. we assessed the appropriateness of the valuation models used and tested the significant assumptions and the underlying data used by the company in its analysis. we compared the revenue and gross margin projections used by management to recent forecasts, current backlog and project estimates, and the company’s historical results. we assessed the historical accuracy of management’s revenue and gross margin projections. we compared the growth rates to current industry and economic trends and other guideline companies within the same industry. we performed sensitivity analyses of the significant assumptions to evaluate the changes in the fair value of the reporting unit that would result from changes in these assumptions. we searched for and evaluated information that - 61 -table of contentscorroborates or contradicts the company’s assumptions, such as market indicators of value. we involved our valuation specialists to assist in reviewing the valuation methodology and tested the terminal values and weighted average cost of capital, including company specific risk premiums for the reporting unit. our valuation specialists also reviewed the multiples and underlying calculations utilized in the market approach valuations. /s/ grant thornton llp we have served as the company’s auditor since 2007. | 2 |
critical audit matters thecritical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements thatwere communicated or required to be communicated to the audit committee of the board of directors and that: (1) relate to accounts ordisclosures that are material to the consolidated financial statements and (2) involved 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 asa whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter oron the accounts or disclosures to which they relate. related party transactions and recoverability of notes receivable from related parties asdiscussed in notes 10 and 12 to the consolidated financial statements, the company has significant related party transactionsand arrangements with the majority owners of the company and other companies owned by the majority owners. in addition to holding severalreceivable agreements, including notes receivable with these related parties, the company is currently involved in a lawsuit againstone of the majority owners and other companies owned by the majority owner. wedetermined the (1) evaluation of the identification of related parties, (2) related party transactions and (3)collectability of notes receivable from related parties, collectively, as a critical audit matter. auditor judgement was involvedin assessing the sufficiency of the procedures performed to identify related parties, identify related party transactions and assessthe collectability of the notes receivable from related parties. 44 thefollowing are the primary procedures we performed to address this critical audit matter. we performed the following procedures to evaluatethe identification of related parties, related party transactions and the collectability of the notes receivable from related partiesby the company: ●reviewed any new agreements and contracts between the company and its related parties, noting none;●queried the accounts payable system for transactions with its related parties;●inspected director and officer questionnaires from the company’s directors and officers;●evaluated the company’s reconciliation of its applicable accounts to the related parties’ records of transactions and balances;●read the company’s minutes from meetings of the board of directors and related committees;●inquired with executive officers and key members of management as to the collectability of these balances due from related parties;●reviewed public filings, external news, and research sources for information related to transactions between the company and relatedparties; and●confirmed with the company’s management and its outside counsel as to the status of the lawsuits. wehave served as the company’s auditor since 2009. | 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 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 21 to the consolidated financial statements, the company’s consolidated revenue balance was $40 million for the year ended january 1, 2022. the company recognizes revenue at the point in time when control is transferred to the end user, when the company’s performance obligations are satisfied, which typically occurs upon delivery from the company’s center facility and installation at the end user’s home.we identified revenue recognition as a critical audit matter. auditing revenue recognition involved especially challenging, subjective or complex auditor judgment due to the nature and extent of audit effort required to address this matter.f-1 the primary procedures we performed to address this critical audit matter included:•evaluating the company’s revenue recognition policy for conformity with accounting principles generally accepted in the united states of america.•inspecting executed contracts to identify the relevant performance obligations and evaluating the accounting treatment for each performance obligation.•testing individual revenue transactions for proper revenue recognition in accordance with the company’s revenue recognition policy.•assessing the company’s disclosures related to revenue recognition for conformity with accounting principles generally accepted in the united states of america. /s/ wsrp, llc we have served as the company's auditor since 2019. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the 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. purchase price allocations for property acquisitions as described in notes 2 and 3 to the consolidated financial statements, the company completed real estate acquisitions with consideration paid for acquired real estate investments, net of liabilities assumed of $220.4 million for the year ended december 31, 2020. for acquired properties with leases classified as operating leases, management allocated the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values. tangible assets include land, land improvements, buildings, fixtures and tenant improvements on an as-if vacant basis. management utilizes various estimates, processes and information to determine the as-if vacant property value. management estimates fair value using data from appraisals, comparable sales, discounted cash flow analysis and other methods. fair value estimates are also made using significant assumptions such as capitalization rates, fair market lease rates, discount rates and land values per square foot. identifiable intangible assets include amounts allocated to acquired leases for above- and below-market lease rates and the value of in-place leases. above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining initial term of the lease for above-market leases and the remaining initial term plus the term of any below-market fixed rate renewal options for below-market leases. the principal considerations for our determination that performing procedures relating to purchase price allocations for property acquisitions is a critical audit matter are (i) the significant judgment by management when developing the fair value estimates of tangible and intangible assets acquired and liabilities assumed; (ii) a high degree of auditor judgment and subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to capitalization rates, fair market lease rates, discount rates and land values per square foot; 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 purchase price allocations for property acquisitions, including controls over management’s valuation of tangible and intangible assets acquired and liabilities assumed and controls over development of the assumptions used in the valuation of tangible and intangible assets acquired and liabilities assumed, related to capitalization rates, fair market lease rates, discount rates and land values per square foot. these procedures also included, among others, (i) reading the purchase agreements and lease documents; (ii) testing the completeness and accuracy of underlying data used by management in the fair value estimates; and (iii) testing management’s process for estimating the fair value of tangible and intangible assets acquired and liabilities assumed, including testing management’s projected cash flows and evaluating the accuracy of valuation outputs. testing management’s process included evaluating the appropriateness of the valuation methods and reasonableness of the significant assumptions, related to capitalization rates, fair market lease rates, discount rates and land values per square foot. evaluating the reasonableness of the significant assumptions included considering whether these assumptions were consistent with external market data, comparable transactions, and evidence obtained in other areas of the audit. in conjunction with certain purchase price allocations, professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of certain assumptions utilized by management, related to capitalization rates, fair market lease rates, discount rates and land values per square foot. /s/ pricewaterhouse coopers llp new york, new york february 25, 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 financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. clinical trial expense accrual description of the matter as of december 31, 2020, the company recorded $1.5 million for accrued clinical trial costs. as described in note 2 of the form 10-k, the company records accruals for estimated costs of clinical trial activities, resulting from the company’s obligations under contracts with vendors, contract research organizations and consultants and under clinical site agreements in connection with conducting clinical trials. the company accounts for these expenses according to the progress of the trial as measured by patient progression and the timing of various aspects of the trial. estimated accruals are determined based on reviewing contractual terms and through communications with internal clinical personnel and external service providers including contract research organizations (“cro”) as to the progress or state of its trials. auditing management’s accounting for accrued clinical trial expenses was especially challenging as calculating the liability for clinical trial activity includes determining the progress or stage of completion of the activities included in the individual clinical trial agreements based on internal and external information, and involves a high volume of data.83 how we addressed the matter in our audit to test the adequacy of the company’s clinical trial expense accruals, we performed audit procedures that included, amongst others, obtaining supporting evidence of the status of significant clinical trials based on communications with both internal and external clinical trial service providers. for instance, we attended internal clinical trial and project status meetings with accounting personnel and clinical project managers to corroborate the status of clinical trial activities. to verify the appropriate measurement of accrued clinical trial costs, we reviewed significant agreements, confirmed fees and status directly with the cro, selected a sample of transactions to compare the recorded expense against related invoices and contracts, recalculated the clinical expense and accrual and tested a sample of payments made subsequent to year-end to evaluate the completeness of the clinical trial expense accruals. /s/ ernst & young llp we have served as the company’s auditor since 2010. | 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. 25 allowance for loan losses (all) – qualitative factors description of the matter the company’s loan portfolio totaled $2.03 billion as of december 31, 2020, and the associated all was $25.03 million. as discussed in notes 1 and 5 to the consolidated financial statements, determining the amount of the all requires significant judgment about the collectability of loans, which includes an assessment of quantitative factors such as historical loss experience within each risk category of loans and testing of certain commercial loans for impairment. management applies additional qualitative adjustments to reflect the inherent losses that exist in the loan portfolio at the balance sheet date that are not reflected in the historical loss experience. qualitative adjustments are made based upon changes in lending policies and practices, economic conditions, changes in the loan portfolio mix, trends in loan delinquencies and classified loans, collateral values, and concentrations of credit risk for the commercial loan portfolios. we identified these qualitative adjustments within the all as critical audit matters because they involve a high degree of subjectivity, which is magnified by the uncertainty resulting from the covid-19 pandemic. in turn, auditing management’s judgments regarding the qualitative factors applied in the all calculation involved a high degree of subjectivity. how we addressed the matter in our audit we gained an understanding of the company’s process for establishing the all, including the qualitative adjustments made to the all. we evaluated the design and tested the operating effectiveness of controls over the company’s all process, which included, among others, management’s review and approval controls designed to assess the need and level of qualitative adjustments to the all. to test the qualitative adjustments, we evaluated the appropriateness of management’s methodology and assessed whether relevant risks were reflected in the all and the need to consider qualitative adjustments, including the potential effect of covid-19 on the adjustments regarding the measurement of the qualitative adjustments, we evaluated the completeness, accuracy, and relevance of the data and inputs utilized in management’s estimate. for example, we compared the inputs and data to the company’s system reports, third-party macroeconomic data, and other internal and external sources and considered the existence of new or contrary information. furthermore, we analyzed the changes in the components of the qualitative reserves relative to changes in external market factors, the company’s loan portfolio, and asset quality trends, which included the evaluation of management’s ability to capture and assess relevant data from both external sources and internal reports on loan customers affected by the covid-19 pandemic and the supporting documentation for substantiating revisions to qualitative factors to ensure that movement in the factors was directionally consistent with the underlying data and quantitatively reasonable based on the underlying risk related to the factor. we also utilized internal credit review specialists with knowledge to evaluate the appropriateness of management’s risk-rating processes, to ensure that the risk ratings applied to the commercial loan portfolio were reasonable. we have served as the company’s auditor since 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 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.uncertain tax positions description of the matter as described in notes 2 and 14, the company establishes reserves for uncertain tax positions for positions that are taken on their income tax returns that might not be sustained upon examination by the taxing authorities. at december 31, 2020, the company has recorded approximately $231 million relating to uncertain tax positions.in determining whether an uncertain tax position exists, the company determines, based solely on its technical merits, whether the tax position is more likely than not to be sustained upon examination, and if so, a tax benefit is measured on a cumulative probability basis that is more likely than not to be realized upon the ultimate settlement. the company identifies its certain and uncertain tax positions and then evaluates the recognition and measurement steps to determine the amount that should be recognized. the company then evaluates uncertain tax positions in subsequent periods for recognition, de-recognition or re-measurement if changes have occurred, or when effective settlement or expiration of the statute of limitations occurs.62table of contents auditing the uncertain tax positions is complex because of the judgmental nature of the tax accruals and various other tax return positions that might not be sustained upon review by taxing authorities. the company files tax returns in multiple jurisdictions and is subject to examination by taxing authorities throughout the world due to its complex global footprint. taxing jurisdictions significant to aptiv include china, barbados, luxembourg, germany, mexico, the u.s., ireland, south korea and the u.k.how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of controls related to the recognition, measurement and the evaluation of changes in uncertain tax positions. this included testing controls over management’s review of the tax positions, their evaluation of whether they met the measurement threshold and then recalculating the amounts recognized based upon a cumulative probability assessment performed by management.our audit procedures to test the company’s uncertain tax positions included, among others, involvement of our tax professionals, including transfer pricing professionals. this included evaluating tax opinions and third-party transfer pricing studies obtained by the company and assessing the company’s correspondence with the relevant tax authorities. we analyzed the company’s assumptions and data used to determine the amount of tax benefit to recognize and tested the accuracy of the calculations. our testing also included the evaluation of the ongoing positions and consideration of changes, the recording of penalties and interest and the ultimate settlement and payment of certain tax matters.revenue recognition description of the matter as described in notes 2 and 25, aptiv occasionally enters into pricing agreements with its customers that provide for price reductions, some of which are conditional upon achieving certain joint cost saving targets. in addition, from time to time, aptiv makes payments to customers in conjunction with ongoing business. revenue is recognized based on the agreed-upon price at the time of shipment, and sales incentives, allowances and certain customer payments are recognized as a reduction to revenue at the time of the commitment to provide such incentives or make these payments. certain other customer payments or upfront fees are considered to be a cost to obtain a contract as they are directly attributable to a contract, are incremental and management expects the payments to be recoverable. in these cases, the customer payment is capitalized and amortized to revenue based on the transfer of goods and services to the customer for which the upfront payment relates. as of december 31, 2020, aptiv has recorded $116 million related to these capitalized upfront payments.auditing the accounting for and completeness of arrangements containing elements such as sales incentives, allowances and customer payments, including the appropriate timing and presentation of adjustments to revenue as well as costs to obtain a contract is judgmental due to the unique facts and circumstances involved in each revenue arrangement, as well as on-going commercial negotiations with 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 review of customer contracts. this included testing controls over the company’s process to identify and evaluate customer contracts that contain sales incentives, allowances and customer payments that impact revenue recognition.our audit procedures to test the completeness of the company’s identification of such contracts included, among others, interviewing sales representatives who are responsible for negotiations with customers and testing cash payments to customers. to test management’s assessment of customer contracts containing sales incentives, allowances and customer payments, our procedures included, among others, selecting a sample of customer agreements, obtaining and reviewing source documentation, including master agreements, and other documents that were part of the agreement, and evaluating the contract terms to determine the appropriateness of the accounting treatment.63table of contents autonomous driving joint venture description of the matter as described in note 24, on march 26, 2020, aptiv completed a transaction with hyundai motor group to form a joint venture focused on the design, development and commercialization of autonomous driving technologies. the joint venture operates globally under the motional brand name. under the terms of the agreement, aptiv contributed to the joint venture autonomous driving technology, intellectual property and approximately 700 employees for a 50% ownership interest in the entity. hyundai contributed to the joint venture approximately $1.6 billion in cash, along with vehicle engineering services, research and development resources and access to intellectual property for a 50% ownership interest in the entity.upon closing of the transaction, aptiv deconsolidated the carrying value of the associated assets and liabilities contributed to the joint venture, previously classified as held for sale, and recognized an asset of approximately $2 billion within investments in affiliates in the consolidated balance sheet, based on the preliminary fair value of its investment in the newly formed joint venture. the company recognized a pre-tax gain of approximately $1.4 billion in the consolidated statement of operations, net of transaction costs of $22 million, based on the difference between the carrying value of its contribution to the joint venture and the preliminary fair value of its investment in the entity. the estimated fair value of aptiv’s ownership interest in the joint venture was determined primarily based on third-party valuations and management estimates, generally utilizing income and market approaches.auditing the company's accounting for the transaction involved subjective auditor judgment due to the significant estimation required in management’s determination of the fair value of joint venture, including the fair value and allocation of identified intangible assets contributed by aptiv and hyundai. the significant estimation was primarily due to the sensitivity of the fair value to underlying assumptions including discount rates, projected revenue growth rates and profit margins. these assumptions relate to the future performance of the joint venture, 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 the company’s controls over its accounting for the transaction. this included testing controls over management’s review of the valuation of joint venture, including the review of the valuation model and significant assumptions and prospective financial information used within the valuation.to test the fair value of the joint venture, our audit procedures included, among others, evaluating the company's use of valuation methodologies, challenging the significant assumptions made by management, including the prospective financial information and testing the completeness and accuracy of the underlying data. we involved our valuation specialists to assist in testing certain significant assumptions used to value the joint venture and its intangible assets. our procedures included among others, comparing significant management assumptions to current industry and market trends, historical results of the contributed business and to other relevant factors. we also performed sensitivity analyses of the significant assumptions to evaluate the change in the fair value resulting from changes in the assumptions. in addition, complex and challenging auditor judgment was required in evaluating the internally developed estimates and assumptions used in the model because there was limited observable market information./s/ ernst & young llp we have served as the company’s auditor since 2006d | 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. 37 qualitative adjustments to the allowance for loan and lease losses as described in notes 1 and 4 of the consolidated financial statements, the company’s allowance for loan and lease losses (allowance) totaled $10.6 million as of december 31, 2020. the recorded allowance was established based on an allowance of $9.2 million related to loans collectively evaluated for impairment and on an allowance of $1.4 million relating to loans individually evaluated for impairment as of december 31, 2020. for loans that are collectively evaluated for impairment, the company segregates loans into pools based on homogeneous risk characteristics. the non-specific allowance is established through historical loss experience of the loan pools over their respective loss emergence periods adjusted for qualitative factors. the qualitative factors are additional reserves applied to the segmented loan pools to reflect the inherent risk of loss that exists in the portfolio as of the balance sheet date. the company has determined qualitative factors to include: 1) changes in lending policies and procedures; 2) changes in international, national, regional, and local economic and business conditions and developments; 3) changes in the nature and volume of the portfolio and in the terms of loans; 4) changes in the experience, ability, and depth of lending management and staff; 5) changes in the volume and loss severity of past due loans, the volume of non-accrual loans, and the volume and loss severity of adversely classified or graded loans; 6) changes in the quality of the company’s loan review system; 7) changes in the value of underlying collateral for collateral-dependent loans; 8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations; 9) the effect of other external factors; and 10) an additional factor allocated to special mention and substandard rated loans. in addition and as a response to the covid-19 pandemic, the company also applied a qualitative factor related to this event, which is designed to absorb probable incurred loan losses that are negatively affected by the covid-19 pandemic. evaluation of the allowance, in particular the qualitative factor adjustments, requires considerable judgment, in order to adequately estimate and provide for the risk of loss inherent in the loan portfolio segments. we identified the qualitative factors adjustments applied to the non-specific allowance as a critical audit matter due to the high degree of auditor judgment in order to evaluate the subjective assumptions made by management within the calculation. our audit procedures related to the qualitative factor adjustments applied to the non-specific allowance included the following: -we tested the completeness and accuracy of data used by management in determining the qualitative factor adjustments by agreeing them to their appropriate internal or external sources. -we evaluated the reasonableness of the directional consistency of changes in qualitative factor adjustments as well as the overall magnitude of management’s qualitative factor adjustments applied to each pool based on the data used by management. goodwill impairment assessment as described in notes 1 and 8 of the consolidated financial statements, the company’s goodwill balance totaled $1.1 million as of december 31, 2020. the company performs a goodwill impairment test annually as of october 31, or whenever certain triggering events occur or there are circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount are identified. management estimates the fair value of the reporting unit by considering multiple valuation techniques, which include subjective assumptions about the future cash flows of the company, assumptions within the capitalization rate, valuation multiples, and market data used. 38 we identified the impairment assessment of goodwill as a critical audit matter due to the high degree of auditor judgement and subjectivity in order to evaluate the fair value of the reporting unit due to the judgements made by management in the estimation of the company’s reporting unit fair value, including those related to future cash flows, the capitalization rate, the valuation multiples used, and the market data incorporated into the estimate. in addition, the increased audit effort involved the use of internal professionals with specialized skill and knowledge in the field of business valuation. our audit procedures related to goodwill impairment assessment included the following for the impairment test performed for the year: -we evaluated management’s process for developing the fair value estimates of the reporting unit including an assessment of the appropriateness of the valuation techniques used. -we evaluated management’s cash flow projections and significant assumptions incorporated into the business plan by considering the current and past performance by the company, the company’s ability to meet financial projections, and the consistency of these assumptions with evidence obtained in other areas of the audit. -we used the assistance of internal professionals with specialized skill and knowledge to assist in the evaluation of significant assumptions used in the valuation methodology. this included: o testing the fair value of the reporting unit through testing of the completeness and accuracy of the data used by management to develop the estimate. o evaluating the reasonableness of the cash flow projections calculations used to develop the estimate. o evaluating the capitalization rate, the valuation multiples used, and the market data incorporated into the estimate by assessing the reasonableness, comparability and appropriateness of the market-based information used by agreeing the components to independent source data. realizability of the deferred tax assets as discussed in notes 1 and 14 to the consolidated financial statements, the company has recorded $11.3 million in deferred tax assets, net of a $1.9 million state net operating loss valuation allowance, as of december 31, 2020. management applied significant judgment in assessing the positive and negative evidence available in the determination of the amount of deferred tax assets that were more-likely-than-not to be realized in the future. in evaluating the need, or continued need, for a valuation allowance, management considers the weighting of the positive and negative evidence, which included, among other things, the nature, frequency and severity of current and cumulative taxable income or losses, forecasts of future profitability, the duration of statutory carryforward periods, as well as the company’s intent and ability to implement tax strategies. 39 we identified the realizability of deferred tax assets as a critical audit matter because of the significant assumptions and judgments use by management in determining the amount of deferred tax assets that were more-likely-than-not to be realized in the future, which in turn led to a high degree of auditor judgment and subjectivity in applying procedures relating to assessing the positive and negative evidence considered by management. additionally, there was significant audit effort necessary in evaluating the weighting of the positive and negative evidence, including the use of internal professionals with specialized skill and knowledge in the field of income tax accounting. our audit procedures related to the realizability of the company’s deferred tax assets included the following, among others: -we obtained an understanding and evaluated management’s process over the assessment of the realizability of deferred tax assets, including how it incorporates positive and negative evidence into its evaluation. -we evaluated the positive and negative evidence in assessing whether the deferred tax assets are more-likely-than-not to be realized in the future, including evaluating the trends of both the historical financial results and the projected sources of taxable income, as well as other qualitative factors. -we evaluated management’s cash flow projections and significant assumptions incorporated into the business plan by considering the current and past performance by the company, the company’s ability to meet financial projections, and the consistency of these assumptions with evidence obtained in other areas of the audit. -with the assistance of our internal tax professionals, we evaluated the company’s application of income tax accounting guidance and regulations used in its realizability analysis. -we evaluated the company’s consideration of cumulative pre-tax losses and the net deferred tax position in assessing whether deferred tax assets were more-than-not to be realized in the future, which included: o testing the completeness and accuracy of the data used by management in their analyses. o evaluating the reasonableness of management’s evaluation of whether tax planning strategies were prudent and feasible. o evaluating management’s intent and ability to implement tax strategies in order to realize state net operating losses before expiration. /s/ rsm us llp we have served as the company’s auditor since 2017. | 2 |
critical audit matter below. basis for opinions the company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management report on internal control over financial reporting. our responsibility is to express an opinion on the company’s consolidated financial statements and an opinion on the company’s internal control over financial reporting based on our audits. we are a public accounting firm registered with the public company accounting oversight board (united states) (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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.70 our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated 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 consolidated financial statements. our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. our audits also included performing such other procedures as we considered necessary in the circumstances. we believe that our audits provide a reasonable basis for our opinions. definition and limitations of internal control over financial reporting a company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. a company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 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. allowance for credit losses - cecl adoption, reasonable and supportable forecasts and qualitative factors as described in note 1 to the consolidated financial statements, the company adopted accounting standards update no. 2016-13, accounting standards codification topic 326, financial instruments - credit losses (topic 326), as of january 1, 2020, using the modified retrospective method of adoption. topic 326 requires the measurement of the current expected credit losses (“cecl”) for financial assets, including the company’s loan portfolio, held at the reporting date. accordingly, the company recorded a decrease to retained earnings of $6,680,000, net of taxes of $3,575,000, as of january 1, 2020, for the cumulative effect of adopting topic 326. as further described in notes 1 and 3, the company’s allowance for credit losses for loans was $41,236,000 as of december 31, 2020, and consists of both historical credit loss experience and management’s estimates of current conditions and reasonable and supportable forecasts. the company’s allowance for credit losses for loans is a valuation account that is deducted from the amortized cost basis of loans to present the net carrying value at the amount expected to be collected on such loans and is a material and complex estimate requiring significant management judgment in the estimation of expected lifetime losses within the loan portfolio at both the date of adoption and the balance sheet date.71 we identified management’s adoption of topic 326, and the reasonable and supportable forecasts, including the estimate of qualitative factors, as a critical audit matter. in estimating the allowance for credit losses on loans, the company utilizes relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. the company considers relevant credit quality indicators for each loan pool, and estimates losses for each loan pool based upon their nature, historical experience, and risk profile. estimation of the lifetime expected credit losses for loans requires significant management judgment, particularly as it relates to forward-looking information through the use of qualitative factors applied over the forecasted life of the loans. 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 adoption of topic 326 and the calculation of the allowance for credit losses on loans, including controls over the selection and evaluation of the qualitative factors selected by the company, model development, selection and application of new accounting policies, and disclosures. •evaluating the reasonableness and appropriateness of the methodology and assumptions used in the estimate of the allowance for credit losses for loans, and testing the calculation itself, including completeness and accuracy of the data used in the calculation and loan pools, application of the qualitative factors determined by management and used in the calculation, and mathematical accuracy of the allowance for credit losses balance. •evaluating the reasonableness of management’s assumptions used to support the estimate, including forecasted economic conditions expected to exist over the expected lives of financial assets, as compared to underlying internal or external source information. •evaluating trends in qualitative factors to ensure directional consistency with significant economic factors identified by management as being indicative of potential credit risk within the loan portfolio. •evaluating the overall reasonableness of assumptions used by management considering current and historical trends identified within peer groups. •evaluating the accuracy and completeness of the company’s disclosures in accordance with topic 326. /s/ moss adams llp spokane, washington march 15, 2021 we have served as the company’s auditor since 2018. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.goodwill impairment assessments - emea and asia pacific reporting units as described in notes 2 and 5 to the consolidated financial statements, the company’s consolidated goodwill balance was $819.0 million as of december 31, 2020, and the goodwill associated with the emea and asia pacific reporting units was $309.9 million and $8.0 million, respectively. as of march 31, 2020, management identified a triggering event for the emea and asia pacific reporting units, and as a result, performed interim goodwill impairment analyses. the results of the impairment testing indicated that the estimated fair value of the asia pacific reporting unit was less than its carrying value, and as such, the company recorded an impairment of $88.1 million. for the impairment analyses performed as of march 31, 2020, the estimated fair values of the emea and asia pacific reporting units were based on a discounted cash flow model (income approach). goodwill is tested annually for impairment 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. for the annual impairment analyses, the estimated fair values of the emea and asia pacific reporting units were based on two valuation techniques, a discounted cash flow model and a market multiple of earnings (market approach), with each method being weighted in the calculation. as disclosed by management, the income approach relies on management’s estimates of revenue growth rates, terminal growth rates, margin assumptions, and discount rates. the market approach requires the determination of an appropriate peer group, which is utilized to derive estimated fair values based on selected market multiples.the principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of emea and asia pacific reporting units is a critical audit matter are (i) the significant judgment by management when developing the fair value measurements of the reporting units; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to revenue growth rates, terminal growth rates, margin assumptions, discount rates, peer group determination, and market multiple 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 goodwill impairment assessment, including controls over the valuation of the company’s emea and asia pacific reporting units. these procedures also included, among others (i) testing management’s process for developing the fair value measurements of the reporting units; (ii) evaluating the appropriateness of the discounted cash flow and market multiple of earnings models; (iii) testing the completeness and accuracy of underlying data used in the models; and (iv) evaluating the reasonableness of significant assumptions used by management related to revenue growth rates, terminal growth rates, margin assumptions, discount rates, peer group determination, and market multiple selections. evaluating management’s assumptions related to revenue growth rates and margin assumptions 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. evaluating the company’s peer group determination included assessing the appropriateness of the identified peer companies. professionals with specialized skill and knowledge were used to assist in the evaluation of management’s discounted cash flow and market multiple models, and management’s significant assumptions related to terminal growth rates, discount rates, selected peer group, and market multiples./s/ pricewaterhouse coopers llp indianapolis, indiana february 16, 2021we have served as the company’s auditor since 2013. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.allowance for loan and lease losses as described in notes 1, 5 and 6 to the financial statements, at december 31, 2021 first guaranty’s total loans were $2.1 billion and the associated allowance for loan and lease losses balance was $24.0 million. the allowance for loan and lease losses is management’s best estimate of probable incurred 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 and lease 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 and lease losses. the general valuation allowance portion of the allowance for loan and lease 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 and lease 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 and lease 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 and lease 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 and lease losses are supported by the analysis provided by management.•testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for loan and lease 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 and lease losses balance.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 (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. goodwill impairment assessment – genewiz reporting unit as described in notes 2, 4 and 8 to the consolidated financial statements, the company’s consolidated goodwill balance was $502 million as of september 30, 2020, of which $235 million relates to the genewiz reporting unit. goodwill is tested for impairment annually or more often if impairment indicators are present at the reporting unit level. the company elected april 1st as its annual goodwill impairment assessment date. if the existence of events or circumstances indicates that it is more likely than not that fair values of the reporting units are below their carrying values, the company performs additional impairment tests during interim periods to evaluate goodwill for impairment. as disclosed by management, the fair values of the reporting units are determined based on an income approach in accordance with the discounted cash flow method, or dcf method. the dcf method is based on projected future cash flows and terminal value estimates discounted to their present values. application of the goodwill impairment test requires judgment based on market and operational conditions at the time of the evaluation, including management’s best estimates of the reporting unit’s future business activity and the related estimates and assumptions of future cash flows from the assets that include the associated goodwill. different assumptions of revenue growth rates, gross margin percentage, selling, general and administrative expense percentage and discount rates used in the dcf model could result in different estimates of the reporting unit’s fair value as of each testing date. the principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the genewiz reporting unit is a critical audit matter are the significant judgment by management when determining the fair value of the genewiz reporting unit, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to management’s significant assumptions related to revenue growth rates, gross margin percentage, selling, general and administrative expense percentage and discount rate. in addition, the audit effort involved the use of professionals with specialized skill and knowledge. 48table of contents 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 goodwill impairment assessment, including controls over management’s determination of the revenue growth rates, gross margin percentage, selling, general and administrative expense percentage and discount rate. these procedures also included, among others, (i) testing management’s process for determining the fair value of the genewiz reporting unit, (ii) evaluating the appropriateness of the dcf model, (iii) testing the completeness and accuracy of the underlying data used in the model, and (iv) evaluating the reasonableness of significant assumptions used by management related to revenue growth rates, gross margin percentage, selling, general and administrative expense percentage and discount rate. evaluating management’s assumptions related to the revenue growth rates, gross margin percentage and selling, general and administrative expense percentage involved evaluating whether the assumptions used were reasonable considering the past performance of the reporting unit and industry data. professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the dcf model and the reasonableness of the discount rate. /s/ pricewaterhouse coopers llp boston, massachusetts november 18, 2020 we have served as the company’s auditor since 2016. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.revenue recognition - evaluation of nonstandard terms and conditions with customers as described in notes 1 and 3 to the consolidated financial statements, the company has $1,917 million of total revenue for the year ended december 31, 2021, of which a significant portion is generated from revenue with contracts which contain multiple performance obligations. when the company enters into contracts with multiple performance obligations, management allocates the contract’s transaction price to each performance obligation using the relative standalone selling price of each distinct good or service in the contract. as disclosed by management, revenue recognition for complex contractual arrangements requires judgment, including a review of specific contracts and other factors. specifically, complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting, including the determination whether promised goods or services are capable of being distinct and distinct within the context of the contract. if these criteria are not met, the promised goods or services are combined with other goods or services and accounted for as a combined performance obligation. the principal considerations for our determination that performing procedures relating to revenue recognition, specifically related to the evaluation of nonstandard terms and conditions with customers, is a critical audit matter are the significant judgment by management in evaluating the impact of nonstandard terms and conditions with customers on revenue recognition and determining the appropriate revenue recognition. this in turn led to significant auditor judgment, subjectivity, and effort in performing procedures to evaluate the impact of nonstandard terms and conditions on revenue recognition. 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 evaluation of the impact of nonstandard terms and conditions with customers on revenue recognition. these procedures also included, among others (i) evaluating and testing management’s process for determining whether the criteria for revenue recognition have been met based on the specific terms and performance under the arrangement, and (ii) examining revenue arrangements on a test basis, which included evaluating the impact of nonstandard terms and conditions with 41table of contentscustomers on revenue recognition./s/pricewaterhouse coopers llp atlanta, ga february 25, 2022we have served as the company’s auditor since 2007. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements, and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.f-2customer allowances for chargebacks, discounts and damaged goods, and accruals for rebates, coupons, product returns, and certain fees as described in note 2 to the financial statements, revenues from product sales are recorded net of estimated allowances for chargebacks, discounts and damaged goods and reflects sales-related accruals for rebates, coupons, product returns, and certain fees. these allowances and accruals are determined on a product-by-product basis, and are established by management as the company’s best estimate at the time of sale based on each product’s historical experience adjusted to reflect known changes in the factors that impact such allowances. management reviews these allowances on an ongoing basis and adjusts them based on the most recent information available, including actual results since the end of the reporting period. as of december 31, 2021, allowances in accounts receivable for chargebacks, cash discounts, and damaged goods were $0.3 million and the estimated liability for rebates, coupons, product returns, and certain fees were $3.7 million. these provisions are recognized concurrently with the sales of products. provisions for chargebacks involve estimates of usage by retailers and other indirect buyers with varying contract prices for multiple wholesalers. the provision for chargebacks varies in relation to changes in sales volume, product mix, pricing, and the level of inventory at the wholesalers. provisions are calculated using historical chargeback experience, and/or expected chargeback levels for new products and anticipated pricing changes. provisions for rebates are recognized based on contractual obligations in place at the time of sales with consideration given to relevant factors that may affect the payment as well as historical experience for estimated market activity. provisions for product returns are calculated based on the expiration dates of products sold, the window where customers are permitted to return products and the history of returns for individual products in relation to the sales volume for each product.the principal consideration for our determination that performing procedures relating to these allowances and accruals is a critical audit matter was the significant judgment by management to estimate the reserves due to the significant measurement uncertainty involved in developing the reserves. management tracks the various types of allowances on several different schedules, each of which relates to different contracts agreed to with various customers or the interplay with government payors. management exercises judgment in computing the amount of sales subject to the allowances and tracks the amount of allowances taken over time. all of this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions.we identified the estimated sales allowances and accruals as a critical audit matter. the primary procedures we performed to address this critical audit matter included: •testing of management’s process for calculating the allowances, including a look back analysis of prior year reserves compared to actual experience in the current year.•testing completeness and accuracy of underlying data used to estimate the accrual by agreeing sales data used in the calculations to reports that were reconciled to the financial statements, reconciling various allowance percentages to signed customer contracts, tracing allowance amounts used by various customers during the year to supporting documentation.•evaluating the reasonableness of significant assumptions used by management in the computation of selected allowances, including comparison to historical results and considering recent changes in factors that could influence the future allowances to be claimed.•testing the clerical accuracy of individual customer allowances computed by management and agreeing the total of all estimated allowances to the respective accounts on the financial statements.•developing our own independent expectation of the reserve balance for certain allowances and comparing that to the balance recorded on the december 31, 2021 balance sheet.f-3•comparing actual allowances reported after december 31, 2021 to estimated reserves and accruals on the december 31, 2021 balance sheet. /s/ bkd, llp 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 (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. goodwill impairment assessment as described in notes 2 and 6 to the consolidated financial statements, the company’s consolidated goodwill balance was $3,300 million as of december 31, 2019. management conducts an impairment assessment as of october 1 of each year, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. this assessment compares the carrying values of the reporting units to their respective fair values and when appropriate, the carrying value is reduced to fair value. fair value of each reporting unit is estimated using the income approach, a discounted cash flow approach. the fair value of the company's reporting units are determined utilizing the best estimate of future revenues, operating expenses, including commission expense, market and general economic conditions, as well as assumptions that management believes marketplace participants would utilize including discount rates, cost of capital, and long-term growth rates. during the third quarter of 2019, management determined that the decrease in the stock price of the company and the impact on future earnings related to the discontinuation of the usaa affinity program qualified as triggering events for all of its reporting units and accordingly management performed an impairment assessment of goodwill and other indefinite-lived intangible assets as of september 1, 2019. as a result of the interim impairment test, management recognized a goodwill impairment charge totaling $237 million related to realogy brokerage group. the principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the reporting units. this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to management’s cash flow projections and significant assumptions, including future revenues, operating expenses. including commission expense, and the discount rates. in addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the determination of the fair value of the company’s reporting units. these procedures also included, among others, testing management’s process for developing the fair value estimates, testing the completeness and accuracy of the underlying data used in the valuation model, and evaluating the reasonableness of the significant assumptions, including future revenues, operating expenses, including commission expense, and discount rates. evaluating management’s assumptions related to future revenues and operating expenses, including commission expense involved evaluating whether the assumptions used by management were reasonable considering the current and past performance of the reporting units and whether the assumptions were consistent with evidence obtained in other areas of the audit. additionally, for future revenues, the evaluation also considered whether the assumption was consistent with external market and industry data. professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the company’s discounted cash flow model and discount rates.other indefinite-lived assets impairment assessment – trademark intangible assets as described in notes 2 and 6 to the consolidated financial statements, the company’s consolidated other indefinite-lived intangible assets balance was $692 million as of december 31, 2019, including trademark intangible assets of $673 million. management conducts an impairment assessment as of october 1 of each year, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. this assessment compares the carrying values f-3table of contentsof the other indefinite lived assets to their respective fair values and, when appropriate, the carrying value is reduced to fair value. fair value of the other indefinite-lived intangible assets is estimated using the relief from royalty method. the fair value of the company's other indefinite lived intangible assets are determined utilizing the best estimate of future revenues, market and general economic conditions as well as assumptions that management believes marketplace participants would utilize including discount rates, cost of capital, trademark royalty rates, and long-term growth rates. during the third quarter of 2019, management determined that the decrease in the stock price of the company and the impact on future earnings related to the discontinuation of the usaa affinity program qualified as triggering events for all of its reporting units and accordingly management performed an impairment assessment of goodwill and other indefinite-lived intangible assets as of september 1, 2019. the principal considerations for our determination that performing procedures relating to the other indefinite-lived intangible assets impairment assessment - trademark intangible assets is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the trademark intangible assets. this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to management’s significant assumptions, including future revenues and the discount rates. 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 trademark intangible asset impairment assessment, including controls over the determination of the fair value of the company’s trademark intangible assets. these procedures also included, among others, testing management’s process for developing the fair value estimates, testing the completeness and accuracy of the underlying data used in the valuation model and evaluating the reasonableness of the significant assumptions, including future revenues and discount rates. evaluating management’s assumption related to future revenues involved evaluating whether the assumption used by management was reasonable considering the current and past performance of the business associated with the trademark, consistency with external market and industry data, and 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 appropriateness of the company’s relief from royalty method, the trademark royalty rates, and discount rates./s/ pricewaterhouse coopers llp florham park, new jersey february 25, 2020 we have served as the company's auditor since 2009. | 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. acquisition of on course learning llc – valuation of customer relationships as described in note 3 to the consolidated financial statements, in fiscal year 2020 the company completed the purchase price allocation related to on course learning llc (“ocl”). ocl was purchased for net consideration of $118 million in the fourth quarter of fiscal year 2019, which resulted in a $26 million customer relationships intangible asset being recorded. as disclosed by management, a multi-period excess earnings method under the income approach was used to estimate the fair value of the customer relationships intangible asset. the significant assumptions utilized in calculating the fair value of the customer relationships intangible asset were the discount rate and the terminal growth rate. the principal considerations for our determination that performing procedures relating to the acquisition of on course learning llc – valuation of customer relationships is a critical audit matter are the significant judgment by management when developing the estimate of fair value of the customer relationships intangible asset, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions related to the discount rate and the terminal growth rate used in the fair value estimate of the customer relationships intangible asset. 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. 76table of contents 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 control over management’s valuation of the customer relationships intangible asset. these procedures included testing management’s process for developing the fair value estimate for the customer relationships intangible asset which included evaluating the appropriateness and mathematical accuracy of the valuation method and the significant assumptions used by management related to the discount rate and the terminal growth rate. evaluating management’s assumptions related to the discount rate and the terminal growth rate involved evaluating whether the assumptions used by management were reasonable by considering consistency with external market and industry data and considering whether the assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of the company’s valuation method, the discount rate and the terminal growth rate. /s/ pricewaterhouse coopers llp chicago, illinois august 18, 2020we have served as the company’s auditor since 1991. | 1 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, 57and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.allowance for loan losses as described in notes 1 and 5 to the company’s consolidated financial statements, the company has a gross loan balance of $1.06 billion and related allowance for loan losses balance of $12.1 million as of december 31, 2020. as described by the company in note 1, the evaluation of the allowance for loan losses is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. the allowance for loan losses is evaluated on a regular basis and is based upon the company’s review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.we identified the company’s estimate of the allowance for loan losses as a critical audit matter. the principal considerations for our determination of the allowance for loan losses as a critical audit matter related to the high degree of subjectivity in the company’s judgments in determining the qualitative factors. auditing these complex judgments and assumptions by the company involves especially challenging auditor judgement due to the nature and extent of audit evidence and 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 the following:• we evaluated the relevance and the reasonableness of assumptions related to evaluation of the loan portfolio, current economic conditions, and other risk factors used in development of the qualitative factors for collectively evaluated loans.• we evaluated the reasonableness of assumptions and data used by the company in developing the qualitative factors by comparing these data points to internally developed and third-party sources, and other audit evidence gathered. mc nair, mc lemore, middlebrooks & co., llc we have served as the company’s auditor since 1995. | 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.depreciation, depletion and amortization of proved oil and natural gas properties description of the matter the net book value of the corporation’s exploration and production assets was $10,993 million at december 31, 2020, and depreciation, depletion and amortization (dd&a) expense was $1,915 million for the year then ended. as described in note 1 to the financial statements, the corporation follows the successful efforts method of accounting for its oil and gas exploration and production activities. under the successful efforts method of accounting, dd&a expense is recorded using the units-of-production method, based on proved oil and gas reserves, as estimated by petroleum engineering specialists, for property acquisition costs and proved developed oil and gas reserves, also estimated by petroleum engineering specialists, for oil and gas production facilities and wells. proved oil and gas reserves are based on geological and engineering evaluations of 53 estimated in-place hydrocarbon volumes using financial and non-financial inputs. significant judgment is required by the corporations’ internal engineering staff in evaluating the geological and engineering data used to estimate reserves. estimating proved reserves also requires the selection of inputs, including oil and natural gas price assumptions, future operating and capital costs assumptions and tax rates by jurisdiction, among others. management used independent petroleum engineering specialists to audit approximately 92% of the corporation’s proved reserves at december 31, 2020 as prepared by the corporation’s internal engineering staff.auditing the corporation’s dd&a expense calculation is complex because of our need to assess the reasonableness of management’s determination of the inputs described above used in estimating proved oil and gas reserves and to use the work of the internal engineering staff and independent petroleum engineering specialists.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls that address the risks of material misstatement relating to the dd&a expense calculation. this included controls over the completeness and accuracy of the financial data used in estimating proved oil and gas reserves. our testing of the corporation’s dd&a expense calculation included, among other procedures, evaluating the professional qualifications and objectivity of the corporation’s internal petroleum engineering specialist responsible for overseeing the preparation of the corporation’s reserve estimates and of the independent petroleum engineering specialist used to audit the estimates. in addition, we tested the completeness and accuracy of the financial data used in the estimation of proved oil and gas reserves by agreeing significant inputs to source documentation, where available, on a sample basis and assessing the inputs for reasonableness based on review of corroborative evidence and consideration of any contrary evidence. for proved undeveloped reserves, we evaluated management’s development plans for compliance with the sec rule that undrilled locations are scheduled to be drilled within five years, unless specific circumstances justify a longer time, by assessing consistency of the development projection with the corporation’s drill plan and the availability of capital relative to the drill plan. additionally, we performed analytic and lookback procedures on inputs into the oil and gas reserve estimate as well as on the outputs. finally, we tested the mathematical accuracy of the dd&a expense calculations, including comparing the proved oil and gas reserves to the corporation’s reserve report. impairment of oil and natural gas properties description of the matter the net book value of the corporation’s exploration and production assets was $10,993 million at december 31, 2020, and impairment expense was $2,105 million for the year then ended. as described in notes 1 and 12 to the financial statements, the corporation reviews long‑lived assets, including oil and gas fields, for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recovered. if the carrying amounts of the long-lived assets are not expected to be recovered by estimated undiscounted future net cash flows, the assets are impaired, and an impairment loss is recorded. the impairments recorded in 2020 were based on estimates of fair value determined by discounting internally developed future net cash flows, a level 3 fair value measurement. significant inputs used in determining the discounted future net cash flows include future prices, which are determined with reference to recent historical prices and published forward prices, projected production volumes using risk adjusted oil and gas reserves and discount rates. the projected production volumes are based on geological54and engineering evaluations of estimated in-place hydrocarbon volumes using financial and non-financial inputs including projected capital expenditures. significant judgment is required by the corporations’ internal petroleum engineering staff in evaluating the geological and engineering data used to estimate reserves. estimating projected production volumes also requires the selection of inputs, including oil and natural gas price assumptions, future operating and capital costs assumptions and tax rates by jurisdiction, among others.auditing the corporation’s impairment calculation involved a high degree of subjectivity as the determination of fair value was based on assumptions as described above about future market and economic conditions. in addition, the cash flows include projected production volumes based on risk adjusted reserve estimates developed by the corporation’s internal engineering staff.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls that address the risks of material misstatement relating to the impairment expense calculation. this included controls over the completeness and accuracy of the significant inputs used to estimate fair value including pricing assumptions and projected production volumes among others. our testing of the corporation’s impairment calculation included, among other procedures, evaluating the significant assumptions used and testing the completeness and accuracy of the underlying data. we involved our valuation specialists to assist in evaluating the appropriateness of the methodology used in the cash flow model, as well as certain of the inputs, including reserve risk adjustment factors and projected pricing among other market inputs. we additionally evaluated the professional qualifications and objectivity of the corporation’s internal petroleum engineering specialist responsible for overseeing the preparation of the corporation’s reserve estimates and of the independent petroleum engineering specialist. we performed testing procedures including testing the completeness and accuracy of the financial data used in the estimation of oil and gas reserves by agreeing significant inputs to source documentation, where available, on a sample basis and assessing the inputs for reasonableness based on review of corroborative evidence and consideration of any contrary evidence. we also performed sensitivity analyses and a retrospective comparison of forecasted cash flows to actual historical data. finally, we tested the mathematical accuracy of the impairment calculations./s/ ernst & young llp we have served as the corporation’s auditor since 1971n | 4 |
critical audit matters the critical audit matters communicated below arematters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicatedto the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and(2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alterin any way our opinion on the consolidated 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. derivative liabilities as described in footnote 2 “derivative liabilities”,footnote 4, “convertible debentures”, footnote 5 “convertible promissory notes” and footnote 12 “fair value measurements” to the consolidated financial statements, the company recorded derivative activity during 2021 that resulted primarilyin a net aggregate derivative related gain of $1,136,063 and derivative liabilities of $123,300 at december 31, 2021. we identified the evaluation of instruments and contractsto determine whether there are derivatives to be recorded, the analysis of the accounting treatment and presentation for derivative transactionsand the valuation of derivatives as critical audit matters. auditing management’s analysis of the above critical audit matters wascomplex and involved a high degree of subjectivity. the primary procedures we performed to address thesecritical audit matters included (a) reviewed and tested management’s conclusions as to whether certain instruments or contractsqualified for derivative treatment by comparing management’s analysis and conclusions to authoritative and interpretive literature,(b) compared the accounting treatment and presentation to that described by the authoritative and interpretive literature, (c) testedmanagement’s process for valuing derivatives by comparing it to generally accepted methodologies for valuing derivatives, (d) testedmanagement’s valuation of the derivatives by testing assumptions and data used in the valuation model including the term, volatilityand interest rate, and (e) recomputed the derivative valuations. /s/ salberg & company, p.a. salberg & company, p.a.we have served as the company’s auditor since2020. | 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 account or disclosures to which they relate.2021 form 10-k | 63table of contents sales rebates and discounts description of the matter at december 31, 2021, the company’s sales rebates and discounts liability totaled $316 million. as explained in notes 3 and 4 to the consolidated financial statements, the company estimates a sales rebates and discounts liability for direct customers and other indirect customers in the distribution chain under the terms of their contracts using the expected value approach. the sales rebates and discounts are recorded as a deduction to revenue at the time the company recognizes a sale to a customer.auditing the sales rebates and discounts liability is complex because of the level of subjectivity involved in management’s assumptions used in the measurement process and the volume of rebate programs offered. for example, the estimate of the sales rebate and discount liability is based on historical experience with similar incentive programs, current sales data and estimates of inventory levels at the channel distributors.how we addressed the matter in our audit we tested the company’s internal controls over the sales rebates and discounts liability process. this included testing controls over management’s review of the significant assumptions in the estimation of sales rebates and discounts, including rebate rates by product category, sales in to and out of the distribution channel, and channel inventory levels.to test the company’s sales rebates and discounts liability, our audit procedures included, among others, evaluating the assumptions discussed above and testing the completeness and accuracy of the underlying data used in management’s expected value analysis. for example, we compared the significant assumptions to third-party reports used by the company to estimate indirect sales volumes during the period and we confirmed product remaining in the distribution channel at period end. in addition, we inspected the underlying direct and indirect customer rebate programs and compared the rebate percentages used in the company’s analyses with the program percentages. additionally, we assessed the historical accuracy of management’s sales rebates and discounts estimates by comparing the prior period sales rebates and discounts liability to the amount of actual payments made in subsequent periods. we also performed independent calculations of the rebate accruals and a sensitivity analysis of certain significant assumptions to evaluate the change in the sales rebates and discounts liability resulting from changes in the assumptions.2021 form 10-k | 64table of contents acquisition of kindred bio description of the matter during 2021, the company completed its acquisition of kindred bio for total consideration of $444 million, as disclosed in note 5 to the consolidated financial statements. the acquisition was accounted for as a business combination. auditing the company's accounting for its acquisition of kindred bio was complex due to the significant estimation uncertainty in determining the fair value of identified intangible assets, which principally consisted of in-process research and development (ipr&d) of $334 million. the company used the income approach valuation technique to estimate the fair value of the ipr&d intangible assets. this valuation technique provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining estimated economic life. the significant assumptions used to estimate the value of these intangible assets included estimated net cash flows that form the basis of the forecasted results (e.g., revenue and ebit margins). how we addressed the matter in our audit we tested the company's controls over its accounting for acquisitions. this included testing controls over the recognition and measurement of consideration transferred and related intangible assets, including the valuation models and underlying assumptions discussed above used to develop such estimates.to test the estimated fair value of the ipr&d intangible assets, our audit procedures included, among others, obtaining an understanding of management’s approach to evaluate the reasonableness of the significant assumptions discussed above. specifically, we evaluated the reasonableness of the projected revenue and ebit margin assumptions used within the valuation as compared against industry and market trends and identified contrary evidence. additionally, we performed sensitivity analyses of the significant assumptions to evaluate the changes in the fair value of the intangible assets resulting from changes in the assumptions. we involved our valuation specialists to assist in our evaluation of the methodology used by the company and certain assumptions included in the fair value estimates. lastly, we evaluated the appropriateness of the company’s related disclosures./s/ ernst & young llp we have served as the company’s auditor since 2017. | 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 and the report of other auditors 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 52table of contentsnot, 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 mortgage servicing rights description of the matter the company’s capitalized mortgage servicing rights (ms rs) totaled $380.0 million as of december 31, 2020. as explained in note 2 to the consolidated financial statements, the company recognized ms rs at estimated fair value upon the sale of an originated loan when the company retained the right to service the loan. the ms rs are amortized over the period of net servicing income or loss and are evaluated for impairment based on the fair value at each reporting date. the company engaged an independent third-party valuation expert to assist in determining the fair value of the ms rs. the fair value estimates for the ms rs primarily utilize discounted cash flow models that incorporate significant assumptions including discount rate, prepayment rate, servicing cost and estimated life. auditing the valuation of ms rs was complex and involved a high degree of subjectivity due to the nature of the assumptions. in particular, the valuation of ms rs was sensitive to assumptions such as discount rate, prepayment rate, servicing cost and estimated life, which were based on current market data and had a significant effect on the valuation of the ms rs. 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 msr valuation process. this included testing controls over management’s evaluation of the msr valuations prepared by the third-party expert and controls over the data inputs and the significant assumptions used in the discounted cash flow models. we involved our valuation professionals to assist with our procedures. our audit procedures included, among others, testing the completeness and accuracy of the data provided to management’s third-party expert, evaluating the appropriateness of the methodology used to determine the fair value of the ms rs and testing the significant assumptions used in the discounted cash flow models. we utilized information obtained from market participants and recent market activity on other msr transactions to test management’s assumptions and identify potential sources of contrary information. allowance for credit losses description of the matter the company’s allowance for credit losses related to structured loans and loss-sharing obligations related to the fannie mae dus program totaled $148.3 million and $30.3 million, respectively, as of december 31, 2020. as discussed in note 2 to the consolidated financial statements, management estimated the allowance for credit losses for the expected term of the loan using third party models, which consider loss factors determined through the generation of probability of defaults and loss given defaults for similar loans with similar credit, historical experience and current conditions for similar loans, reasonable and supportable forecasts about the future, and specific factors depending on the nature of the loans. for loans experiencing credit deterioration, management may use cash flow models or third party appraisals to estimate the fair value of the underlying collateral securing the impaired loan to estimate the expected credit losses. auditing management’s estimation of credit loss for structured loans and loss-sharing obligations related to the fannie mae dus program was complex and involved a high degree of subjectivity due to the significant uncertainty associated with the assumptions used in the estimation. in particular, the estimation of the allowance for credit losses and loss-sharing obligations were sensitive to significant assumptions, such as historical loss information, reasonable and supportable forecast periods, and depending on the nature of the loan, debt service coverage ratio, loan-to-value, capitalization rates, and expected loan term. 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 allowance for credit losses process. this included testing internal controls over management’s expected credit loss and impaired loan assessments, including testing controls over significant model assumptions and data inputs used in those assessments. we involved our valuation professionals to assist with our procedures. our audit procedures included, among others, evaluating the appropriateness of the methodologies used to estimate the allowance for credit losses and loss-sharing obligations, testing the completeness and accuracy of data used in the expected credit loss and cash flow models, and testing the significant assumptions used in the models. we utilized the company’s historical data and information obtained from market participants to test management’s assumptions and identify potential sources of contrary information. /s/ ernst & young llp we have served as the company’s auditor since 2003. | 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: (i) relates to accounts or disclosures that are material to the 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 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.allowance for loan losses as described in notes 1 and 4 to the financial statements, the company’s allowance for loan losses is a valuation allowance that reflects the company’s estimation of incurred losses in its loan portfolio to the extent they are both probable and reasonable to estimate. the allowance for loan losses was $20,363,000 at december 31, 2020, which consists of two components; the allowance for loans individually evaluated for impairment (“specific reserves”) and the allowance for loans collectively evaluated for impairment (“general reserves”). the company’s general reserves include reserves based on historical charge-off factors and qualitative general reserve factors. the component for qualitative general reserve factors involves an evaluation of items which are not yet reflected in the factors for historical charge-offs including changes in: lending policies and procedures, economic and business conditions, nature and volume of the portfolio, lending staff, volume and severity of delinquent loans, loan review systems, collateral values, and concentrations of credit. the evaluation of these items results in qualitative general reserve factors, which contribute significantly to the general reserve component of the estimate of the allowance for loan losses. 67we identified management’s estimate of the aggregate effect of the qualitative reserve factors on the allowance for loan losses as a critical audit matter as it involved subjective auditor judgment. management’s determination of qualitative general reserve factors involved especially subjective judgment because management's estimate relies on qualitative analysis to determine the quantitative impact the items have on the allowance. the primary procedures we performed to address this critical audit matter included:evaluated the design and tested the operating effectiveness of controls over the determination of items used to estimate the qualitative general reserve factors, including controls addressing:a.the data used as the basis for the adjustments relating to qualitative general reserve factors.b.management’s determination of loans excluded from qualitative general reserve factors calculation.c.management’s review of the qualitative and quantitative conclusions related to the qualitative general reserve factors and the resulting allocation to the allowance.substantively tested the general reserves related to qualitative general reserve factors which included:a.evaluation of the completeness and accuracy of data inputs used as a basis for the adjustments relating to the qualitative general reserve factors. b.evaluation of loans excluded from the qualitative general reserve calculation for propriety of classification. c.evaluation of the reasonableness of management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of qualitative general reserve factors and the resulting allocation to the allowance. our evaluation considered the weight of confirming and disconfirming evidence from internal and external sources, loan portfolio performance and third-party data, and whether management’s assumptions were applied consistently period to period./s/ horne llp 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 (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.valuation of the asset-specific provision for loan losses as described in notes 2 and 3 to the consolidated financial statements, the company’s consolidated mortgage loan receivables held for investment, net, at amortized cost were $3.3 billion, net of provision for loan losses of $20.5 million, as of december 31, 2019. as disclosed by management, the provision for loan losses includes a portfolio-based, general component and an asset-specific component of $5.8 million and $14.7 million, respectively. management considers a loan to be impaired when, based upon current information and events, it believes it is probable the company will be unable to collect all amounts due under the contractual terms of the loan agreement. an asset-specific provision for loan losses is established by management for an impaired loan when the present value of payments expected to be received, observable market prices, or the estimated fair value of the collateral (for loans that are dependent on the collateral for repayment) is lower than the carrying value of that loan. determining fair value of the collateral may take into account a number of assumptions including, but not limited to, cash flow projections, market capitalization rates, discount rates and data regarding recent comparable sales of similar properties. such assumptions are generally based on current market conditions and are subject to economic and market uncertainties. the principal considerations for our determination that performing procedures relating to the valuation of the asset-specific provision for loan losses is a critical audit matter are (i) there was significant judgment by management to estimate the fair value of the collateral of impaired loans, which resulted in a high degree of auditor judgment and subjectivity in applying procedures relating to these fair value measurements and in evaluating audit evidence related to the asset-specific provision for loan losses and the fair value of underlying collateral, (ii) there was significant audit effort in evaluating the significant assumptions, including cash flow projections, market capitalization rates, discount rates and data regarding recent comparable sales of similar properties, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing procedures and evaluating the audit evidence obtained.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the valuation of the asset-specific provision for loan losses. these procedures also included, among others, an evaluation of the significant assumptions used by management in developing the fair value measurements, including cash flow projections, market capitalization rates, discount rates and data regarding recent comparable sales of similar properties. when evaluating the significant assumptions, we evaluated whether the assumptions used were reasonable considering the past performance of the real estate property and other relevant economic and market conditions. professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of methodologies used by management and the reasonableness of significant assumptions. we also considered whether assumptions and conclusions made by management were supported by evidence obtained in other areas of the audit and tested the completeness and accuracy of the data provided by management. valuation of assets acquired through foreclosure as described in notes 2 and 5 to the consolidated financial statements, the company’s consolidated real estate and related lease intangibles, net were $1 billion, inclusive of $88.6 million of foreclosed properties, as of december 31, 2019. the company generally acquires real estate assets or land and development assets through cash purchases and may also acquire such assets through foreclosure or deed-in-lieu of foreclosure in full or partial satisfaction of defaulted loans. the company records real estate acquired through foreclosure at fair value. in estimating the fair value of the tangible and intangible assets acquired, management considers information obtained about each property as a result of its due diligence and marketing and leasing activities, and utilizes various valuation methods, such as estimated cash flow projections utilizing appropriate discount and capitalization rates, estimates of replacement costs net of depreciation, and available market information. the principal considerations for our determination that performing procedures relating to the valuation of assets acquired through foreclosure is a critical audit matter are (i) there was significant judgment by management to estimate the fair value of 93table of contentsthe assets acquired through foreclosure, which resulted in a high degree of auditor judgment and subjectivity in applying procedures relating to these fair value measurements and in evaluating audit evidence related to the fair value of the assets acquired, (ii) there was significant audit effort in evaluating the significant assumptions, including discount and capitalization rates utilized in management’s estimated cash flow projections, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing procedures and evaluating the audit evidence obtained. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the valuation of assets acquired through foreclosure. these procedures also included, among others, an evaluation of the significant assumptions used by management in developing the fair value measurements, including discount and capitalization rates utilized in management’s estimated cash flow projections. when evaluating the significant assumptions, we evaluated whether the assumptions used were reasonable considering the past performance of the real estate property and other relevant economic and market conditions. professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of methodologies used by management and the reasonableness of significant assumptions. we also considered whether assumptions and conclusions made by management were supported by evidence obtained in other areas of the audit and tested the completeness and accuracy of the data provided by management. /s/ pricewaterhouse coopers llp new york, new york february 27, 2020 we have served as the company’s or its predecessor’s auditor since 2009. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the 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. ritchie bros. 61 table of contents valuation of goodwill related to the mascus reporting unit description of the matter at december 31, 2020, the company’s goodwill related to mascus was $21.6 million. as discussed in note 2(r) to the consolidated financial statements, goodwill is tested for impairment at least annually at the reporting unit level. the company’s goodwill is further described in note 19 to the consolidated financial statements. auditing management’s annual goodwill impairment test related to the mascus reporting unit involved subjective auditor judgment due to the significant estimation uncertainly in determining the fair value of the reporting unit. the fair value estimate was made using a discounted cash flow model. significant judgment was required in assessing the assumptions used, in particular projected revenue growth rates, the terminal growth rate, projected earnings before interest, taxes, depreciation and amortization (ebitda) margins and the discount rate. 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, including controls over management’s review of the significant assumptions described above. our substantive procedures to test the company’s estimated fair value of the mascus reporting unit, included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the company in its analysis. we assessed the projected revenue growth rates, terminal growth rates and ebitda margins used by management by comparing them to current economic and industry trends. we assessed the accuracy of the company’s projections for revenue growth rates and ebitda margins by comparing the projections to actual historic operating results. we performed sensitivity analysis of significant assumptions discussed above to evaluate the potential changes in the fair value of the reporting unit that would result from changes in the assumptions. we also involved our valuation specialists to assist in the review of the valuation methodology as well as the appropriateness of the discount rates used. accounting for acquisitions description of the matter as disclosed in note 4 to the consolidated financial statements, on december 8, 2020, the company completed its acquisition of rouse services llc (“rouse”) for net consideration of $251.7 million. the transaction was accounted for as a business combination. auditing the company’s accounting for its acquisition of rouse was complex due to the significant estimation required by management to determine the fair value of the intangible assets acquired, in particular customer relationships of $71.0 million. the significant estimation uncertainty was primarily due to the sensitivity of the fair value to underlying assumptions about the future performance of the acquired business. the company used a discounted cash flow model to measure the customer relationship intangible asset. the significant assumptions used to estimate the value of the intangible asset included the discount rate and certain assumptions that form the basis of the forecasted results, in particular revenue growth rates, earnings before interest, taxes, depreciation and amortization (ebitda) margins, customer attrition rates and the forecast period. these significant assumptions are forward looking and could be affected by future economic and market conditions. ritchie bros. 62 table of contents how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of the company’s controls over its accounting for acquisitions, including controls over the estimation process supporting the recognition and measurement of the customer relationship intangible asset and controls over management’s review of the significant assumptions described above. to test the estimated fair value of the customer relationship intangible asset, we performed audit procedures that included, among others, evaluating the company's selection of the valuation methodology, evaluating the methods and significant assumptions incorporated therein and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions. we compared the revenue growth rates, ebitda margins and the forecast period to current industry, market and economic trends, the historical results of the acquired business and other guidelines used by companies within comparable industries. we also involved our valuation specialists to assist in the review of the valuation methodology, as well as the appropriateness of the discount rates and the customer attrition rates used. /s/ernst & young llp chartered professional accountants we have served as the company‘s auditor since 2013. | 1 |
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