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critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.valuation of interest-rate derivatives and hedged items as described in notes 17 and 18 to the financial statements, the company uses derivatives to manage its interest rate exposure. the total notional amount of derivatives as of december 31, 2021 was $95 billion, of which 81% were designated as hedging instruments, and the fair value of derivative assets and liabilities as of december 31, 2021 was $298 million and $37 million, respectively. the fair values of interest-rate derivatives and hedged items are primarily estimated using a discounted cash-flow model. the discounted cash-flow model uses market observable inputs such as interest rate curves, volatility, and, if applicable, prepayment assumptions.the principal considerations for our determination that performing procedures relating to the valuation of interest-rate derivatives and hedged items is a critical audit matter are the significant audit effort in evaluating the interest rate curves, volatility, and, if applicable, prepayment assumptions used to fair value these derivatives and hedged items, and the audit effort involved the use of professionals with specialized skill and knowledge.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. these procedures included testing the effectiveness of controls relating to the valuation of interest-rate derivatives and hedged items, including controls over the model, data and assumptions. these procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent range of prices for a sample of interest-rate derivatives and hedged items and comparison of management’s estimate to the independently developed ranges. developing the independent range of prices involved testing the completeness and accuracy of data provided by management and independently developing the interest rate curves, volatility, and, if applicable, prepayment assumptions./s/ pricewaterhouse coopers llp new york, new york march 22, 2022we have served as the company’s auditor since 1990. | 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 separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.revenue recognition related to deferred revenue - refer to notes 2 and 4 to the consolidated financial statements critical audit matter description the partnership defers revenue for season-long products sold in the current year for use in the subsequent season for admissions, dining, beverages and other products and recognizes revenues based on an estimated number of uses expected for each type of product. the partnership estimates a redemption rate for each multi-use product using historical and forecasted uses at each park. revenue is then recognized on a per-usage basis determined by the selling price of the multi-use product and the estimated uses of that product. during the third quarter of 2019, management began selling season-long admission multi-use products for the 2020 operating season. these products included providing the customer park access for the remainder of the 2019 operating season. the total year end deferred revenue balance as of december 31, 2019 was $151.4 million.auditing the amount of deferred revenue associated with the season-long multi-use products that should be recognized in revenue in each fiscal year required a high degree of auditor judgment and an increased extent of effort.how the critical audit matter was addressed in the audit our audit procedures related to the estimated park use projections and the recognition of revenue from deferred revenue included the following, among others:•we tested the effectiveness of controls over revenue recognition related to multi-use products.•we tested the completeness and accuracy of the year end deferred revenue balance.•we evaluated the reasonableness of the year-over-year change in deferred revenue.•we tested whether revenue relating to the current fiscal year was appropriately recognized.schlitterbahn acquisition - refer to note 3 to the consolidated financial statements critical audit matter description on july 1, 2019, the partnership completed the acquisition of two water parks and one resort in texas, the schlitterbahn waterpark & resort new braunfels and the schlitterbahn waterpark galveston ("schlitterbahn"), for a cash purchase price of $257.7 million. accordingly, the purchase price was allocated to the underlying assets acquired and liabilities assumed based upon management's estimated relative fair values at the date of acquisition. the method for determining relative fair value varied depending on the type of asset or liability and involved management making significant estimates related to assumptions such as future cash flows, discount rates, projected revenue, and current market interest rates.auditing the fair value of the property and equipment and trade names acquired 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 relative fair value of the property and equipment and trade names acquired for schlitterbahn included the following, among others:•we tested the effectiveness of controls over the valuation methodology for estimating the fair value of assets acquired.•with the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology, (2) reasonableness of the valuation assumptions, including testing the mathematical accuracy of the calculation, and developing a range of independent estimates and comparing our estimates to those used by management, and (3) cost to replace certain assets, including external trend factors.•we tested management's projections by comparing the assumptions used in the valuation models to external market sources, historical data, and results from other areas of the audit./s/ deloitte & touche llp cleveland, ohio february 21, 2020we have served as the partnership’s auditor since 2004. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.goodwill impairment assessment as described in note 2 to the consolidated financial statements, the company’s goodwill balance was $15 million as of december 31, 2020. goodwill is subject to impairment testing annually as of march 31, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. management first assesses qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. potential impairment is identified by comparing the fair value of a reporting unit to the carrying value, including goodwill. in the first quarter of 2020, the company concluded that due to the negative effects of the covid-19 pandemic on revenue and profitability, a triggering event existed for the company’s reporting unit as of march 31, 2020, and therefore performed a quantitative assessment. fair value for the reporting unit was determined based on a combination of the discounted future cash flow model (income approach) and the application of current market multiples for comparable publicly-traded companies (market approach). under the income approach, the fair value of the reporting unit is estimated based on the discounted present value of the projected future cash flows. management’s cash flow projections for the reporting unit included significant judgments and assumptions, including revenue growth rate, ebitda margin, and wacc rate. under the market approach, management uses selected financial information of publicly-traded companies that compare to the reporting unit to derive a market-based multiple. the principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are (i) the significant judgment by management when determining the fair value of the reporting unit; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to the revenue growth rate, ebitda margin, and wacc 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 goodwill impairment assessment, including controls over the valuation of the reporting unit. these procedures also included, among others (i) testing management’s process for determining the fair value of the reporting unit; (ii) evaluating the appropriateness of the income and market approaches; (iii) testing the completeness and accuracy of underlying data used in the income and market approaches; and (iv) evaluating the significant assumptions used by management related to the revenue growth rate, ebitda margin, and wacc rate. evaluating management’s assumptions related to the revenue growth rate and ebitda margin involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. professionals with specialized skill and knowledge were used to assist in the evaluation of (i) the company’s income and market approaches and (ii) the wacc rate assumption./s/ pricewaterhouse coopers llp florham park, new jersey february 19, 2021we have served as the company’s auditor since 2015. | 1 |
critical audit matters arising from the audit of the current period’s financial statements in the auditor’s report. the requirements related to critical audit matters in as 3101 were effective for audits of fiscal years ending on or after june 30, 2019, for large accelerated filers; and for fiscal years ending on or after december 15, 2020, for all other companies to which the requirements apply. therefore, critical audit matters are included in the report of independent registered public accounting firm for tanger factory outlet centers, inc.'s consolidated financial statements as of and for the year ended december 31, 2019, and are included in the report of independent registered public accounting firm for tanger properties limited partnership's consolidated financial statements as of and for the year ended december 31, 2020.59non-gaap supplemental measures beginning with the three months ended march 31, 2020, we elected to supplement our disclosure with three additional non-gaap measures, adjusted ebitda, ebitd are and adjusted ebitd are (each as defined below), that are commonly provided in the reit industry. see “adjusted ebitda, ebitd are and adjusted ebitd are” below for more information. we also now refer to adjusted funds from operations (“affo”) as core funds from operations (“core ffo”), but there has been no change to the definition of this measure.funds from operations funds from operations (“ffo”) is a widely used measure of the operating performance for real estate companies that supplements net income (loss) determined in accordance with gaap. we determine ffo based on the definition set forth by the national association of real estate investment trusts (“nareit”), of which we are a member. in december 2018, nareit issued “nareit funds from operations white paper - 2018 restatement” which clarifies, where necessary, existing guidance and consolidates alerts and policy bulletins into a single document for ease of use. nareit defines ffo as net income (loss) available to the company’s common shareholders computed in accordance with gaap, excluding (i) depreciation and amortization related to real estate, (ii) gains or losses from sales of certain real estate assets, (iii) gains and losses from change in control, (iv) impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity and (v) after adjustments for unconsolidated partnerships and joint ventures calculated to reflect ffo on the same basis.ffo is intended to exclude historical cost depreciation of real estate as required by gaap which assumes that the value of real estate assets diminishes ratably over time. historically, however, real estate values have risen or fallen with market conditions. because ffo excludes depreciation and amortization of real estate assets, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income (loss).we present ffo because we consider it an important supplemental measure of our operating performance. in addition, a portion of cash bonus compensation to certain members of management is based on our ffo or core ffo, which is described in the section below. we believe it is useful for investors to have enhanced transparency into how we evaluate our performance and that of our management. in addition, ffo is frequently used by securities analysts, investors and other interested parties in the evaluation of rei ts, many of which present ffo when reporting their results. ffo is also widely used by us and others in our industry to evaluate and price potential acquisition candidates. we believe that ffo payout ratio, which represents regular distributions to common shareholders and unit holders of the operating partnership expressed as a percentage of ffo, is useful to investors because it facilitates the comparison of dividend coverage between rei ts. nareit has encouraged its member companies to report their ffo as a supplemental, industry-wide standard measure of reit operating performance. ffo has significant limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under gaap. some of these limitations are:•ffo does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;•ffo does not reflect changes in, or cash requirements for, our working capital needs;•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and ffo does not reflect any cash requirements for such replacements; and•other companies in our industry may calculate ffo differently than we do, limiting its usefulness as a comparative measure.60because of these limitations, ffo should not be considered as a measure of discretionary cash available to us to invest in the growth of our business or our dividend paying capacity. we compensate for these limitations by relying primarily on our gaap results and using ffo only as a supplemental measure.core funds from operations we present core ffo (formerly referred to as affo) as a supplemental measure of our performance. we define core ffo as ffo further adjusted to eliminate the impact of certain items that we do not consider indicative of our ongoing operating performance. these further adjustments are itemized in the table below, if applicable. you are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. in evaluating core ffo you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. our presentation of core ffo should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.we present core ffo because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. in addition, we believe it is useful for investors to have enhanced transparency into how we evaluate management’s performance and the effectiveness of our business strategies. we use core ffo when certain material, unplanned transactions occur as a factor in evaluating management’s performance and to evaluate the effectiveness of our business strategies, and may use core ffo when determining incentive compensation.core ffo has limitations as an analytical tool. some of these limitations are:•core ffo does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;•core ffo does not reflect changes in, or cash requirements for, our working capital needs;•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and core ffo does not reflect any cash requirements for such replacements;•core ffo does not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; and•other companies in our industry may calculate core ffo differently than we do, limiting its usefulness as a comparative measure.because of these limitations, core ffo should not be considered in isolation or as a substitute for performance measures calculated in accordance with gaap. we compensate for these limitations by relying primarily on our gaap results and using core ffo only as a supplemental measure.61below is a reconciliation of net income (loss) to ffo and core ffo available to common shareholders (in thousands, except per share amounts): 202020192018net income (loss)$(38,013)$92,728 $45,563 adjusted for:depreciation and amortization of real estate assets - consolidated114,021 120,856 129,281 depreciation and amortization of real estate assets - unconsolidated joint ventures12,024 12,512 13,314 impairment charges - consolidated(2)67,226 37,610 49,739 impairment charge - unconsolidated joint ventures3,091 — 7,180 foreign currency loss from sale of joint venture property— 3,641 gain on sale of assets(2,324)(43,422)— ffo156,025 223,925 245,077 ffo attributable to noncontrolling interests in other consolidated partnerships(190)(195)421 allocation of earnings to participating securities(1,713)(1,991)(2,151)ffo available to common shareholders (1)$154,122 $221,739 $243,347 as further adjusted for:compensation related to voluntary retirement plan and executive officer retirement (3)573 4,371 — gain on sale of outparcel(992)— — impact of above adjustments to the allocation of earnings to participating securities 5 (35)— core ffo available to common shareholders (1)$153,708 $226,075 $243,347 ffo available to common shareholders per share - diluted (1)$1.58 $2.27 $2.48 core ffo available to common shareholders per share - diluted (1)$1.57 $2.31 $2.48 weighted average shares:basic weighted average common shares92,618 92,808 93,309 effect of outstanding options and restricted common shares— — 1 diluted weighted average common shares (for earnings per share computations)92,618 92,808 93,310 effect of outstanding options94 — — exchangeable operating partnership units 4,903 4,958 4,993 diluted weighted average common shares (for ffo and core ffo per share computations) (1)97,615 97,766 98,303 (1)assumes the class a common limited partnership units of the operating partnership held by the noncontrolling interests are exchanged for common shares of the company. each class a common limited partnership unit is exchangeable for one of the company's common shares, subject to certain limitations to preserve the company's reit status.(2)the 2020 amount includes $4.0 million of impairment loss attributable to the right-of-use asset associated with the ground lease at the mashantucket (foxwoods), connecticut outlet center.(3)the 2019 amount represents the accelerated recognition of compensation cost entitled to be received by the company’s former president and chief operating officer per the terms of a transition agreement executed in connection with his retirement. the 2020 amount represents compensation cost related to a voluntary retirement plan offer which required eligible participants to give notice of acceptance by december 1, 2020 for an effective retirement date of march 31, 2021.62portfolio net operating income and same center noi we present portfolio net operating income (“portfolio noi”) and same center net operating income (“same center noi”) as supplemental measures of our operating performance. portfolio noi represents our property level net operating income which is defined as total operating revenues less property operating expenses and excludes termination fees and non-cash adjustments including straight-line rent, net above and below market rent amortization, impairment charges and gains or losses on the sale of assets recognized during the periods presented. we define same center noi as portfolio noi for the properties that were operational for the entire portion of both comparable reporting periods and which were not acquired, or subject to a material expansion or non-recurring event, such as a natural disaster, during the comparable reporting periods. we believe portfolio noi and same center noi are non-gaap metrics used by industry analysts, investors and management to measure the operating performance of our properties because they provide performance measures directly related to the revenues and expenses involved in owning and operating real estate assets and provide a perspective not immediately apparent from net income (loss), ffo or core ffo. because same center noi excludes properties developed, redeveloped, acquired and sold; as well as non-cash adjustments, gains or losses on the sale of outparcels and termination rents; it highlights operating trends such as occupancy levels, rental rates and operating costs on properties that were operational for both comparable periods. other rei ts may use different methodologies for calculating portfolio noi and same center noi, and accordingly, our portfolio noi and same center noi may not be comparable to other rei ts. portfolio noi and same center noi should not be considered alternatives to net income (loss) or as an indicator of our financial performance since they do not reflect the entire operations of our portfolio, nor do they reflect the impact of general and administrative expenses, acquisition-related expenses, interest expense, depreciation and amortization costs, other non-property income and losses, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, or trends in development and construction activities which are significant economic costs and activities that could materially impact our results from operations. because of these limitations, portfolio noi and same center noi should not be viewed in isolation or as a substitute for performance measures calculated in accordance with gaap. we compensate for these limitations by relying primarily on our gaap results and using portfolio noi and same center noi only as supplemental measures.63below is a reconciliation of net income (loss) to portfolio noi and same center noi for the consolidated portfolio (in thousands):20202019net income (loss)$(38,013)$92,728 adjusted to exclude:equity in earnings of unconsolidated joint ventures(1,126)(7,839)interest expense63,142 61,672 gain on sale of assets(2,324)(43,422)other (income) expense (925)2,761 impairment charges67,226 37,610 depreciation and amortization117,143 123,314 other non-property expenses1,359 1,049 corporate general and administrative expenses48,172 53,881 non-cash adjustments (1)6,170 (6,237)lease termination fees(12,125)(1,615)portfolio noi248,699 313,902 non-same center noi (2)(728)(5,993)same center noi $247,971 $307,909 (1)non-cash items include straight-line rent, above and below market rent amortization, straight-line rent expense on land leases and gains or losses on outparcel sales, as applicable. (2)excluded from same center noi: outlet centers sold:nags head, ocean city, park city, and williamsburg march 2019terrell august 2020adjusted ebitda, ebitd are and adjusted ebitd are we present earnings before interest, taxes, depreciation and amortization (“ebitda”) as adjusted for items described below (“adjusted ebitda”), ebitda for real estate (“ebitd are”) and adjusted ebitd are, all non-gaap measures, as supplemental measures of our operating performance. each of these measures is defined as follows:we define adjusted ebitda as net income (loss) available to the company’s common shareholders computed in accordance with gaap before interest expense, income taxes (if applicable), depreciation and amortization, gains and losses on sale of operating properties, joint venture properties, outparcels and other assets, gains and losses on change of control, impairment write-downs of depreciated property and of investment in unconsolidated joint ventures caused by a decrease in value of depreciated property in the affiliate, compensation related to voluntary retirement plan and executive officer retirement, gains and losses on extinguishment of debt, net and other items that we do not consider indicative of the company's ongoing operating performance.we determine ebitd are based on the definition set forth by nareit, which is defined as net income (loss) available to the company’s common shareholders computed in accordance with gaap before interest expense, income taxes (if applicable), depreciation and amortization, gains and losses on sale of operating properties, gains and losses on change of control and impairment write-downs of depreciated property and of investment in unconsolidated joint ventures caused by a decrease in value of depreciated property in the affiliate and after adjustments to reflect our share of the ebitd are of unconsolidated joint ventures.adjusted ebitd are is defined as ebitd are excluding gains and losses on extinguishment of debt, net, compensation related to voluntary retirement plan and executive officer retirement, gains and losses on sale of outparcels, and other items that that we do not consider indicative of the company's ongoing operating performance.64we present adjusted ebitda, ebitd are and adjusted ebitd are as we believe they are useful for investors, creditors and rating agencies as they provide additional performance measures that are independent of a company’s existing capital structure to facilitate the evaluation and comparison of the company’s operating performance to other rei ts and provide a more consistent metric for comparing the operating performance of the company’s real estate between periods. adjusted ebitda, ebitd are and adjusted ebitd are have significant limitations as analytical tools, including:•they do not reflect our interest expense;•they do not reflect gains or losses on sales of operating properties or impairment write-downs of depreciated property and of investment in unconsolidated joint ventures caused by a decrease in value of depreciated property in the affiliate;•adjusted ebitda and adjusted ebitd are do not reflect gains and losses on extinguishment of debt and other items that may affect operations; and•other companies in our industry may calculate these measures differently than we do, limiting its usefulness as a comparative measure.because of these limitations, adjusted ebitda, ebitd are and adjusted ebitd are should not be considered in isolation or as a substitute for performance measures calculated in accordance with gaap. we compensate for these limitations by relying primarily on our gaap results and using adjusted ebitda, ebitd are and adjusted ebitd are only as supplemental measures.65below is a reconciliation of net income (loss) to adjusted ebitda (in thousands):202020192018net income (loss)$(38,013)$92,728 $45,563 adjusted to exclude:interest expense63,142 61,672 64,821 depreciation and amortization117,143 123,314 131,722 impairment charges - consolidated(1)67,226 37,610 49,739 impairment charge - unconsolidated joint ventures3,091 — 7,180 loss on sale of joint venture property, including foreign currency effect— 3,641 — gain on sale of assets(2,324)(43,422)— compensation related to voluntary retirement plan and executive officer retirement(2)573 4,371 — gain on sale of outparcel - unconsolidated joint ventures(992)— adjusted ebitda$209,846 $279,914 $299,025 below is a reconciliation of net income (loss) to ebitd are and adjusted ebitd are (in thousands):202020192018net income (loss)$(38,013)$92,728 $45,563 adjusted to exclude:interest expense63,142 61,672 64,821 depreciation and amortization117,143 123,314 131,722 impairment charges - consolidated(1)67,226 37,610 49,739 impairment charge - unconsolidated joint ventures3,091 — 7,180 loss on sale of joint venture property, including foreign currency effect— 3,641 — gain on sale of assets(2,324)(43,422)— pro-rata share of interest expense - unconsolidated joint ventures6,545 8,117 7,259 pro-rata share of depreciation and amortization - unconsolidated joint ventures12,024 12,458 13,315 ebitd are$228,834 $296,118 $319,599 compensation related to voluntary retirement plan and executive officer retirement(2)573 4,371 — gain on sale of outparcel - unconsolidated joint ventures(992)— — adjusted ebitd are$228,415 $300,489 $319,599 (1)the 2020 amount includes $4.0 million of impairment loss attributable to the right-of-use asset associated with the ground lease at the mashantucket (foxwoods), connecticut outlet center.(2)the 2019 amount represents the accelerated recognition of compensation cost entitled to be received by the company’s former president and chief operating officer per the terms of a transition agreement executed in connection with his retirement. the 2020 amount represents compensation cost related to a voluntary retirement plan offer which required eligible participants to give notice of acceptance by december 1, 2020 for an effective retirement date of march 31, 2021.66economic conditions and outlook we are closely monitoring the impact of the covid-19 pandemic on all aspects of our business and geographies, including how it will impact our tenants and business partners. for a complete discussion of the impact the pandemic is having on our current operations, the steps we have taken to increase liquidity and preserve financial flexibility and the uncertainties around our future operations and financial condition, see “management’s discussion and analysis of financial condition and results of operations-covid-19 pandemic”.the majority of our leases contain provisions designed to mitigate the impact of inflation. such provisions include clauses for the escalation of base rent and clauses enabling us to receive percentage rentals based on tenants' gross sales (above predetermined levels), which generally increase as prices rise. a component of most leases includes a pro-rata share or escalating fixed contributions by the tenant for property operating expenses, including common area maintenance, real estate taxes, insurance and advertising and promotion, thereby reducing exposure to increases in costs and operating expenses resulting from inflation.a portion of our rental revenues are derived from percentage rents that directly depend on the sales volume of certain tenants. accordingly, declines in these tenants' sales would reduce the income produced by our properties. if the sales or profitability of our retail tenants decline sufficiently, whether due to a change in consumer preferences, legislative changes that increase the cost of their operations or otherwise, such tenants may be unable to pay their existing rents as such rents would represent a higher percentage of their sales.in addition, certain of our lease agreements include co-tenancy and/or sales-based provisions that may allow a tenant to pay reduced rent and/or terminate a lease prior to its natural expiration if we fail to maintain certain occupancy levels or retain specified named tenants, or if the tenant does not achieve certain specified sales targets. our occupancy at our consolidated centers has declined from 97% at the end of 2019 to 92% at then end of 2020. if our occupancy continues to decline, certain outlet centers may fall below the minimum co-tenancy thresholds and could trigger many tenants ability to pay reduced rents, which in turn may negatively impact our results of operations. our outlet centers typically include well-known, national, brand name companies. by maintaining a broad base of well-known tenants and a geographically diverse portfolio of properties located across the united states, we believe we reduce our operating and leasing risks. no one tenant (including affiliates) accounts for more than 8% of our square feet or 7% of our rental revenues.due to the relatively short-term nature of our tenants’ leases, a significant portion of the leases in our portfolio come up for renewal each year. as of january 1, 2020, we had approximately 1.5 million square feet, or 13% of our consolidated portfolio at that time coming up for renewal during 2020. as of december 31, 2020, we had renewed approximately 70%of this space. in addition, for the twelve months ended december 31, 2020, we completed renewals and re-tenanted space totaling 1.5 million square feet at a blended 6.7% decrease in average base rental rates compared to the expiring rates. during 2021, approximately 1.7 million square feet, or 15%, of our current consolidated portfolio will come up for renewal. our operations are subject to the operating results and operating decisions of our retail tenants. as is typical in the retail industry, certain tenants have closed, or will close, certain stores by terminating their lease prior to its natural expiration or as a result of filing for protection under bankruptcy laws, or may request modifications to their existing lease terms. the current environment has negatively impacted certain retailers, in particular some who were already pressured prior to the pandemic. during 2020 and 2021, 16 retailers on our tenant roster declared bankruptcy or announced a brand-wide restructuring. recent chapter 11 bankruptcy filings include, but not limited to, j. crew group, inc. (filed in may 2020) and brooks brothers, lucky brand jeans, new york and company and ascena retail group, inc. (all filed in july, 2020), francesca's (filed in december 2020) and christopher and banks (filed in january 2021). also, in 2020, g-iii apparel announced a brand-wide restructuring, including its intention to close all of its wilsons and bass stores. 67during the year ended december 31, 2020, we recaptured approximately 903,000 square feet within the consolidated portfolio related to bankruptcies and brand-wide restructurings by retailers, compared to 198,000 square feet during the year ended december 31, 2019. while a number of tenant bankruptcies and brand-wide restructurings remain fluid, at this time, we expect approximately 50 stores comprising approximately 200,000 square feet to close mostly during the first half of 2021. we also expect there will be an impact on rental rates as some of these tenant leases are renewed at reduced spreads, or in select cases mid-lease modifications are implemented. as many of these are still in process, we don’t yet know what the ultimate impact of store closures, timing, lease adjustments or potential early termination fees will be.due to store closures, tenant bankruptcies and rent adjustments that may result from the impact of the covid-19 pandemic, our same center noi for 2020 compared to 2019 was adversely impacted and may continue to be adversely impacted in 2021. we believe outlet stores will continue to be a profitable and fundamental distribution channel for many brand name manufacturers. while we continue to attract and retain additional tenants, if we were unable to successfully renew or re-lease a significant amount of this space on favorable economic terms or in a timely manner, the loss in rent and our same center noi could be further negatively impacted in 2021. occupancy at our consolidated centers was 91.9% and 97.0% as of december 31, 2020 and 2019, respectively. as a result of covid-19, occupancy could be further negatively impacted in 2021.item 7a. quantitative and qualitative disclosures about market risk market risk we are exposed to various market risks, including changes in interest rates. market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates. interest rate risk we may periodically enter into certain interest rate protection and interest rate swap agreements to effectively convert existing floating rate debt to a fixed rate basis. we do not enter into derivatives or other financial instruments for trading or speculative purposes. we currently have interest rate swap agreements to fix the interest rates on outstanding debt with notional amounts totaling $640.0 million. see note 9 to the consolidated financial statements for additional details related to our outstanding derivatives. as of december 31, 2020, 1% of our outstanding consolidated debt, excluding the amount of variable rate debt with interest rate protection agreements in place, had variable interest rates and therefore was subject to market fluctuations. a change in the libor index of 100 basis points would result in an increase or decrease of approximately $114,000 in interest expense on an annual basis. the interest rate spreads associated with our unsecured lines of credit and our unsecured term loan are based on the higher of our two investment grade credit ratings. changes to our credit ratings could cause our interest rate spread to adjust accordingly. in february 2020, due to a change in our credit rating, our interest rate spread over libor on our $600.0 million unsecured line of credit facility increased from 0.875% to 1.0% and our annual facility fee increased from 0.15% to 0.20%. as of december 31, 2020, there were no outstanding balances under our unsecured lines of credit. in addition, our interest rate spread over libor on our $350.0 million unsecured term loan increased from 0.90% to 1.0%. if additional decreases to our credit ratings occurs, interest expense could increase depending upon the level of downgrade.the information presented herein is merely an estimate and has limited predictive value. as a result, the ultimate effect upon our operating results of interest rate fluctuations will depend on the interest rate exposures that arise during the period, our hedging strategies at that time and future changes in the level of interest rates.68the estimated fair value and recorded value of our debt consisting of senior unsecured notes, unsecured term loans, secured mortgages and unsecured lines of credit was as follows (in thousands):december 31, 2020december 31, 2019fair value of debt$1,639,803 $1,603,814 recorded value of debt$1,567,886 $1,569,773 a 100 basis point increase from prevailing interest rates at december 31, 2020 and december 31, 2019 would result in a decrease in fair value of total consolidated debt of approximately $55.8 million and $62.9 million, respectively. refer to note 10 to the consolidated financial statements for a description of our methodology in calculating the estimated fair value of debt. considerable judgment is necessary to develop estimated fair values of financial instruments. accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize on the disposition of the financial instruments.foreign currency risk we are also exposed to foreign currency risk on investments in outlet centers that are located in canada. our currency exposure is concentrated in the canadian dollar. to mitigate the risk related to changes in foreign currency, cash flows received from our canadian joint ventures are either reinvested to fund ongoing canadian development activities, if applicable, or converted to u.s. dollars and utilized to repay amounts outstanding under our unsecured lines of credit, if any. accordingly, cash held in canadian dollars at any point in time is insignificant. we generally do not hedge currency translation exposures.item 8.financial statements and supplementary data the information required by this item is set forth on the pages indicated in item 15(a) below.item 9.changes in and disagreements with accountants on accounting and financial disclosure not applicable.item 9a. controls and procedures tanger factory outlet centers, inc.(a)evaluation of disclosure control procedures.the president and chief executive officer, stephen j. yalof (principal executive officer), and chief financial officer, james f. williams (principal financial officer), evaluated the effectiveness of the company's disclosure controls and procedures and concluded that, as of december 31, 2020, the company's disclosure controls and procedures were effective to ensure that the information the company is required to disclose in its filings with the sec under the exchange act is recorded, processed, summarized and reported, within the time periods specified in the sec's rules and forms, and to ensure that information required to be disclosed by the company in the reports that it files or submits under the exchange act is accumulated and communicated to the company's management, including the president and chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.(b)management's report on internal control over financial reporting. internal control over financial reporting, as such term is defined in rules 13a-15(f) and 15d-15(f) under the exchange act, is a process designed by, or under the supervision of, the company's president and chief executive officer and chief financial officer, or persons performing similar functions, and effected by the company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accord | 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 do not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.impairment of real estate investments description of the matter at december 31, 2021, the company’s real estate investments totaled $2.8 billion. as discussed in note 1 of the consolidated financial statements, the company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the real estate investments are not expected to be recovered through future undiscounted cash flows. the company did not identify any assets that were impaired at december 31, 2021. 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. the significant inputs used in the assessment included capitalization rates, current and estimated future cash flows associated with each property, which were based on market information including, where applicable, market rental rates, leasing trends, occupancy trends, expense ratios, and other quantitative and qualitative factors.52how we addressed the matter in our audit we obtained an understanding of management’s process to identify indicators of impairment, including the qualitative and quantitative 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, in addition to controls around the quantitative assessment of impairment. for example, we tested controls over the company’s process to estimate the fair value of its real estate assets and to assess the recoverability of each investment, including controls over management’s development and review of the significant inputs and assumptions described above used in the quantitative assessment. our testing of the company’s impairment assessment included, among other procedures, evaluating significant judgments applied in determining whether indicators of impairment were present at any given property by obtaining evidence to corroborate such judgments and searching for evidence contrary to such judgments. for example, we reviewed the bad debt reserves analysis and rent rolls for any tenants with large reserved balances or upcoming lease expirations, in addition to reviewing various industry market surveys that indicate potential tenants with deteriorating credit quality to determine if they occupied a substantial portion of any particular property. property asset acquisitions description of the matter in 2021, the company acquired five assets, for a combined purchase price of approximately $125.5 million. as discussed in note 1 and note 2 to the consolidated financial statements, the company accounted for these purchases as asset acquisitions in accordance with the authoritative accounting guidance on acquisitions and business combinations. the company’s methodology of allocating the cost of acquisitions to assets acquired and liabilities assumed is based on estimated fair values. for acquired operating real estate properties, the purchase price is allocated to land and buildings, intangible assets such as in-place leases, and intangible liabilities acquired, if any.auditing the company’s accounting for its acquisitions was complex and highly judgmental due to the significant judgment required in determining estimated fair values of the acquired land and buildings, intangible assets such as in-place leases, and intangible liabilities. the significant judgment was primarily due to (1) the judgmental nature of inputs, including discount rate, capitalization rates, cost multipliers and various market assumptions such as market rental rates, and (2) the complexity of the models used to allocate the value to the components of properties acquired could have a material effect on the company’s net income due to the differing depreciable and amortizable lives of each component and the classification of the related depreciation or amortization expense in the company’s consolidated statements of operations.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s process for determining and reviewing the key inputs and assumptions used in estimating the fair value of acquired assets and liabilities and allocating fair value to the various components. for example, we tested controls over the valuation of acquired land, buildings and intangible assets, including the valuation models and underlying assumptions used to develop such estimates.our testing of the company’s accounting for its acquisitions included, among other procedures, reading the purchase agreement and testing the values allocated to the assets acquired and liabilities assumed by evaluating the valuation methods and significant assumptions used by management. for example, our real estate valuation specialists assisted us in evaluating the methodologies used by the company and testing the consistency of the selected discount rates, capitalization rates, and various market assumptions such as market rental rates with external market data sources. additionally, we evaluated the completeness and accuracy of the underlying data supporting the determination of various inputs. also, with the assistance of our specialists, we evaluated the incorporation of the key assumptions in the aforementioned models and tested such models for clerical accuracy./s/ ernst & young llp we have served as the company’s auditor since 2010s | 2 |
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.accrued liabilities and prepaid expenses – management’s estimates of accrued and prepaid research and development costs associated with clinical trials - refer to notes 2 and 5 to the financial statements critical accounting matter description the company recognizes research and development costs for clinical trials based on an evaluation of the progress to completion of specific tasks using information and data provided by contract research organizations (cr os) and other third parties. depending on the timing of payments to providers of research and development services, the company recognizes prepaid expenses or accrued expenses related to these costs. these prepaid or accrued expenses are based on management’s estimates of the work performed under service agreements and milestones achieved.99we identified accrued and prepaid research and development costs related to clinical trials as a critical audit matter because of the judgments necessary for management to estimate the level of service performed and the associated cost incurred for the service when the company has not yet been invoiced or otherwise notified of actual cost. the volume and complexity of the service agreements required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to audit management’s estimates of services performed and costs incurred and evaluating the results of those procedures.how the critical audit matter was addressed in the audit our audit procedures related to clinical trial accrued and prepaid expenses include the following, among others: •we evaluated publicly available information (such as press releases and investor presentations) and board of directors’ materials regarding the status of clinical trial activities. •we made selections of specific amounts recognized as research and development expense as well as those recognized as accrued and prepaid expenses to evaluate management’s estimates of the services performed and costs incurred and performed the following procedures: •obtained and read the related service agreements, amendments thereto, purchase orders, invoices, or other supporting documentation (such as communications between the company and cr os). •performed corroborating inquiries with company management and clinical operations personnel. •evaluated management’s judgments compared to the evidence obtained./s/ deloitte & touche llp grand rapids, michigan march 11, 2021we have served as the company's auditor since 2014. | 4 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. discontinued operations - transfer of majority interest in e financial careers– refer to notes 1 and 4 to the financial statements critical audit matter description on june 30, 2021, the company transferred majority ownership and control of its e financial careers business (“e fc”) to e fc management, while retaining a 40% common share interest (the “e fc transaction”). as a result, e fc was deconsolidated as of june 30, 2021 and is reflected as a discontinued operation.the deconsolidation and related evaluation of the loss of control required significant accounting judgments. this required a high degree of auditor judgment and increased level of effort when performing audit procedures to evaluate the reasonableness of management’s judgments.how the critical audit matter was addressed in the audit our audit procedures related to the deconsolidation of e fc included the following, among others:•we tested the effectiveness of controls over the accounting and reporting for significant non-recurring transactions, which included the deconsolidation of e fc.•with the assistance of firm specialists having expertise in consolidation accounting, we evaluated management’s accounting judgments related to the deconsolidation of e fc. •we evaluated the presentation and disclosure of the e fc transaction in the financial statements.54table of contents goodwill – refer to notes 2, 4 and 11 to the financial statements critical audit matter description the company determines whether the carrying value of recorded goodwill is impaired on an annual basis or more frequently if indicators of potential impairment exist. if the fair value of the reporting unit is less than its carrying amount, an impairment charge is recorded for the amount the carrying value exceeds the fair value. fair values are determined by using a combination of a discounted cash flow methodology and a market comparable method. determining the fair value of a reporting unit is judgmental in nature and requires the use of estimates and key assumptions, particularly assumed discount rates and projections of future operating results, such as forecasted revenues and earnings before interest, taxes, depreciation and amortization (ebitda) margins. changes in these assumptions could have a significant impact on the determination of fair value. on june 30, 2021, the company transferred a majority interest of e fc, which was part of the tech-focused reporting unit, to e fc management. in order to account for the e fc transaction and allocate the reporting unit goodwill, the company performed an interim valuation analysis to determine the fair value of e fc and the continuing business as of june 30, 2021. the company allocated $5.3 million and $128.1 million of goodwill to e fc and the continuing business, respectively, using a relative fair value approach. given the significant judgments made by management to determine the relative fair value of, and goodwill allocated to, e fc and the continuing business, performing auditing procedures to evaluate the reasonableness of management’s judgments regarding the business and valuation assumptions utilized in the valuation models, particularly the forecasts of future revenue and ebitda margins and the selection of the discount rates, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. how the critical audit matter was addressed in the audit our audit procedures related to the forecasts of future revenues and ebitda margins and selection of the discount rates used by management to estimate the fair value of e fc and the continuing business included the following, among others: •we tested the effectiveness of controls over management’s determination of the fair value of e fc and the continuing business, including controls related to management’s forecasts of future revenues and ebitda margins and selection of the discount rates. •we tested the allocation of goodwill to e fc and the continuing business based on the weighting of the relative fair value.•we evaluated the reasonableness of management’s forecasts of future revenues and ebitda margins by comparing the forecasts with:◦historical revenues and ebitda margins and forecasted information in industry reports.◦internal communications to management and the board of directors.•with the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) valuation assumptions, including the discount rates, by: ◦testing the source information underlying the determination of the assumption and testing the mathematical accuracy of the calculation.◦developing a range of independent estimates and comparing those to the assumptions selected by management. /s/ deloitte & touche llp des moines, iowa february 11, 2022we have served as the company's auditor since 2005. | 1 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.57central states pension fund coordinating benefit obligation assumptions - refer to note 6, company-sponsored employee benefit plans (actuarial assumptions - central states pension fund), to the financial statements critical audit matter description the company was a contributing employer to the central states pension fund (“cspf”) until 2007 when it withdrew and fully funded its allocable share of unvested benefits. the company agreed to provide coordinating benefits in the ups/ibt full time employee pension plan (“ups/ibt plan”) to cspf participants whose last employer was the company and who had not retired as of january 1, 2008 (the “ups transfer group”) if the cspf were to lawfully reduce benefits consistent with the terms of its withdrawal agreement with the company. the cspf has asserted that, absent legislative reform, it will become insolvent in 2025. if the cspf were to become insolvent consistent with that assertion, the company may be required to provide coordinating benefits through the ups/ibt plan to the ups transfer group. under accounting standards generally accepted in the united states of america (“gaap”), the company is required to determine its best estimate of the eventual outcome of this matter and is prohibited from anticipating potential changes in law in making that best estimate. the company considered potential outcomes based on the existing legislative framework, including the eventual insolvency of the cspf or an approved application to reduce benefits under the u.s. multiemployer pension reform act (“mpra”). due to the passage of time and further deterioration of the cspf’s funded status, the company believes the trustees of the cspf (the “trustees”) can no longer submit and implement another benefit reduction plan under mpra. as such, the company developed a deterministic cash flow projection that reflects updated estimated cspf cash flows and investment earnings, the lack of legislative action, and the projected financial assistance to the cspf from the pension benefit guaranty corporation (“pbgc”) to fund the pbgc’s guaranteed benefit levels. as a result, at the december 31, 2020 measurement date, the best estimate of the company’s projected benefit obligation for coordinating benefits that may be required to be directly provided by the ups/ibt plan to the ups transfer group increased by $2.9 billion. at the december 31, 2020 measurement date, the total obligation for the cspf coordinating benefits was $5.5 billion.the assumptions require significant management judgment and the following audit considerations:1.auditing management’s assumption related to the level of financial assistance that cspf may receive from the pbgc based on enacted law is subjective.2.auditing the actuarial assumptions used to estimate the timing and present value of future cspf cash flows is challenging because the underlying data is limited to information made publicly available by the cspf.3.auditing the sufficiency of the company’s disclosure of this matter in the footnotes to the financial statements is challenging due to the number of uncertainties associated with the obligation. how the critical audit matter was addressed in the audit our audit procedures to address the company’s assumptions used to measure its obligation to pay for cspf coordinating benefits to the ups transfer group (the “coordinating benefits”) included the following, among others:•we tested the effectiveness of controls over coordinating benefits assumptions, including those over the determination of the accounting model, the key legal position relevant to the level of financial assistance guaranteed by the pbgc based upon enacted law, the other actuarial assumptions used to project the coordinating benefits obligation; and the related financial statement disclosures. •with the assistance of professionals in our firm having expertise in pension accounting, we evaluated the company’s conclusions regarding the accounting model applied to the coordinating benefits obligation.•with the assistance of our actuarial specialists, we tested the underlying data and actuarial model used by management to estimate the obligation to provide coordinating benefits, including consideration of (1) the discount rate; (2) the projected contributions and benefit payments, including pbgc contributions to the cspf and (3) the expected return on cspf assets. further, because the data used by management is limited to publicly available cspf information, we considered whether other available sources of data may yield a more precise estimate.•we compared the company’s footnote disclosure relating to this matter to the information communicated between management and the company’s audit committee to evaluate whether significant uncertainties had been omitted from the disclosure. 58valuation of u.s. hedge fund, risk parity, private debt, private equity and real estate investments - refer to note 6, company-sponsored employee benefit plans (fair value measurements), to the financial statements critical audit matter description the company’s u.s. pension and postretirement medical benefit plans (the “u.s. plans”) held hedge fund, risk parity, private debt, private equity and real estate investments valued at $7.9 billion as of december 31, 2020. the company determines the reported values of the u.s. plans’ investments in hedge, risk parity, private debt, private equity and real estate funds primarily based on the estimated net asset value (“nav”) of the fund. in order to estimate nav, the company evaluates audited and unaudited financial reports from fund managers, and makes adjustments, as appropriate, for investment activity between the date of the financial reports and december 31st. these investments are not actively traded, and their values can only be estimated using these subjective assumptions. auditing the estimated nav of these hedge fund, risk parity, private debt, private equity and real estate investments requires a high degree of auditor judgment and subjectivity to evaluate the completeness, reliability and relevance of the inputs used by management.how the critical audit matter was addressed in the audit our audit procedures related to the inputs used by management to estimate the nav of the u.s. plans’ hedge fund, risk parity, private debt, private equity and real estate investments included the following, among others:•we tested the effectiveness of controls, including those related to the reliability of values reported by fund managers, the relevance of asset class benchmark returns, and the completeness and accuracy of unobservable inputs related to the underlying assets of the funds. •for certain investments, we confirmed directly with the respective fund manager its preliminary estimate of the fund’s nav as of december 31, 2020.•for certain investments, we inquired of management to understand year over year changes in the fund manager's estimate of nav and compared the fund's return on investment to other available qualitative and quantitative information relevant to the fund.•we evaluated the company’s historical ability to accurately estimate nav for these funds by comparing each fund’s recorded valuation as of its prior fiscal year end to the nav per the audited fund financial statements (which are received in arrears of the company’s reporting timetable).revenue - refer to note 2, revenue recognition, to the financial statements critical audit matter description approximately 82 percent of the company’s revenues are from its global small package operations that provide time-definite delivery services for express letters, documents, small packages and palletized freight via air and ground services. the company’s global small package revenues are comprised of a significant volume of low-dollar transactions sourced from systems that were primarily developed by the company. the processing of transactions, including the recording of them, is highly automated and based on contractual terms with the company’s customers. auditing global small package revenue required a significant extent of effort and the involvement of professionals with expertise in information technology (“it”) necessary for us to identify, test, and evaluate the company’s systems, software applications, and automated controls.59how the critical audit matter was addressed in the audit our audit procedures related to the company’s systems to process global small package revenue transactions included the following, among others: •with the assistance of our it specialists, we:–identified the significant systems used to process global small package revenue transactions and tested the effectiveness of the general it controls over each of these systems, including testing of user access controls, change management controls, and it operations controls.–tested the effectiveness of system interface controls and automated controls within the global small package revenue stream, as well as the controls designed to ensure the accuracy and completeness of revenue. •we tested the effectiveness of controls over the relevant global small package revenue business processes, including those in place to reconcile the various systems to the company’s general ledger. •we performed analytical procedures to evaluate the company’s recorded revenue and evaluate trends.•for a sample of customers, we read the company’s contract with the customer and evaluated the company’s pattern of revenue recognition for the customer. in addition, we evaluated the accuracy of the company’s recorded global small package revenue for a sample of customer invoices. /s/ deloitte & touche llp atlanta, georgia february 22, 2021 we have served as the company's auditor since 1969. | 4 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the carve-out 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 carve-out 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 carve-out financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.f-2 valuation of intangible assets acquired in a business combination in march 2020, the company acquired sapphire biotech, inc., a biotechnology company focusing on improving cancer care through the development of proprietary therapeutics for inhibiting cancer growth and metastasis. the company issued 54,000,000 shares of common stock with a total fair value of $7,506,000, in exchange for all outstanding shares of sapphire biotech, inc. the company accounted for the acquisition using the purchase method of accounting for business combinations. addressing the matter involved testing the estimated fair value of the company's intangible assets acquired from sapphire biotech, inc. our audit procedures, among others, included evaluating the company's use of appropriate valuation methodologies with the assistance of a valuation specialist, and testing the accuracy of the underlying data used to develop the assumptions. our audit procedures over the significant assumptions included comparing the most significant assumptions to current industry, market and economic trends, and to other relevant factors. /s/ rbsm, llp we have served as the company’s auditor since 2014 | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the 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. level 3 fair value measurements the fair value of the company’s investments valued using level 3 fair value measurements was approximately $1.02 billion as of september 30, 2021. the fair value of the company’s financial instruments classified as liabilities valued using level 3 fair value measurements was approximately $218.9 million as of september 30, 2021. as discussed in notes 2 and 5 to the consolidated financial statements, the company’s investment portfolio generally consists of illiquid securities, including debt and equity investments, which were acquired directly from the issuer. such investments include first lien secured debt, second lien secured debt, subordinated debt and equity investments. additionally, the company has elected to apply the fair value option to certain financial instruments classified as liabilities. the inputs into the determination of fair value may require significant management judgment or estimation. we identified level 3 fair value measurements as a critical audit matter due to the subjective nature of the judgments necessary for management to select valuation techniques and the use of significant unobservable inputs to estimate the fair value. auditing the reasonableness of management’s selection of valuation technique and the related unobservable inputs required a high degree of auditor judgment and increased audit effort, including the use of a valuation specialist. the primary procedures we performed to address this critical audit matter included the following, among others: •we obtained an understanding of the relevant controls related to management’s valuation of level 3 fair value measurements, including those related to valuation techniques and significant unobservable inputs and tested such controls for design and operating effectiveness. •with the assistance of our valuation specialists, we evaluated the appropriateness of the selected valuation techniques, and any changes to selected valuation techniques from prior periods, used for level 3 fair value measurements. we also tested the related significant unobservable inputs by comparing these inputs to external sources. •we evaluated management’s historical ability to estimate fair value through comparison of previous estimates to the transaction price of available transactions occurring subsequent to the previous valuation date./s/ rsm us llp we have served as the company's auditor since 2013. | 1 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. f-2table of contents fair value measurements of level 3 assets and liabilities critical audit matter description: as described in note 9 to the consolidated financial statements, at december 31, 2021, approximately 83% of the company’s consolidated assets and approximately 84% of the company’s consolidated liabilities are measured at fair value on a recurring basis utilizing models and unobservable inputs. unlike the fair value of level 1 financial assets and liabilities which are readily observable, these financial assets and liabilities are not actively traded, and fair value is determined based on valuation methodologies, valuation models, and unobservable inputs to those models, supplemented with third party pricing data and investor bids, where applicable. we identified the valuation of level 3 financial assets and liabilities as a critical audit matter because of the significance of level 3 financial assets and liabilities to the total consolidated assets and liabilities of the company, and the unobservable inputs, complexity of models and methodologies used by management to estimate fair value for these level 3 financial assets and liabilities. the valuations involve a high degree of auditor judgment and increased efforts, including the involvement of a valuation specialist who possesses significant quantitative analysis and modeling experience, to assist with the audit and evaluation of the appropriateness of the models utilized and the evaluation of the appropriateness of unobservable inputs used by management. the unobservable inputs used by management to estimate the fair value of level 3 financial assets and liabilities include, among others, prepayment speeds, default rates, discount rates and yields, loss severities and pull-through rates. how we addressed the matter in our audit:the primary procedures we performed to address this critical audit matter included, among others: ●evaluating the design effectiveness of the company’s valuation controls, including:øindependent price verification controls to determine yields, where applicable.ødata validation controls (data inputs to models).ømanagement review of reasonableness of underlying assumptions. ●evaluating the reasonableness of management’s valuation methodologies and estimates:øtesting the mathematical accuracy of the valuation models utilized by the company and agreeing the resulting values in the models to the company’s books and records.øevaluating the valuation methodologies utilized by the company by comparing the methodologies to those utilized by other companies holding similar financial instruments.øwhere applicable, developing valuation estimates using valuation models created by our valuation specialist and inputting the underlying loan‐level data and assumptions inputs from the company into our models and comparing the results against the results of the company.øevaluating the reasonableness of significant unobservable inputs by comparing management’s inputs with inputs from external sources and available economic forecasts and data. additionally, evaluating the competency and objectivity of third-party specialists engaged by the company to assist in developing management’s inputs.øcomparing actual cash flows to management’s projections. f-3table of contents we evaluated management’s ability to estimate fair value by 1) comparing management’s historical projected prepayment and loss curves to actual results, where applicable and 2) comparing management’s valuation estimates to subsequent transactions with a reconciliation of subsequent market events, when available. baker tilly us, llp we have served as the company's auditor since 2008. | 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. derivative liabilities as described in footnote 2 “derivative liabilities” and “fair value measurements” and footnote 5, “convertible notes payable” to the consolidated financial statements, the company recorded derivative activity during fiscal 2020 that resulted primarily in a net aggregate derivative expense of $5,184,212 and derivative liabilities of $10,997,765 at september 30, 2020. we identified the evaluation of instruments and contracts to determine whether there are derivatives to be recorded, the analysis of the accounting treatment and presentation for derivative transactions and the valuation of derivatives as critical audit matters. auditing management’s analysis of the above critical audit matters was complex and involved a high degree of subjectivity. the primary procedures we performed to address these critical audit matters included (a) reviewed and tested management’s conclusions as to whether certain instruments or contracts qualified 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) tested management’s process for valuing derivatives by comparing it to generally accepted methodologies for valuing derivatives, (d) tested management’s valuation of the derivatives by testing assumptions and data used in the valuation model including the term, volatility and 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 since 2019. | 3 |
critical audit matters section below the accompanying consolidatedfinancial statements have been prepared assuming that the company will continue as a going concern. as discussed in note 3 to the consolidatedfinancial statements, the company has suffered recurring losses from operations and has a net capital deficiency at december 31, 2021.these conditions raise substantial doubt about its ability to continue as a going concern. management’s plans in regard to thesematters are also described in note 3. the consolidated financial statements do not include any adjustments that might result from theoutcome of this uncertainty. basis for opinion these consolidatedfinancial statements are the responsibility of the company’s management. our responsibility is to express an opinion on the company’sconsolidated financial statements 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 audit in accordancewith the standards of the pcaob. those standards require that we plan and perform the audit to obtain reasonable assurance about whetherthe consolidated financial statements are free of material misstatement, whether due to error or fraud. the company is not required tohave, nor were we engaged to perform, an audit of its internal control over financial reporting. as part of our audits we are requiredto obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectivenessof the company’s internal control over financial reporting. accordingly, we express no such opinion. our audit included performing procedures to assessthe risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing proceduresthat respond to those risks. such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in theconsolidated financial statements. our audit also included evaluating the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall presentation of the consolidated financial statements. we believethat our audit provides a reasonable basis for our opinion. f-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. accounting for embedded derivative liabilities related to convertible debentures as described in note 6 to the financial statements,the company had convertible debentures that required accounting considerations and significant estimates. the company determined that variable conversionfeatures issued in connection with certain convertible debentures required derivative liability classification. these variable conversionfeatures were initially measured at fair value and subsequently have been remeasured to fair value at each reporting period. the companydetermined the fair value of the embedded derivatives using the black-scholes-merton option pricing model. the value of the embedded derivativeliabilities related to the convertible debentures was $533,753 at december 31, 2021. we identified the accounting considerations andrelated valuations, including the related fair value determinations of the embedded derivative liabilities of such as a critical auditmatter. our audit procedures related to the company’saccounting considerations and significant estimate included the following, among others: ·we reviewed the accounting considerations madeby the company in determining the nature of the various features;·we evaluated of the potential derivatives andpotential bifurcation in the instruments;·we evaluated the determination of the fair valueof the various debt and equity instruments and the conversion features that include valuation models and assumptions utilized by managementagainst current accounting guidance. ·we tested the mathematical accuracy of management’scalculations related to the estimate. auditing these elements is especially challengingand requires auditor judgement due to the nature and extent of audit effort required to address these matters, including the extent ofspecialized skill or knowledge needed. going concern uncertainty – see also going concern uncertainty explanatory paragraph above as described further in note 3 to the consolidatedfinancial statements, the company has suffered recurring losses from operations and does not have an established source of revenues sufficientto cover its operating costs. the ability of the company to continue as a going concern is dependent on executing its business plan andultimately 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. managementintends to continue to fund its business by way of public or private offerings of the company’s stock or through loans from privateinvestors, in order satisfy the company’s obligations as they come due for at least one year from the financial statement issuancedate. however, the company has not concluded that these plans alleviate the substantial doubt related to its ability to continue as agoing concern. f-3 we determined the company’s ability to continueas a going concern is a critical audit matter due to the estimation and uncertainty regarding the company’s available capital andthe risk of bias in management’s judgments and assumptions in their determination. our audit procedures related to the company’sassertion on its ability to continue as a going concern included the following, among others: ·we performed testing procedures such as analytical proceduresto identify conditions and events that indicate that there could be substantial doubt about the company’s ability to continueas a going concern for a reasonable period of time.·we reviewed and evaluated management's plansfor dealing with adverse effects of these conditions and events.·we inquired of company management and reviewedcompany records to assess whether there are additional factors that contribute to the uncertainties disclosed.·we assessed whether the company’s determinationthat there is substantial doubt about its ability to continue as a going concern was adequately disclosed. revenue recognition the company recognizes revenue upon transfer ofcontrol of promised services to customers in an amount that reflects the consideration the company expects to receive in exchange forthose services. significant judgment is exercised by the companyin determining revenue recognition for customer agreements, and include the pattern of delivery (i.e., timing of when revenue is recognized)for each distinct performance obligation. the related audit effort in evaluating management’sjudgments in determining revenue recognition for customer agreements required a high degree of auditor judgment. our principal audit procedures related to the company’s revenue recognition for customer agreements included the following: ·we gained an understanding of internal controlsrelated to revenue recognition.·we evaluated management’s significant accountingpolicies for reasonableness.·we selected a sample of revenues recognized andperformed the following procedures:o obtained and read contract source documents for each selection and other documents that were part of theagreement, if applicable.o assessed the terms in the customer agreement and evaluated the appropriateness of management’s applicationof their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions.o we tested the mathematical accuracy of management’s calculationsof revenue and the associated timing of revenue recognized in the financial statements. business combinations – valuationof intangible assets as described in note 4 of the consolidated financial statements, the company completed the acquisitions of 100% of optilan guernsey limited and optilan holdco 2 limited (optilan) and tjm electronics west for $694,527 and $450,000, respectively and 60% of wildlife specialists llc, remote intelligence, llc and terra data unmanned,pllc for $1,478,000 and $1,478,000, and $600,000 respectively (collectively referred to as the “acquisitions”) and accountedfor as business combinations. the acquired intangible assets included optilan holdco 3, limited tradename for valued at $4,033,638. the company recorded the acquired intangible assets at fair value on the date of acquisition considering a discounted cash flow methodology.the methods used to estimate the fair value of acquired intangible assets involve assumptions. the assumptions applied by management inestimating the fair value of acquired intangible assets included income projections and discount rates. f-4 the principal considerations for our determinationthat performing procedures relating to the valuation of intangible assets in the acquisitions is a critical audit matter are (1) therewas a degree in significant auditor judgement and subjectivity in applying procedures to the fair value of the intangible assets acquireddue to the judgment by management when developing estimates and (2) audit effort was required relating to the estimates, projections,discount rates, and weighted average cost of capital utilized by the company. in addition, the audit effort involved the use of professionalswith specialized skill and knowledge to assist in performing these procedures and evaluating the conclusions. our principal audit procedures to evaluate thevaluation of intangible assets included the following: ·we read the purchase agreements used in the underlyingacquisitions and utilized by the company to allocate the purchase price.·we obtained the valuation reports prepared bymanagement’s third-party expert.·utilized professionals with specialized skilland knowledge to evaluate the reasonableness of the methodology, assumptions, including the discount rate and weighted average cost ofcapital, as compared to their experience and publically available market data. ·considered the reasonableness of the overallallocation of the total purchase price. /s/ urish popeck & co., llc we have served as the company's auditor since2021. | 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. unpaid losses and loss adjustment expenses— refer to notes 1 and 15 to the financial statements critical audit matter description the company’s unpaid losses and loss adjustment expenses (“claim liabilities”) under short duration property and casualty insurance and reinsurance contracts are $73,019 million as of december 31, 2019. the key assumptions affecting certain claim liabilities include expected loss and expense (“loss”) ratios, expected claim count emergence patterns, expected loss payment emergence patterns and expected loss reporting emergence patterns.given the subjectivity of estimating these key assumptions, performing audit procedures to evaluate whether claim liabilities were appropriately recorded as of december 31, 2019, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial specialists.how the critical audit matter was addressed in the audit our audit procedures related to the key assumptions affecting certain claim liabilities included the following, among others:•we tested the operating effectiveness of controls over claim liabilities, including those over the key assumptions.•we evaluated the methods and assumptions used by management to estimate the claim liabilities by: •testing the underlying data that served as the basis for the actuarial analysis, such as historical claims and earned premium, to test that the inputs to the actuarial estimate were reasonable. •comparing management’s prior-year claim liabilities to actual development during the current year to identify potential bias in the determination of the claim liabilities.•with the assistance of our actuarial specialists: •we developed independent estimates of the claim liabilities, including loss data and industry claim development factors as needed, and compared our estimates to management’s estimates. •we compared management’s change in ultimate loss and loss adjustment expense to prior year estimates to test the reasonableness of the prior year estimates and assessed unexpected development.unpaid losses and loss adjustment expenses under retroactive reinsurance contracts — refer to notes 1 and 16 to the financial statements critical audit matter description the company’s unpaid losses and loss adjustment expenses (“claim liabilities”) for property and casualty retroactive reinsurance contracts are $42,441 million as of december 31, 2019. the key assumptions affecting certain claim liabilities and related deferred charge reinsurance assumed assets (“related assets”), include expected loss expense (“loss”) ratios, expected loss payment emergence patterns and expected loss reporting emergence.given the subjectivity of estimating these key assumptions, performing audit procedures to evaluate whether claim liabilities were appropriately recorded as of december 31, 2019, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial specialists.how the critical audit matter was addressed in the audit our audit procedures related to the key assumptions affecting claim liabilities and related assets included the following, among others:•we tested the operating effectiveness of controls over claim liabilities and related assets, including those over the key assumptions. k-64 report of independent registered public accounting firm (continued)•we evaluated the methods and assumptions used by management to estimate the claim liabilities and related assets by: •testing the underlying data that served as the basis for the actuarial analysis, including historical claims, to test that the inputs to the actuarial estimate were reasonable. •comparing management’s prior-year claim liabilities to actual development during the current year to identify potential bias in the determination of the claim liabilities and related assets.•with the assistance of our actuarial specialists: •we developed independent claim liability estimates for certain retroactive reinsurance contracts and compared our estimates to management’s estimates. for other retroactive reinsurance contracts and related assets, we evaluated the process used by management to develop the estimated claim liabilities and related assets. •we compared management’s change in ultimate loss and loss adjustment expense to prior year estimates, assessed unexpected development and assessed internal rates of return.goodwill and indefinite-lived intangible assets — refer to notes 1, 13, and 27 to the financial statements critical audit matter description the company’s evaluation of goodwill and indefinite-lived intangible assets for impairment involves the comparison of the fair value of each reporting unit or asset to its carrying value. the company evaluates goodwill and indefinite-lived intangible assets for impairment at least annually. when evaluating goodwill and indefinite-lived intangible assets for impairment, the fair value of each reporting unit or asset is estimated. significant judgment is required in estimating fair values and performing impairment tests. the company primarily uses discounted projected future earnings or cash flow methods to estimate fair value, which requires management to make significant estimates and assumptions related to forecasts of future revenue, earnings before interest and taxes (“ebit”), and discount rate. changes in these assumptions could have a significant impact on the fair value of reporting units and indefinite-lived intangible assets.a reporting unit within the manufacturing reportable segment, which had goodwill at acquisition date of $16,011 million, was an acquisition made by the company in 2016. this subsidiary also has certain customer relationships that are intangible assets with indefinite lives. these customer relationships are a significant portion of the $18,965 million of indefinite-lived intangible assets the company reported as of december 31, 2019. the fair values of the reporting unit and customer relationships exceeded their carrying values as of the annual evaluation date; therefore, no impairments were recognized. given the significant judgments made by management to estimate the fair value of this reporting unit and the customer relationships and the difference between their fair values and carrying values, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to forecasts of future revenue and ebit and the selection of the discount rates 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 forecasts of future revenue and ebit and selection of the discount rates for the reporting unit and customer relationships included the following, among others: •we tested the effectiveness of controls over goodwill and indefinite-lived intangible assets, including those over the forecasts of future revenue and ebit. •we evaluated management’s ability to accurately forecast future revenue and ebit by comparing prior year forecasts to actual results in the respective years. •we evaluated the reasonableness of management’s current revenue and ebit forecasts by comparing the forecasts to historical results and forecasted information included in analyst and industry reports and certain peer companies’ disclosures. •with the assistance of our fair value specialists, we evaluated the valuation methodologies, the long-term growth rates and discount rates, including testing the underlying source information and the mathematical accuracy of the calculations, and developed a range of independent estimates and compared those to the long-term growth rates and discount rates selected by management./s/ deloitte & touche llp omaha, nebraska february 22, 2020 we have served as the company’s auditor since 1985. | 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. income taxes — unrecognized tax benefits — refer to notes 1 and 6 to the financial statements critical audit matter description the company operates in the u.s. and numerous foreign taxable jurisdictions, and at any point in time has numerous audits underway at various stages of completion. the company evaluates its tax positions and establishes liabilities for uncertain tax positions that may be challenged by tax authorities and may not be fully sustained, despite the company’s belief that the underlying tax positions are fully supportable. the tax effects of an uncertain tax position taken or expected to be taken in income tax returns are recognized only if it is “more likely than not” to be sustained on examination by the taxing authorities, based on its technical merits as of the reporting date. the tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. management judgment is required to identify and evaluate each uncertain tax position to determine whether the more likely than not recognition thresholds have been met. further, the evaluation of each uncertain tax position requires management to apply specialized skill and knowledge related to the identified position. the company has unrecognized tax benefits of $201.3 million, including penalties and interest, as of december 31, 2019. we identified the liabilities for uncertain tax positions as a critical audit matter because of the complexity created by the multiple jurisdictions in which the company files its tax returns, each of which has differing and complex tax laws and regulations. this required a high degree of auditor judgment and an increased extent of effort, including the need to involve our income tax specialists, when performing audit procedures to evaluate management’s identification of uncertain tax positions, the estimates of the amounts to be realized and whether it is more likely than not that the tax position will be sustained. how the critical audit matter was addressed in the audit our audit procedures related to uncertain tax positions included the following, among others: ●we tested the effectiveness of controls over the uncertain tax positions for income taxes, including management’s controls over the identification and recording of uncertain tax positions as well as the determination of whether it is more likely than not that the tax position will be sustained. ●with the assistance of our income tax specialists, we evaluated management’s significant judgements regarding uncertain tax positions including: o assessing the reasonableness of the methods and assumptions used by management to identify uncertain tax positions including but not limited to: ◾evaluating former, ongoing and anticipated tax audits by tax authorities ◾evaluating transactions for which third-party tax advice or tax opinions were received ◾determining if there’s any additional information available to us that was not identified and considered in management’s assessment. o assessing the technical merits of a sample of positions identified and the reasonableness of the methodology used to determine the uncertain tax liability. o evaluating management’s conclusion with respect to whether uncertain tax positions accounted for in prior periods have been effectively settled and/or whether the statute of limitations has expired and, if so, whether the resolution of the tax position has been appropriately accounted for in the financial statements. o evaluating tax positions that have not yet settled or are within statute to determine whether any new information regarding the sustainability of these tax positions or measurement of tax benefit is present such that a previously unrecognized uncertain tax position is recognized. /s/ deloitte & touche llp hartford, connecticut february 12, 2020 we have served as the company's auditor since 1997. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. the communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.assessment of the company’s evaluation of events or changes in circumstances that indicate the carrying value of properties or investments in unconsolidated joint ventures may not be recoverable as discussed in notes 1, 4, and 5 to the consolidated financial statements, properties are evaluated for impairment on an individual basis whenever events or changes in circumstances indicate their carrying value may not be recoverable. properties, net as of december 31, 2019 was $3,216 million, or 71% of total assets. other than temporary impairment of an investment in an unconsolidated joint venture is recognized when the carrying value of the investment is not considered recoverable. recoverability is based on evaluation of the severity and duration of the decline in value. investments in unconsolidated joint ventures as of december 31, 2019 was $832 million, or 18% of total assets.f-3table of contents we identified the assessment of the company’s evaluation of events or changes in circumstances that indicate the carrying value of properties or investments in unconsolidated joint ventures may not be recoverable as a critical audit matter. subjective and challenging auditor judgment, as well as knowledge and experience in the industry, was required to evaluate the company’s determination of indicators, including: 1) the likelihood that a property, including those held in unconsolidated joint ventures, will be sold before the end of its previously estimated useful life, and 2) the impact of changes in market conditions on the recoverability of each individual property.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 potential impairment indicators. we evaluated the company’s consideration of individual real estate properties and investments in unconsolidated joint ventures for potential impairment indicators by:•inquiring of company officials and inspecting meeting minutes of the board of directors to evaluate the likelihood that a property will be sold before the end of its previously estimated useful life.•inquiring and obtaining representations from the company regarding the status and evaluation of any potential disposal of properties. we corroborated that information with others in the organization who are responsible for, and have authority over, disposition activities.•reading external communications with investors and analysts in order to identify information regarding potential sales of the company’s properties.•examining the company’s analysis of internal financial information for indications of a decrease in the fair value of the company’s properties resulting from continued decline in operating performance of the company’s properties. /s/ kpmg llp we have served as the company’s auditor since 2004. | 3 |
critical audit matter the critical audit matter communicatedbelow is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicatedto the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involvedour especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in anyway our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. tradename impairment assessment the company’s indefinite livedintangible assets consist of tradenames with a balance of approximately $2.1 million at december 31, 2020. as described in notes 1 and 4 to the consolidated financial statements, the tradenames are carried at acquisition fair value net of anyimpairment charges recognized. the company tests indefinite lived intangible assets for impairment at least annually on october 1, or more frequently whenever events or circumstances occur indicating that they may be impaired. to estimate thefair value of the tradenames, the company utilizes the relief from royalty method. the principal consideration for our determinationthat performing procedures relating to the impairment assessments of the tradenames is a critical audit matter was due to the subjectivenature of the assumptions used to estimate the fair value of the tradenames. in particular, the fair value estimate was sensitiveto significant assumptions, such as forecasted revenue growth rates, terminal period revenue growth rate, discount rate and royaltyrate, which are affected by expectations about future market or economic conditions, including uncertainty resulting from the covid-19pandemic. to test the estimated fair value of the company’s tradenames, with the support of our internal valuation specialists, we performed audit procedures that included,among others, assessing the valuation methodology and testing the significant assumptions discussed above and the underlying dataused by the company in its analysis. we also compared the significant assumptions used by management to current industry and economictrends. we have served as the company's auditorsince 2020. | 1 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 47 capitalization of properties — refer to notes 2 and 11 to the financial statements critical audit matter description the corporation’s operations are highly capital intensive and their large network of assets turns over on a continuous basis. each year, the corporation develops a capital program for both the replacement of assets and for the acquisition or construction of new assets. in determining whether costs should be capitalized, the corporation exercises significant judgment in determining whether expenditures meet the applicable minimum units of property criteria and extend the useful life, improve the safety of operations, or improve the operating efficiency of existing assets. the corporation capitalizes all costs of capital projects necessary to make assets ready for their intended use and because a portion of the corporation’s assets are self-constructed, management also exercises significant judgment in determining the amount of material, labor, work equipment, and indirect costs that qualify for capitalization. net properties were $54,161 million as of december 31, 2020 and, during 2020, the corporation’s capital investments were $2.9 billion. we identified the capitalization of property as a critical audit matter because of the significant judgment exercised by management in determining whether costs meet the criteria for capitalization. this, in turn, required a high degree of auditor judgment when performing audit procedures to evaluate whether the criteria to capitalize costs were met and to evaluate sufficiency of audit evidence to support management’s conclusions.how the critical audit matter was addressed in the audit our procedures related to capitalization of property included the following, among others: we tested the effectiveness of controls over the corporation’s determination of whether costs related to the corporation’s capital program should be capitalized or expensed.we evaluated the corporation’s capitalization policy in accordance with accounting principles generally accepted in the united states of america.for a selection of capital projects, we performed the following: −obtained the corporation’s evaluation of each project and determined whether the amount of costs to be capitalized met the criteria for capitalization as outlined within the corporation’s policy by unit of property. −obtained supporting documentation that the project met the applicable minimum units of property criteria and was approved, and evaluated whether the project extended the useful life of an existing asset, improved the safety of operations, or improved the operating efficiency of existing assets. for a selection of capitalized costs during the year, we performed the following:−evaluated whether the individual cost selected met the criteria for capitalization.−evaluated whether the selection was accurately recorded at the appropriate amount based on the evidence obtained. /s/ deloitte & touche llp omaha, nebraska february 5, 2021 we have served as the corporation’s auditor since 1967. | 4 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.related party transactions - variable interest entity primary beneficiary determination - refer to note 1 to the financial statements critical audit matter description the company has a variety of business relationships defined by various agreements with ablecom technology, inc. (“ablecom”) and its affiliate, compuware technology, inc. ("compuware"). ablecom is one of the company’s major contract manufacturers; compuware is both a distributor of the company’s products and a contract manufacturer for the company. 67purchases from ablecom and compuware were $144.5 million and $139.6 million, respectively, for the fiscal year ended june 30, 2019. net sales to compuware as a distributor were $17.7 million for the fiscal year ended june 30, 2019. the company concluded that ablecom and compuware are variable interest entities (vi es) and that it is not the primary beneficiary as it does not have the power to direct the activities that are most significant to ablecom and compuware. therefore, the company does not consolidate ablecom and compuware. the company considered its explicit arrangements with ablecom and compuware, including its supplier arrangements, and as a result of the substantial related party relationships between the company, ablecom and compuware, the company also considered whether any implicit arrangements exist that would cause the company to protect those related parties’ interests from suffering losses. the company determined that no material implicit arrangements exist with ablecom, compuware, or their shareholders.we identified management’s conclusion that it is not the primary beneficiary as a critical audit matter because of the judgments necessary for management to determine whether any explicit and implicit arrangements exist that would cause the company to protect those related parties’ interest from absorbing losses, as well as the material weaknesses identified by the company in all five components of internal control - integrated framework (2013) issued by coso. this required extensive audit effort due to the complexity and variety of related party relationships with ablecom and compuware and required a high degree of auditor judgment when performing audit procedures to audit the company’s conclusion that it is not the primary beneficiary.how the critical audit matter was addressed in the audit our audit procedures related to management’s conclusion that it is not the primary beneficiary included the following, among others: •we evaluated and tested whether the arrangements are accurately considered and that arrangements have been included in the consideration by comparing those related parties we had identified during our audit procedures for proper inclusion in the company’s evaluation and performed inspection of source documents on a sample basis.•we tested management’s assertion that it does not have the power to direct the activities that are most significant to, or obligation to absorb the losses of, ablecom and compuware by reviewing all agreements and transactions between the parties.•we obtained confirmations directly from ablecom and compuware regarding the nature of their business relationships with the company, the extent of power, if any, held by the company over the most significant activities of ablecom and compuware’s businesses, and the existence of any implicit arrangements that may have a bearing on the company’s ability to have power over ablecom and compuware.as a result of the material weaknesses identified by the company in all five components of internal control - integrated framework (2013) issued by coso, we increased the extent of testing around the company’s procedures for assessing whether the arrangements with ablecom and compuware are off market or whether they force ablecom and compuware to absorb losses. we also increased the extent of testing to determine if there are any agreements that provide the company with power to direct the activities that are most significant to ablecom and compuware.inventories - excess and obsolescence reserve - refer to notes 1 and 5 to the financial statements critical audit matter description the company’s inventories are stated at weighted average cost, subject to lower of cost or net realizable value, and as necessary, the company writes down the valuation of inventories for excess and obsolescence. the provision for excess and obsolete inventory for the fiscal year ended june 30, 2019, was $28.5 million. we identified the excess and obsolescence reserve as a critical audit matter because of the judgments management makes to estimate the excess and obsolescence reserve, as well as the material weaknesses identified by the company in all five components of internal control - integrated framework (2013) issued by coso. this required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the methodology and the reasonableness of the excess and obsolescence reserve.68how the critical audit matter was addressed in the audit our audit procedures related to the company’s excess and obsolescence reserve included the following procedures, among others:•we gained an understanding and evaluated the company’s methodology for determining inventory that is excess or obsolete and the key assumptions and judgments made as part of the process.•we evaluated the assumptions used by the company to define what is considered aged inventory by assessing historical trends in the company’s product life cycle as well as evaluating the underlying calculations applied to the aged inventory.•we evaluated the inventory valuation utilizing the methodology above to assess the inventory reserve rate applied to different aging buckets.as a result of the company’s material weaknesses identified by the company in all five components of internal control - integrated framework (2013) issued by coso, we increased the extent of testing on reports derived from the company’s systems and applications.revenue - refer to note 3 to the financial statements critical audit matter description the company recognizes revenue from sales of products as control is transferred to customers, which generally happens at the point of shipment or upon delivery, unless customer acceptance is uncertain. revenue from distributors is recognized when the distributor obtains control of the product, which generally happens at the point of shipment or upon delivery, unless customer acceptance is uncertain. net sales for the fiscal year ended june 30, 2019 was $3.5 billion, which principally consist of product sales.we identified the timing of revenue recognition for product sales (i.e., whether the company recorded product sales in the appropriate fiscal year) as a critical audit matter because of the material weaknesses identified by the company associated with revenue recognition accounting controls and the material weaknesses in all five components of internal control - integrated framework (2013) issued by coso. this made auditing the timing of revenue recognition for product sales more challenging and required an increased extent of audit effort, including the need for us to involve specialists and modify the nature and extent of our audit procedures and the evidence obtained.how the critical audit matter was addressed in the audit our audit procedures related to the timing of revenue recognition for product sales included the following, among others:•we selected a sample of product sales from the period immediately preceding the company’s fiscal year end and obtained the invoice, purchase order, customer contract or agreement, packing list, bill of lading, proof of delivery, and evidence of cash collection, in order to evaluate whether revenue was recognized in the appropriate fiscal year.•we selected a sample of product sales for the year and obtained the related contract to identify whether customer acceptance clauses existed that delayed the timing of revenue recognition. •we selected a sample of credit memos from the period immediately subsequent to the company’s fiscal year end and obtained the credit memo and the related invoice, return merchandise authorization form, and shipping documents, as applicable and among others, to evaluate whether revenue was recognized in the fiscal year ended june 30, 2019 before control was transferred to the customer or customer acceptance was certain.•we obtained and evaluated internal certifications provided by the company’s employees related to sales transactions in order to identify the existence of side agreements that could impact the timing of revenue recognition. we also selected a sample of employees and conducted interviews to corroborate the accuracy and completeness of the information provided in the certifications.•we selected a sample of the company’s top customers and confirmed the terms and conditions of the master sales 69agreement or purchase orders directly with the customer.as a result of the material weaknesses, among other modifications to the nature and extent of our audit procedures and the evidence obtained, we involved forensic specialists, increased the number of selections we would have otherwise made if the company’s controls were designed and operating effectively. with the assistance of information technology and data analytics specialists, we also performed data extraction procedures to test the accuracy and completeness of the revenue information generated from the company’s systems and applications./s/ deloitte & touche llp san jose, california december 19, 2019we have served as the company's auditor since fiscal 2003. | 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.32table of contents vendor incentives - refer to note 2 to the consolidated financial statements critical audit matter description the company receives incentives in the form of reductions in amounts owed to and/or payments due from vendors related to volume rebates and other promotions. volume rebates and vendor promotional allowances are earned based on inventory purchases and initially recorded as a reduction to inventory, except for allowances provided as reimbursement of specific, incremental and identifiable costs incurred to promote a vendor’s products that are offset in selling, general and administrative expenses. the deferred amounts are recorded as a reduction in cost of sales as the inventory is sold. total deferred vendor incentives included as a reduction of inventories were $82.4 million as of january 1, 2022.the company purchases inventory from a significant number of vendors, with no single vendor accounting for more than 10% of purchases. while many of these incentives are under long-term agreements in excess of one year, others are negotiated on an annual basis or shorter. accordingly, auditing vendor incentives was challenging due to the extent of audit effort required to evaluate whether the vendor incentives were recorded in accordance with the terms of the vendor agreements. how the critical audit matter was addressed in the audit our audit procedures related to whether the vendor incentives were recorded in accordance with the terms of the vendor agreements included the following, among others: •we tested the effectiveness of controls over the process that ensures that all vendor agreements are communicated to accounting.•we tested the effectiveness of controls over the recording of vendor incentives as a reduction in inventories, and subsequently as a reduction in cost of sales as the related inventory was sold.•we selected a sample of vendor incentives earned during the year and deferred at year-end and recalculated, using the terms of the vendor agreement, both the amount recorded as deferred vendor incentives as a reduction in inventories and the amount recognized in earnings as a reduction in cost of sales. •we selected a sample of vendors from the company’s inventory purchases made during the year and from vendor incentives recorded as a reduction in cost of sales and confirmed directly with the vendor that the agreement obtained from the company and used in the determination of recording vendor incentives as a reduction in cost of sales was the most recent for the applicable period between the parties.•we tested the amount of the income by developing an expectation based on the historical amounts recorded as a percentage of total cost of sales and compared our expectation to the amount recorded. /s/deloitte & touche llp charlotte, north carolina february 15, 2022we have served as the company’s auditor since 2002. | 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. customer finance receivables allowance for credit losses as described in notes 1 and 2 to the consolidated financial statements, as of december 31, 2021, the collectively evaluated customer finance receivables allowance for credit losses makes up a significant portion of total customer finance receivable allowance for credit losses of $251 million. as disclosed by management, the allowance for credit losses is management’s estimate of expected credit losses over the life of the customer finance receivables portfolio measured on a collective (pool) basis calculated using loss forecast models utilizing probabilities of default and management’s estimated loss given default based on past loss experience adjusted for current economic conditions and reasonable and supportable forecasts and scenarios capturing country and industry-specific economic factors.the principal considerations for our determination that performing procedures relating to the customer finance receivables allowance for credit losses is a critical audit matter are the significant judgment by management in determining the probabilities of default adjusted for country and industry-specific economic factors utilized in their models; this in turn led to a high degree of auditor judgment, subjectivity and effort in performing audit procedures and evaluating audit evidence related to probabilities of default adjusted for country and industry-specific economic factors, and the audit effort involved the use of professionals with specialized skill and knowledge.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the determination of the allowance for credit losses, including controls relating to management’s consideration of probabilities of default and country and industry-specific economic factors. these procedures also included, among others, (i) testing management’s process for determining the allowance for credit losses estimate, (ii) testing the data used by management, including underlying customer finance receivable data and country and industry-specific economic factors, and (iii) involving professionals with specialized skill and knowledge to assist in evaluating the appropriateness of the models used in the allowance for credit losses, the reasonableness of probabilities of default assumptions, and the selection of country and industry-specific economic factors. /s/pricewaterhouse coopers llp nashville, tennessee february 16, 2022we have served as the company’s auditor since 1984. | 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.valuation of investments in securities description of the matter as of december 31, 2021, the fair value of the company’s fixed-income and equity securities totaled $11.43 billion, a portion of which are valued based on internally developed prices, using significant inputs not based on, or corroborated by, observable market information, or valued based on non-binding broker quotes. the fair values of these securities are determined by management applying the methodologies outlined in note e to the consolidated financial statements. the credit spread applied by management for internally developed fixed-income investment values and the lack of visibility into assumptions used in non-binding broker quotes are significant unobservable inputs, which create greater subjectivity when determining the fair values. credit spread inputs are developed based on management’s review of trade activity for comparable securities and credit spreads over the treasury yield of securities with a similar duration. auditing the fair value of the fixed-income and equity securities that use unobservable inputs was complex and highly judgmental due to the judgment used by the company in determining unobservable inputs and assumptions to estimate the securities’ fair value. significant unobservable inputs and assumptions include credit spreads over the treasury yield and non-binding broker quotes.f-1table 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 management’s valuation process for the fixed-income and equity securities priced using unobservable inputs. this included, among others, testing controls over investment pricing and the development and review of significant inputs and assumptions used in determining the fair values. to test the company’s investment fair values, our audit procedures included, among others, comparing the fair values for a sample of securities to pricing service values or internally developed cash flow models. with the assistance of our valuation specialists, we evaluated the valuation methodologies used by the company and compared the company’s fair value estimate to an independently calculated range of fair value estimates for a sample of securities. we evaluated information that corroborated or contradicted the company’s fair value estimates, including observable spreads, transaction data for similar securities, and historical collateral performance data.property and casualty unpaid losses and loss adjustment expenses description of the matter as of december 31, 2021, the company’s unpaid losses and loss adjustment expenses reserve liabilities net of reinsurance recoverables, net of allowance, (“reserves”) totaled $7.66 billion as disclosed in note n to the consolidated financial statements. this liability represents management’s best estimate of the ultimate net cost of all unpaid losses and loss adjustment expenses and is determined by using case-basis evaluations, actuarial projections, and management’s judgment. estimating the reserves is inherently judgmental and is influenced by factors that are subject to significant variation, particularly for lines of business that develop or are paid over a long period of time or that contain exposures with high potential severities, such as workers’ compensation, other liability, and asbestos and environmental. auditing management’s best estimate of reserves was complex because it required the involvement of our actuarial specialists due to the highly judgmental nature of the assumptions used in the evaluation process. the significant judgment was primarily due to the sensitivity of management’s best estimate to the selection and weighting of actuarial methods, loss development factors, expected loss ratios, and estimated inflation. these assumptions have a significant effect on the valuation of reserves.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the process for estimating reserves. this included, among others, the review and approval processes that management has in place for the methods and assumptions used in estimating the reserves. with the assistance of actuarial specialists, our audit procedures included, among others, an evaluation of the company’s selection and weighting of actuarial methods used, including consideration of methods used in prior periods and those used in the industry for the specific types of insurance. to evaluate the significant assumptions used by management, we compared the significant assumptions, including loss development factors, expected loss ratios, and inflation, to factors historically used and current industry benchmarks. we also performed a review of the development of prior years’ reserve estimates. with the assistance of actuarial specialists, we established an independent range of reasonable reserve estimates, which we compared to management’s best estimate./s/ ernst & young llp we have served as the company’s auditor since 1961. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.revenue recognition – identification of performance obligations as described in notes 2 and 3 to the consolidated financial statements, the company generated $3.0 billion of its revenue from the sale of advertising services, with $0.5 billion from data licensing and other arrangements, for the year ended december 31, 2019. significant judgments made by management are (i) identifying the performance obligations in the contract, (ii) determining the basis for allocating contract consideration to performance obligations, (iii) determining whether the company is the principal or the agent in arrangements where another party is involved in providing specified services to a customer, and (iv) estimating the transaction price to be allocated for contracts with tiered rebate provisions.the principal considerations for our determination that performing procedures relating to revenue recognition, specifically related to the identification of performance obligations, is a critical audit matter are that there was a significant amount of judgment by management in identifying performance obligations. this in turn resulted in significant audit effort and a high degree of subjectivity in performing procedures and evaluating audit evidence.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the identification of performance obligations. these procedures also included, among others, examining revenue arrangements on a test basis and testing management’s process for (i) determining whether the criteria for revenue recognition have been met based on the terms and performance under the arrangement, and (ii) identifying performance obligations and, where applicable, determining whether the company is the principal or agent for the performance obligation identified.income taxes - valuation of deferred tax assets related to intra-entity transfers of intangible assets as described in notes 2 and 15 to the consolidated financial statements, the company transferred certain intangible assets among its wholly-owned subsidiaries, which resulted in the establishment of deferred tax assets and the recognition of a deferred tax benefit from income tax of $1.2 billion as of and for the year ended december 31, 2019. the establishment of deferred tax assets from intra-entity transfers of intangible assets required management to make significant estimates and assumptions to determine the fair value of such intangible assets. critical estimates in valuing the intangible assets include, but are not limited to, internal revenue and expense forecasts, the estimated life of the intangible assets, and discount rates.the principal considerations for our determination that performing procedures relating to the valuation of deferred tax assets related to the intangible assets transferred intra-entity is a critical audit matter are that there was significant judgment by management in developing the estimates and assumptions to determine the fair value of the intangible assets transferred, which management used as the basis for the recording of the deferred tax assets. this led to significant auditor judgment, subjectivity, and effort in performing procedures to evaluate the estimates and assumptions in valuing the intangible assets, including internal revenue and expense forecasts and 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 the valuation of intangible assets transferred, including controls over the development of the estimates and assumptions, including internal revenue and expense forecasts and discount rates. these procedures also included, among others, testing management’s process for developing the fair value of the intangible assets transferred; testing the completeness, accuracy, and relevance of underlying data used in the model; and evaluating the significant assumptions used by management, including internal revenue and expense forecasts and discount rates. professionals with specialized skill and knowledge were used to assist in the evaluation of the company’s model and certain significant assumptions, including discount rates./s/ pricewaterhouse coopers llp san francisco, california february 18, 2020we have served as the company’s auditor since 2009. | 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.revenue recognition - u.s. wholesale as described in notes 2 and 3 to the consolidated financial statements, the company’s u.s. wholesale revenue was $1,126,415 thousand for the year ended january 1, 2022. the company relies on shipping terms to determine when performance obligations are satisfied. when goods are shipped to wholesale customers “fob shipping point,” control of the goods is transferred to the customer at the time of shipment if there are no remaining performance obligations. the company recognizes the revenue once control passes to the customer. the transaction price is the amount of consideration the company expects to receive under the arrangement. the company is required to estimate variable consideration (if any) and to factor that estimation into the determination of the transaction price. the company may offer sales incentives to wholesale customers, including discounts.the principal consideration for our determination that performing procedures relating to u.s. wholesale revenue recognition is a critical audit matter is the significant audit effort in performing procedures related to the company’s 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 recording of u.s. wholesale revenue at the transaction price once control passes to the customer. these procedures also included, among others (i) testing the completeness, accuracy, and occurrence of revenue recognized for a sample of revenue transactions by obtaining and inspecting source documents, including purchase orders, invoices, proof of shipment, and subsequent cash receipts, where applicable; ii) testing the completeness, accuracy, and occurrence of a sample of sales incentive transactions by obtaining and inspecting source documents, including support for the nature of the incentive, amount, and agreement with the customer; and iii) confirming a sample of outstanding customer invoice balances as of january 1, 2022 and obtaining and inspecting source documents, including invoices, proof of shipment, and subsequent cash receipts, where applicable, for confirmations not returned./s/ pricewaterhouse coopers llp atlanta, georgia february 25, 2022we have served as the company’s auditor since at least 1968. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.impairment assessments of real estate investments and investments in unconsolidated real estate ventures as described in notes 2, 3 and 4 to the consolidated financial statements, the company’s gross carrying value of operating real estate investments was $4,006 million and its investments in unconsolidated real estate ventures was $12o million as of december 31, 2019. during 2019, the company did not recognize an impairment related to real estate investments or an other than temporary impairment related to investments in unconsolidated real estate ventures. management reviews its real estate investments for impairment following the end of each quarter for each of its real estate investments where events or changes in circumstances indicate that the carrying amounts may not be recoverable. for real estate investments, management analyzes recoverability based on the estimated undiscounted future cash flows expected to be generated from the operations and eventual disposition of the assets. estimated future cash flows used in such analysis are based on management’s plans for the real estate investment and its views of market economic conditions. the estimates consider assumptions, including but not limited to, market rental rates, capitalization rates, and recent sales data for comparable real estate investments. at least quarterly, management assesses whether there are any other than temporary impairment indicators of the company’s investments in unconsolidated real estate ventures. an investment is other than temporarily impaired only if the fair value of the investment in an unconsolidated real estate venture, as estimated by management, is less than the carrying value and the decline is other than temporary. the principal considerations for our determination that performing procedures relating to the impairment assessments of real estate investments and investments in unconsolidated real estate ventures is a critical audit matter are there was significant judgment by management when evaluating the real estate investments and investments in unconsolidated real estate ventures for potential impairment. this in turn led to a high degree of auditor judgment and subjectivity in applying procedures and evaluating audit evidence related to (i) the estimated undiscounted future cash flows expected to be generated by the real estate investments and (ii) the identification of any indicators that the value of the company’s investments in unconsolidated real estate ventures may be other than temporarily impaired. in addition, there was significant audit effort in evaluating (i) the significant assumptions relating to the estimated undiscounted future cash flows expected to be generated by the real estate investments, including market rental rates, capitalization rates, and recent sales data for comparable real estate investments, and (ii) any indicators that the value of the company’s investments in unconsolidated real estate ventures may be other than temporarily impaired.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the impairment assessments of real estate investments and investments in unconsolidated real estate ventures, including controls over management’s identification of events or changes in circumstances that may indicate an impairment of real estate investments or indicate that the value of the company’s investments in unconsolidated real estate ventures may be other than temporarily impaired. these procedures also included, among others, testing management’s process for (i) developing the estimated undiscounted future cash flows expected to be generated by the real estate investments, including the evaluation of the reasonableness of significant assumptions, the appropriateness of methods, the reasonableness of the model outputs and testing the completeness and accuracy of data provided by management, and (ii) identifying any indicators that the value of the company’s investments in unconsolidated real estate ventures may be other than temporarily impaired. evaluating the reasonableness of significant assumptions relating to the estimated undiscounted future cash flows expected to be generated by the real estate investments, including market rental rates, capitalization rates, and recent sales data for comparable real estate investments, involved considering past performance of the asset and whether the assumptions were consistent with evidence obtained in other areas of the audit. evaluating management’s assessment of indications of other than temporary impairment in investments in unconsolidated real estate ventures involved considering whether any market economic conditions, past performance of the asset, or evidence obtained in other areas of the audit may be indicative of other than temporary impairment.f-2/s/ pricewaterhouse coopers llp philadelphia, pennsylvania march 2, 2020we have served as the company’s auditor since 2003. | 4 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.oil and gas reserve quantities & related cashflows as used in the calculation of dd&a and impairment — refer to notes 2 and 18 to the financial statements f-2critical audit matter description the company’s proved oil and natural gas properties are depleted using the units of production method driven by the underlying oil and natural gas reserves. the company’s proved oil and natural gas properties and the related support equipment and facilities are evaluated for impairment by comparing the carrying value of the assets to the future net cashflows of the underlying oil and natural gas reserves. if the carrying amount of a property exceeds the estimated undiscounted future net cash flows, the company recognizes an impairment expense equal to the difference between the carrying value and the fair value of the property, which is estimated to be the net present value of the future net cash flows associated with the underlying oil and natural gas reserves. the development of the company’s oil and natural gas reserve quantities require management to make significant estimates and assumptions related to the intent and ability to complete undeveloped proved reserves within a five-year development period, as prescribed by sec guidelines. when developing the related net present value of the future net cash flows associated with these reserves quantities, management must make significant estimates related to the risk adjusted discount rates, and future oil and natural gas prices. the company engages an independent reservoir engineer, management’s specialist, to estimate oil and natural gas quantities using these estimates and assumptions and engineering data. changes in these assumptions or engineering data could have a significant impact on the amount of depletion and impairment recorded for the company’s proved oil and natural gas properties and related support equipment and facilities. as of december 31, 2020, the total gross proved oil and gas properties balance was $775 million. the depletion, depreciation, and amortization was $40 million for the twelve months ended december 31, 2020. the impairment expense associated with the company’s proved oil and natural gas properties and the related support equipment and facilities was $477 million for the twelve months ended december 31, 2020. given the significant judgements made by management and management’s specialist, performing audit procedures to evaluate the company’s oil and natural gas reserve quantities and the related net cash flows including management’s estimates and assumptions requires a high degree of auditor judgement and an increased extent of effort, including the need to involve our fair value specialists. how the critical audit matter was addressed in the audit our audit procedures of management’s significant judgments and assumptions related to oil and natural gas reserves quantities and estimates of the future net cash flows included the following, among others: •we evaluated the reasonableness of management’s five-year development plan by comparing the forecasts to: -historical conversions of proved undeveloped oil and natural gas reserves into proved developed oil and natural gas reserves. -internal communications to management and the board of directors. -forecasted information included in company press releases as well as in analyst and industry reports for the company and certain of its peer companies. -the financial capability of the company to execute its drilling program. •we evaluated the reasonableness of management’s estimated reserve quantities by performing the following: -evaluating the experience, qualifications and objectivity of management’s specialist, an independent reservoir engineering firm. -performing analytical procedures on the reserve quantities developed by management’s specialist. •with the assistance of our fair value specialists, we evaluated management’s estimated future oil and natural gas prices and risk adjusted discount rates by performing the following: -understanding the methodology used by management for development of these assumptions and comparing the estimates to independently determined values. -comparing management’s estimates to third-party industry publications and other third party sources. /s/ deloitte & touche llp houston, texas march 11, 2021we have served as the company’s auditor since 2020. | 5 |
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.measurement of unrecognized tax benefits as described in notes 1 and 11 to the consolidated financial statements, management has recorded unrecognized tax benefits of $110.5 million as of december 31, 2020. as disclosed by management, the breadth of operations and the global complexity of tax regulations require assessments of uncertainties and judgments in estimating taxes. the final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of disputes arising from federal, state and international tax audits in the normal course of business. a liability for unrecognized tax benefits is recorded when management concludes that the likelihood of sustaining such positions upon examination by taxing authorities is less than “more-likely-than not.” the principal considerations for our determination that performing procedures relating to the measurement of unrecognized tax benefits is a critical audit matter are the significant judgment by management when applying the more-likely-than-not recognition criteria to the company’s tax positions, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence obtained related to the measurement of unrecognized tax benefits. additionally, 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 identification and recognition of the liability for unrecognized tax benefits, including controls addressing completeness of the unrecognized tax benefits and controls over measurement of the liability. these procedures also included, among others, evaluating the significant judgment used by management in applying the more-likely-than-not recognition criteria and in measuring the company’s unrecognized tax benefits. professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of assumptions made by management, the technical merits of positions taken based upon application of the tax law and new information, and the measurement of unrecognized tax benefits. /s/ pricewaterhouse coopers llp philadelphia, pennsylvania february 18, 2021we have served as the company’s auditor since 2011. | 3 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.118table of contents fair value — investments — refer to footnote 2 and 5 in the financial statements critical audit matter description as described in note 5 to the consolidated financial statements, the company held $9,501,329 thousand of total level 3 investments at fair value as of december 31, 2021, with debt investments representing approximately 98% of this total. for $9,155,453 thousand or 96% of the level 3 debt investments, the fair values were determined by the adviser using a yield analysis. the significant unobservable input used in the yield analysis is the discount rate based on comparable market yields. we identified the valuation of level 3 debt investments utilizing a yield analysis as a critical audit matter given the significant judgments made by the adviser to estimate the fair value. this required a high degree of auditor judgment and extensive audit effort, including the need to involve fair value specialists who possess significant valuation experience, to evaluate the appropriateness of the valuation methodologies and the significant unobservable inputs.how the critical audit matter was addressed in the audit our audit procedures related to the valuation methodologies and the significant unobservable inputs used to estimate the fair value of debt investments utilizing a yield analysis included the following, among others: •we evaluated the appropriateness of the valuation methodologies used by the adviser.•we evaluated the appropriateness of the estimates in the yield analyses through independent analysis and evidence, including the selected yields for debt investments. •with the assistance of our fair value specialists, we evaluated the valuation methodologies and related significant assumptions. •we evaluated the impact of current market events and conditions on the valuation methodologies and inputs used by the adviser./s/ deloitte & touche llp new york, new york february 28, 2022we have served as the company’s auditor since 2018. | 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.remedial liabilities - refer to note 2, significant accounting policies, and note 10, remedial liabilities, to the financial statements critical audit matter description remedial liabilities include the costs of removal or containment of contaminated material, the treatment of potentially contaminated groundwater and maintenance and monitoring costs necessary to comply with regulatory requirements. the estimate of remedial liabilities involves an analysis of numerous factors including: (i) the nature and extent of environmental contamination, (ii) the terms of applicable permits and level of regulatory oversight, (iii) the cost of performing the cleanup activities, and (iv) the adjudication of certain complex matters, particularly superfund sites, involving multiple parties. remedial liabilities are inherently difficult to estimate and involve a significant amount of judgment. the company routinely reviews and evaluates the sites for which remedial liabilities have been recognized to determine if there should be changes in the cost estimates. as a result, the valuation of liabilities is subject to material changes as additional information becomes available, particularly as it relates to changes in technologies and changes in laws and regulations that govern the remediation efforts.total remedial liabilities recorded as of december 31, 2020 were $114.8 million.45table of contents given the subjectivity and judgment involved in measuring remedial liabilities, auditing remedial liabilities involved especially subjective judgment and an increased extent of effort, including the need to involve our specialists who have expertise in environmental remediation.how the critical audit matter was addressed in the audit our audit procedures related to the remedial liabilities included the following, among others:•we tested the effectiveness of controls related to the recognition and measurement of remedial liabilities, including those controls over changes in estimates.•we evaluated management’s ability to accurately forecast future cash flows by comparing actual results to management’s historical forecasts through retrospective reviews.•we evaluated the methods and assumptions used by management to estimate the remedial liabilities by confirming specific facts and circumstances related to a selection of sites with project managers and other company personnel responsible for monitoring these sites, including legal counsel.•with the assistance of auditor specialists who have expertise in environmental matters and specialized skills and training, we evaluated the reasonableness of the company’s estimates by:◦searching for information in the public domain for completeness of sites identified for remediation.◦assessing the completeness of the company’s costs estimate for a selection of sites, specifically, comparing the costs estimates to relevant regulatory guidelines and specifications.◦testing the accuracy of the amounts recorded for a selection of sites, specifically, verifying the mathematical accuracy of the calculation, agreeing cost components to supporting documents, and/or developing an independent range of cost estimates./s/ deloitte & touche llp boston, massachusetts february 24, 2021we have served as the company's auditor since 2005. | 2 |
critical audit matters critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.19impairment of real estate investments description of the matter as described in note 2 to the financial statements, the company tests investments in real estate for recoverability when events or changes in circumstances indicate that the carrying value may not be recoverable. management determines whether impairment has occurred by comparing the property’s probability-weighted future undiscounted cash flows to its carrying value. the company’s undiscounted future cash flows analysis requires management to make significant estimates and assumptions related to future rental rates, occupancy levels, costs to obtain a tenant, holding expenses while vacant, and estimated sale proceeds. if the expected future cash flows are less than the carrying value of the property, the company recognizes an impairment loss equal to the amount by which the carrying amount of the property exceeds the fair value of the property. fair value is determined based on independent appraisals, selling prices of comparable properties, sale agreements under negotiation, and/or final selling prices. we identified the impairment of real estate investments as a critical audit matter because of the significant estimates and assumptions management makes to evaluate the recoverability of real estate investments. given these factors, the related audit effort in evaluating management’s assumptions in determining the recoverability of real estate assets was extensive and required a high degree of auditor judgment. how we addressed the matter in our audit our audit procedures related to the company’s real estate recoverability analysis included the following, among others: we obtained an understanding and evaluated the design of controls over management’s evaluation of recoverability of real estate property assets, including management’s process for determining the key inputs utilized in estimating the undiscounted future cash flows. we evaluated the undiscounted cash flow analysis, including management’s estimates of tenant occupency, future rental income and estimated sale proceeds, for each real estate asset with possible impairment indicators by evaluating the adequacy and reasonableness of the source information and assumptions used by management and testing mathematical accuracy of the analysis. we made inquiries of management regarding the current status of potential transactions and about management’s judgments to understand the probability of future events that could affect the cash flow assumptions for the properties. /s/ boulay pllp boulay pllp we have served as the company’s auditor since 2002. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the 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. heavy maintenance costs as described in note 2 to the consolidated financial statements, the company accounts for heavy maintenance costs for airframes and engines used in the acmi and charter segments using the direct expense method, except for engines used on 747-8f aircraft, which are accounted for using the deferral method. heavy maintenance costs for airframes and engines used in the dry leasing segment are accounted for using the deferral method. under the direct expense method, heavy maintenance costs are charged to expense upon induction, based on management’s best estimate of the costs. under the deferral method, the company defers the expense recognition of scheduled heavy maintenance events, which are amortized over the estimated period until the next scheduled heavy maintenance event is required. heavy maintenance costs are included in operating expenses and are presented as a component of the maintenance, materials and repairs expense of $381.7 million for the year ended december 31, 2019. accrued heavy maintenance is included in accrued liabilities and represents a significant portion of the maintenance accruals of $136.3 million (which includes heavy maintenance costs that are direct expensed, deferred, or accounted for as capital expenditures) as of december 31, 2019. when estimating the expected cost for each heavy maintenance event, management considers multiple factors, including historical costs and experience and information provided by third party maintenance providers. these estimates may be subsequently adjusted for changes and the final determination of actual costs incurred. the principal considerations for our determination that performing procedures relating to heavy maintenance costs is a critical audit matter are there was significant judgment by management when developing the estimated costs for heavy maintenance events. this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and in evaluating audit evidence relating to the estimated costs for uncompleted heavy maintenance events and management’s significant assumptions, including historical costs and experience and information provided by third party maintenance providers. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the accounting for heavy maintenance costs, including controls over management’s process to 52 estimate and monitor the costs of uncompleted heavy maintenance events. these procedures also included, among others, testing management’s process for developing the estimated costs for heavy maintenance events. this included evaluating the appropriateness of the methods and reasonableness of the significant assumptions used by management in developing the estimated costs for heavy maintenance events, testing the completeness and accuracy of historical costs and experience data used in the estimate, and assessing management’s process for monitoring the estimated costs of ongoing heavy maintenance events. evaluating management’s assumptions related to the estimated costs for heavy maintenance events involved evaluating whether the assumptions used by management were reasonable considering (i) past performance of comparable heavy maintenance events, (ii) testing information from third party maintenance providers on a sample basis, and (iii) whether the assumptions were consistent with evidence obtained in other areas of the audit, such as testing for unrecorded liabilities and subsequent event procedures. long-lived assets - impairment of 747-400 freighter fleet and related assets & impairment of assets held for sale as described in note 5 to the consolidated financial statements, the company recognized an impairment charge of $580.3 million for the year ended december 31, 2019 related to its 747-400 freighter fleet, as well as the related engines, operating lease right-of-use assets, rotable parts, and other related flight equipment in that asset group. management records impairment charges for long-lived assets when events and circumstances indicate that the assets in an asset group may be impaired, the undiscounted cash flows estimated to be generated by those assets are less than their associated carrying amount, and the net book value of the assets exceeds their associated estimated fair value. in determining the fair value of the owned assets in the 747-400 freighter asset group, management obtained appraisals or bids from independent third parties, which considered the effects of the current market environment, age of the assets, and marketability. for rotable parts, the appraisals considered the maintenance condition of the parts. for owned 747-400 freighter aircraft and spare engines, management made adjustments to the appraisals to reflect the impact of their current maintenance condition to determine fair value. management determined the fair value of operating lease right-of-use assets based on the present value of current market fixed lease rates utilizing the company’s incremental borrowing rate for the remaining term of each lease. in addition, the company recognized an impairment charge of $58.1 million for the year ended december 31, 2019 related to the writedown of other flight equipment that was sold or is held for sale as of december 31, 2019. in determining the fair value of assets held for sale, management used bids received for those assets from independent third parties. the principal considerations for our determination that performing procedures relating to the impairment of long-lived assets related to the 747-400 freighter fleet and related assets and assets held for sale is a critical audit matter are there was significant judgment by management when determining the fair value measurements used in calculating the related impairment charges. this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and in evaluating audit evidence relating to the estimated fair value of the 747-400 freighter asset group and the other flight equipment held for sale as of december 31, 2019. 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 impairment assessment, including controls relating to the valuation of 747-400 freighter asset group and the other flight equipment held for sale. these procedures also included, among others, testing management's process for determining the fair value of the 747-400 freighter asset group and other flight equipment held for sale. this included evaluating the appropriateness of the impairment model, testing the completeness, accuracy, and relevance of underlying data used in the impairment model, and evaluating the reasonableness of management’s determination of fair value. evaluating the reasonableness of management's determination of fair value for the 747-400 freighter asset group involved evaluating the appraisals or bids from independent third parties and for owned 747-400 freighter aircraft and spare engines, evaluating the adjustments made by management to reflect the impact of their current maintenance condition. evaluating the reasonableness of management’s determination of fair value for the operating lease right-of-use assets involved evaluating the reasonableness of the present value of current market fixed lease rates utilizing the company’s incremental borrowing rate for the remaining term of each lease for leased flight equipment. evaluating the reasonableness of management’s determination of fair value for the other flight equipment held for sale as of december 31, 2019 involved evaluating the reasonableness of the bids received for those assets from independent third parties on a 53 sample basis. professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the impairment model and certain significant inputs and assumptions, including current market fixed lease rates and the reasonableness of adjustments made to reflect maintenance condition./s/ pricewaterhouse coopers llp new york, new york february 24, 2020 we have served as the company’s auditor since 2007. | 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.completeness and measurement of costs capitalized to obtain revenue contracts description of the matter the company capitalized $33.2 million of costs to obtain revenue contracts during the year ended january 31, 2021. as described in note 2 to the consolidated financial statements, capitalized costs are inclusive of sales commissions and any associated payroll taxes or fringe benefit costs that are incremental to obtain the contract with the customer but expected to be recoverable.auditing the costs capitalized to obtain contracts with the customers required complex auditor judgment and was especially challenging due to the material weakness identified by the company and the impact it had on management’s evaluation of completeness and measurement of these costs. the company has a high volume of sales commission plans with various underlying criteria and inputs used to calculate amounts capitalized to obtain contracts with the customers. the material weakness required an increased extent of audit effort to test the completeness and accuracy of inputs of the commission-eligible revenue contracts and measurement of incremental costs eligible for capitalization.55how we addressed the matter in our audit we performed audit procedures that included, among others, assessing whether those costs capitalized were eligible costs and met the criteria of incremental and recoverable. for example, we tested a sample of commissions transactions by reviewing and assessing the underlying commission plan and tested the measurement of capitalized costs by recalculating the amount earned based on sales and contract data. we validated that each commission earned and capitalized was an incremental cost to obtain a revenue contract. to respond to the material weakness, we performed incremental audit procedures, for instance, by increasing our sample size related to commission transactions. our procedures also included reconciling the capitalized commission population to sales commissions paid throughout the year. we performed a retrospective review of commission payments made subsequent to the balance sheet date related to commissions earned in the current fiscal year to test the completeness of costs capitalized.revenue recognition description of the matter the company recorded consolidated revenue and unearned revenue of $354.7 million and $192.0 million, respectively, for the year ended january 31, 2021. as described in note 2 to the consolidated financial statements, the company primarily earns revenue from subscriptions and associated support to the platform. the company’s revenue contracts include contractual terms and conditions that can impact the amount allocated to each of its performance obligations and the timing of revenue recognition.auditing the timing and measurement of the company's revenue recognition was especially challenging due to the volume of executed contracts and the assessment of the unique terms. this involved assessing the contractual terms and conditions of both new and modified contracts to determine the contract period, identifying all performance obligations, and determine if the transaction price expected to be received was fixed or variable.how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of the company’s internal controls over the accounting for revenue. for example, we tested controls over the company’s processes to evaluate contractual terms and conditions and determine the timing and amount of revenue to be recognized related to the performance obligations identified as services are transferred to the customer. this included testing relevant controls over the it systems that are important to the initiation, processing and recording of revenue transactions.we performed audit procedures that included, among others, reading a sample of revenue contracts to evaluate the contractual terms and conditions, identify performance obligations, assess the fixed and variable components to determine the transaction price, and assess the measurement and timing of revenue recognized and unearned revenue recorded as of year-end. we tested the revenue recognized and unearned revenue as of year-end through analytical procedures, including the recalculation of balances on a disaggregated basis. finally, we assessed the appropriateness of the related disclosures in the consolidated financial statements./s/ ernst & young, llp we have served as the company’s auditors 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. 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 $9.9 million as of december 31, 2021. the recorded allowance was established based on an allowance of $7.6 million related to loans collectively evaluated for impairment and on an allowance of $2.3 million relating to loans individually evaluated for impairment as of december 31, 2021. 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 including underwriting standards, collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; 2) changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the loan portfolio, including the condition of various market segments; 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; and 9) the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in its current loan portfolio. 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. 39 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, 2021. 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. 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 $12.1 million in deferred tax assets and released a valuation allowance of $1.9 million as of and for the period ending december 31, 2021. 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 lack of need, for a valuation allowance, management considered 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. we identified the realizability of deferred tax assets as a critical audit matter because of the significant assumptions and judgments used 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. - 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 deferred tax position in assessing whether deferred tax assets were more-likely-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 matters” section ofour report. basis for opinion these consolidated financial statements are theresponsibility of the company’s management. our responsibility is to express an opinion on the company’s consolidated financialstatements 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 andthe applicable rules and regulations of the securities and exchange commission and the pcaob. we conducted our audits in accordance with thestandards of the pcaob. those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud. the company is not required to have, nor were weengaged to perform, an audit of its internal control over financial reporting. as part of our audits, we are required to obtain an understandingof internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the company’sinternal control over financial reporting. accordingly, we express no such opinion. our audits included performing procedures to assessthe risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing proceduresthat respond to those risks. such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in theconsolidated financial statements. our audits also included evaluating the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall presentation of the consolidated financial statements. we believe that our audits providea reasonable basis for our opinion. f-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. going concern critical audit matter description as described in note 2, the company’s operationsare mainly funded with debt financing, which is dependent upon many external factors and may be difficult to raise when required. the company may not have sufficient cash to fund its operations, and therefore, will require additional funding, which if not raised, mayresult in the delay, postponement or curtailment of some or all of its activities. management has prepared future cash flow forecasts,which involves judgement and estimation of key variables, such as planned capital expenditures, revenue, production volumes and marketconditions. future economic conditions, including the impact of the global covid-19 pandemic and effects of key events subsequent to theyear end, such as debt financing, also impacted management’s judgements and estimates. we identified the company’s ability to continueas a going concern as a critical audit matter because auditing the company’s going concern assessment is complex and involves ahigh degree of auditor judgment to assess the reasonableness of the cash flow forecasts, planned refinancing actions and other assumptionsused in the company’s going concern analysis. the company’s ability to execute the planned refinancing actions are especiallyjudgmental given that the global financial markets and economic conditions have been, and continue to be, volatile as a result of the covid-19 pandemic. this matter is also described in the “material uncertainty relatedto going concern” section of our report. audit response we responded to this matter by performing procedures overmanagement’s assessment of the company’s ability to continue as a going concern. our audit work in relation to this included,but was not restricted to, the following: ·we evaluated the cash flow forecasts prepared by managementand evaluated the integrity and arithmetical accuracy of the model.·we evaluated the key assumptions used in the model to estimatefuture cash flows for a reasonable period of time, not exceeding 12 months from the date of the balance sheet, by comparing assumptionsused by management against historical performance, budgets, economic and industry indicators and publicly available information.·we evaluated the key assumptions pertaining to estimatedcash flows from operating activities and expected cash flows from financing activities, comparing these to available market data, underlyingagreements and subsequent events thereafter.·we compared the assumptions related to revenue projectionsto those used in impairment assessments of non-financial assets.·we assessed the adequacy of the going concern and covid-19disclosures included in note 2 of the consolidated financial statements and consider these to appropriately reflect the assessments thatmanagement has performed. f-3 goodwill and intangible assets impairment critical audit matter description as described in note 3 to the consolidated financialstatements, the company performed impairment tests of its goodwill and intangible assets. as a result of the impairment tests, the companyrecognized a $7.2m impairment loss related to goodwill and certain intangible assets, which is the amount by which the carrying valueexceeded the estimated fair value of the reporting unit these assets were allocated to. we identified the estimation of goodwill and intangibleassets impairment as a critical audit matter. evaluating the company’s assessment of the fair value of goodwill and intangible assetsrequired complex auditor judgement. specifically, the key assumptions in the assessment are future operating results, including forecastedsales, gross profit margins, operating expenses, growth rates, and discount rates used to measure the reporting unit’s fair values. audit response we responded to this matter by performing proceduresover the impairment of goodwill and intangible assets. our audit work in relation to this included, but was not restricted to, the following: ·we unitized our internal valuation team to evaluate the integrityof the impairment model used for mechanical and arithmetical accuracy and test the fair values using management’s cash flow estimatesand discount rates and comparing the results to the fair value amounts used by the company.·with respect to projected cash flows from operations, wecompared management’s assumptions with historical results.·we assessed the discount rates applied, including comparisonof underlying components in management’s calculations to external benchmarks and publicly available data for comparable entities,as applicable.·we assessed the appropriateness and completeness of relateddisclosures in the consolidated financial statements. chartered professional accountants licensed public accountants we have served as the company auditors 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.revenue recognition – platform fees as described in note 2 to the consolidated financial statements, the company maintains agreements with each client and supplier in the form of master service agreements, which set out the terms of the relationship and access to the company’s platform. the company’s performance obligation is to provide the use of its platform to clients to develop ad campaigns and select the advertising inventory, data and other add-on features. the company charges clients a platform fee, based on a percentage of a client’s purchases through the platform. the company recognizes revenue for its platform fee at a point in time when the purchase by a client occurs through its platform. management reports revenue on a net basis for the platform fees charged to clients. for the year ended december 31, 2020, the company’s revenue was $836 million. the principal considerations for our determination that performing procedures relating to revenue recognition – platform fees is a critical audit matter are the significant audit effort required in performing audit procedures and in evaluating audit evidence relating to client purchases through the company’s platform to recognize revenue. 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 completeness and accuracy of the revenue recognized for platform fees charged to clients, including both manual and automated controls operating over the information generated from the company’s platform and controls over the accuracy in calculating revenue invoices based on client purchases. these procedures also included, among others, evaluating the completeness, accuracy, and relevance of underlying information generated from the company’s platform by inspecting a sample of master service agreements and contracts for selected clients and evaluating the appropriateness of the revenue recognized by recalculating platform fees due and validating related cash receipts. /s/ pricewaterhouse coopers llp los angeles, california february 18, 2021 we have served as the company’s auditor since 2015. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the 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. insperity f-22019 form 10-kconsolidated financial statements estimation of the cost of incurred health insurance claims description of the matter as discussed in note 1 of the consolidated financial statements under “health insurance costs”, the company provides the majority of its health insurance coverage to its worksite employees through a fully insured health insurance policy with united healthcare (“united”). while the policy with united is a fully-insured plan, as a result of certain contractual terms, the company accounts for this plan using a partially self-funded insurance accounting model. accordingly, the company records the cost of the united plan, including an estimate of the incurred claims, taxes and administrative fees as benefits expense, which is a component of direct costs. the estimated incurred claims under the company’s united insurance policy are based upon: (i) the level of claims processed during each quarter; (ii) estimated completion rates based upon recent claim development patterns under the plan; and (iii) the number of participants in the plan, including both active and cobra enrollees.auditing management’s estimation of the cost of incurred health insurance claims was subjective and judgmental due to the significant estimation required in determining the medical and pharmacy completion rates. estimating actual claims incurred is subjective due to the large number of plan participants and the possibility that the number, magnitude, nature, and the timing of processing of current period claims may not be comparable to historical results experienced by the company. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the estimation process, including, among others, controls over the completeness and accuracy of the data used to estimate the cost of incurred health insurance claims and the review and approval processes that management has in place for the assumptions applied and the calculation of the cost of incurred health insurance claims. with the support of our actuarial specialists, we performed an independent assessment of the estimated cost of incurred health insurance claims. our audit procedures included, among others, assessing (i) the company’s health insurance cost estimation methodologies, (ii) significant assumptions used to develop the medical and pharmacy completion rates, which includes the incurred but not reported component, (iii) the accuracy and completeness of the claims processed and the number of plan participants used in the company’s computation, as well as (iv) the historical accuracy of management’s estimates of the cost of incurred health insurance claims. our testing of the medical and pharmacy completion rate assumptions included comparing the completion rate assumptions used by management to the completion rates experienced in historical periods and assessing whether contrary evidence exists with respect to the completion rate assumptions utilized by the company to estimate the cost of incurred health insurance claims. we compared the company’s estimate to a range developed by our actuarial specialists based on independently selected assumptions and historical data.insperity f-32019 form 10-kconsolidated financial statements estimation of the cost of incurred workers’ compensation claims and related liability description of the matter as discussed in note 1 of the consolidated financial statements under “workers’ compensation costs”, the company provides workers’ compensation insurance, including ongoing health care and indemnity coverage, to its worksite employees whereby claims are paid over numerous years following the date of injury. under the company’s insurance program, the company has financial responsibility for a significant portion of the workers’ compensation claims. accordingly, the accrual related to incurred costs includes estimates that take into account the ongoing development of claims and therefore requires a significant level of judgment. the estimated accrued claims are based on (i) the loss development rate which is primarily based upon the nature of worksite employees’ job responsibilities, the location of worksite employees, the historical frequency and severity of workers’ compensation claims, (ii) an estimate of future cost trends, and (iii) discount rates which correspond to the weighted average estimated claim payout period.auditing management’s estimation of the cost of incurred workers’ compensation claims was subjective due to the significant estimation required in determining the loss development rate and future cost trends. these assumptions have a significant effect on the valuation of the liability. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the estimation process, including, among others, controls over the completeness and accuracy of data used to estimate the cost of incurred workers’ compensation claims and the review and approval processes that management has in place for the assumptions applied and the calculation of the cost of incurred workers’ compensation claims.with the support of our actuarial specialists, we performed an independent assessment of the estimated cost of workers’ compensation claims incurred and the related liability. our audit procedures included, among others, assessing (i) the company’s workers’ compensation reserve methodologies, (ii) significant assumptions used to develop the loss development rate, as well as (iii) the historical accuracy of management’s estimates of the cost of incurred workers’ compensation claims. our audit procedures included testing the completeness and accuracy of the underlying claims and payroll data provided to management's third-party actuaries and reviewing the company's insurance contracts to assess the company's self-insured retentions, deductibles, and coverage limits. furthermore, we involved our actuarial specialists to assist in our evaluation of the methodologies utilized by management's third-party actuaries in developing the reserves recorded by the company. we compared the company's reserved amount to a range developed by our actuarial specialists based on historical loss data and independently selected assumptions. /s/ ernst & young llp we 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 financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. impairment analysis of goodwill description of the matter at december 31, 2020, the company’s goodwill was $18.6 million related to its halo reporting unit. as discussed in note 1 and 9 to the consolidated financial statements, goodwill is tested for impairment annually as of october 1st or whenever events or circumstances indicate it is more likely than not that impairment may have occurred. the company estimates the fair value of a reporting unit using a combination of the market approach and the income approach, using discounted cash flows.auditing management’s annual goodwill impairment assessment for the reporting unit was complex and highly judgmental due to the significant estimation required to determine the fair value of the halo reporting unit. in particular, the fair value estimate was sensitive to changes in significant assumptions, such as revenue growth rates, the terminal growth rate, ebitda margin, the weighted average cost of capital, and market multiples which are affected by expectations about future market or economic conditions.f-2table of contents how we addressed the matter in our audit to test the estimated fair value of the company’s halo reporting unit, we performed audit procedures that included, among others, evaluating valuation methodologies and testing the significant assumptions discussed above used by the company in its analysis. we involved our specialist to assist in the evaluation of the valuation methodologies and testing certain significant assumptions, including the discount rate and market multiples. we compared the significant assumptions used by management to current industry and economic trends, recent historical performance and other factors. we specifically evaluated the company’s forecasted growth rates and ebitda margins by comparing these assumptions to those of the company’s peers and industry reports. we assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting unit that would result from changes in the assumptions. we also tested the underlying data used by the company in its analysis for completeness and accuracy. issuance of convertible instruments and associated warrants description of the matter as described in note 10 to the consolidated financial statements, on june 24, 2020, the company issued $1.5 million in subordinated convertible promissory notes (the “notes”). in connection with this issuance, each noteholder also received common stock purchase warrants (the “warrants”) to purchase up to 500,000 shares of the company’s common stock; 1,000,000 common stock purchase warrants were issued in total. the total cash proceeds received from the issuance of the notes were allocated to the notes and warrants at the time of issuance.as described in note 13 to the consolidated financial statements, during october 2020 the company consummated a private placement in which the company issued and sold units (the “series f units”) to the investors for a purchase price of $1,000 per unit. each unit consisted of one share of the company’s series f convertible preferred stock (“series f preferred”) and a warrant (“series f warrants”) to purchase shares of common stock. the company issued 18,202 series f units for a total of $18.2 million in gross cash proceeds. the total cash proceeds received were allocated to the series f unit components (preferred stock and warrant) at the time of issuance.auditing the valuation of the notes, warrants, and series f units was complex due to the judgmental nature of the assumptions, which included stock price volatility (warrants and series f warrants), debt discount rate (notes), probability of exit events (notes, warrants, series f preferred, series f warrants), and expected life (warrants and series f warrants). these assumptions had a significant effect on the fair value measurement of the notes, warrants, and series f units.how we addressed the matter in our audit to test the estimated fair value of the notes, warrants, and series f units, our audit procedures included, among others, evaluation of the significant assumptions discussed above and consideration of the appropriateness of related methodologies utilized for estimation. this included evaluating the volatility rate by assessing the guideline public companies (“gpc”) selected and the weighting applied between the gp cs and the company’s historical volatility, evaluating the company’s specific risk premium incorporated into the debt discount assumption, assessing the reasonableness of the probability of various exit events based on information available as of the observable transaction dates, and evaluating the expected time to exercise for all warrants and series f warrants outstanding. we involved our specialist to assist with the evaluation of the assumptions as used by management./s/ ernst & young llp we have served as the company’s auditor since 2019. | 4 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter, in any way, our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.allowance for loan losses (all) – qualitative factors description of the matter the company’s loan portfolio totaled $610 million as of december 31, 2020, and the associated all was $8.3 million. as discussed in notes 1 and 3 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. critical audit matters (continued)allowance for loan losses (all) – qualitative factors (continued)furthermore, concern about the spread of covid-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause borrowers to be unable to make scheduled loan payments. if the effects of covid-19 result in widespread and sustained loan repayment shortfalls, significant loan delinquencies, foreclosures, declines in collateral values, and credit losses could result in, and significantly impact, the overall adequacy of the all. the extent of covid-19’s effects on business, operations, or the global economy as a whole is highly uncertain and cannot be predicted, including the scope and duration of the pandemic, which increases the degree of subjectivity involved in estimating the related qualitative factors within the all.we identified these qualitative adjustments within the all as critical audit matters because they involve a high degree of subjectivity and are highly difficult to estimate based on the uncertainty of the 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 as well as the reliability of the data utilized to support management’s assessment.to test the qualitative adjustments, we evaluated the appropriateness of management’s methodology and assessed whether all relevant risks were reflected in the all and the need to consider qualitative adjustments, including the potential effect of covid-19 on the adjustments. regarding the measurement of the qualitative adjustments, we evaluated the completeness, accuracy, and relevance of the data and inputs utilized in management’s estimate. for example, we compared the inputs and data to the company’s historical loan performance data, third-party macroeconomic data, and other internal and external data point 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 economic factors, the company’s loan portfolio, and asset quality trends, which included the evaluation of management’s ability to capture and assess relevant data from both external sources and internal reports on loan customers affected by the covid-19 pandemic and the supporting documentation for substantiating revisions to qualitative factors we also utilized internal credit review specialists with knowledge to evaluate the appropriateness of management’s risk-rating processes, to ensure that the risk ratings applied to the commercial loan portfolio were reasonable. we have served as the company’s auditor since 2005. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.managed services sale and leaseback revenue – refer to notes 2 and 9 to the financial statements critical audit matter description during the year ended december 31, 2021, the company completed several sale and leaseback transactions to sell energy servers to financiers and lease them back. the company recognizes revenue for such transactions when control of the energy servers transfers to the financier and the leaseback qualifies as an operating lease in accordance with asc 842 - leases (“asc 842”). revenue is recognized based on the fair value of the energy servers, which is allocated to product revenue and installation revenue based on the relative standalone selling prices. any proceeds to finance the company’s ongoing costs to operate the energy servers during the term of the leaseback are recognized as financing obligations. the company recognized $35.1 million of product revenue and $20.9 million of installation revenue for the year ended december 31, 2021 and $10 million of financing obligations from such sale and leaseback transactions.we identified accounting for revenue recognition under sale and leaseback transactions as a critical audit matter because of the complexity in applying the accounting framework. 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 audit the revenue recognized during the year.71how the critical audit matter was addressed in the audit our audit procedures related to the accounting for revenue recognition for sale and leaseback transactions included the following:•we tested the effectiveness of internal controls over the company’s accounting for sale and leaseback transactions, including those over management’s evaluation of revenue recognition and the existence and completeness of financing obligations. •for each sale and leaseback transaction executed during the year ended december 31, 2021, we performed the following:•we inspected the executed contracts to identify the relevant terms and conditions which would impact the company’s accounting conclusions, including (i) the transfer of control of the energy servers to the financier, (ii) the classification of the leaseback as an operating lease in accordance with asc 842, and (iii) the existence of financing obligations.•with the assistance of our revenue and lease accounting specialists, we evaluated the company’s conclusions regarding the accounting treatment applied to the sale and leaseback transactions, including the recognition of revenue and the identification of financing obligations.securities purchase agreement – refer to note 18 to the financial statements critical audit matter description on october 23, 2021, the company entered into a securities purchase agreement with sk ecoplant co., ltd. (“sk ecoplant”), to sell 10,000,000 shares of redeemable convertible series a preferred stock (the “rcps”) for a purchase price of $255 million. the agreement included an option for sk ecoplant to purchase additional shares of the company’s class a common stock (“the option”). we identified the accounting and the valuation of the securities purchase agreement as a critical audit matter because of the complexity in applying the accounting framework and the significant estimates and assumptions made by management in the determination of the fair values of both the rcps and the option (collectively, the “financial instruments”). 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 the reasonableness of the fair value estimates and assumptions.how the critical audit matter was addressed in the audit our audit procedures related to the accounting for the securities purchase agreement, including the company’s determination of the fair values of the financial instruments, included the following: •we tested the effectiveness of controls over the company’s accounting for the securities purchase agreement and over the determination of the fair values of the financial instruments.•with the assistance of our financial instrument accounting specialists, we evaluated the company’s conclusions regarding the accounting treatment applied to the securities purchase agreement. •with the assistance of our fair value specialists, we evaluated the reasonableness of the following:–valuation methodologies applied to determine the fair values of the financial instruments –assumptions used by the company in the valuation of the financial instruments, including the expected timing and the probability of a redemption event for the rcps, and the expected number of shares to be exercised with the option–accuracy, completeness, and relevancy of the source information underlying the fair value of the financial instruments and the mathematical accuracy of the calculations.•with the assistance of our fair value specialists, we developed independent estimates and compared them to the fair values of the financial instruments determined by management.72/s/ deloitte & touche llp san jose, california february 25, 2022 we have served as the company's auditor since 2020. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the 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 1 and 7 to the consolidated financial statements, the company’s consolidated goodwill balance was $18,178 million as of september 30, 2019. management reviews goodwill for impairment as of july 31 of each fiscal year, or more frequently if events or changes in circumstances indicate the asset might be impaired. the estimated fair value of each reporting unit, using a fair value method based on management’s judgments and assumptions, is compared with the carrying amount of each reporting unit, including recorded goodwill. the fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. in estimating the fair value of each reporting unit, management uses multiples of earnings based on the average of published multiples of earnings of comparable entities with similar operations and economic characteristics, applied to the company’s average of historical and future financial results. 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 of each reporting unit. this, in turn, led to a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s significant assumptions, including multiples of earnings of comparable entities with similar operations and economic characteristics. 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. the procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the fair value of the company’s reporting units. these procedures also included, among others, (i) testing management’s process for developing the fair value estimates, (ii) evaluating the appropriateness of the multiples of earnings model, (iii) testing the completeness, accuracy, and relevance of underlying data used in the model, and evaluating the significant assumptions used by management, including the multiples of earnings of comparable entities with similar operations and economic characteristics. evaluating management’s assumptions related to multiples of earnings involved evaluating whether the assumptions used by management were reasonable considering (i) the consistency with external market and industry data, and (ii) 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 multiples of earnings model and certain significant assumptions, including multiples of earnings of comparable entities with similar operations and economic characteristics. uncertain tax positions as described in note 18 to the consolidated financial statements, the company recorded uncertain tax position liabilities totaling $2,451 million, primarily as a non-current liability, as of september 30, 2019. the company is subject to income taxes in the u.s. and in numerous foreign jurisdictions. judgment is required by management in determining the company’s worldwide provision for income taxes and recording the related income tax assets and liabilities. as described by management, 50the company has recorded a liability for its best estimate of the probable loss on certain of the tax positions. the company’s income tax filings are regularly under audit by tax authorities. the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.the principal considerations for our determination that performing procedures relating to uncertain tax positions is a critical audit matter are there was significant judgment by management in identifying and recording the estimated probable loss for each uncertain tax position. this, in turn, led to a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate the timely identification and accurate measurement of uncertain tax positions. also, the evaluation of audit evidence available to support the tax liabilities for uncertain tax positions is complex and required significant auditor judgment as the nature of the evidence is often highly subjective. 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 assessment of uncertain tax positions, including controls over the identification and estimate of probable loss for each uncertain tax position. these procedures also included, among others, (i) testing the information used in the calculation of the estimate of probable loss for uncertain tax positions, (ii) testing the calculation of the liability for uncertain tax positions by jurisdiction, (iii) testing the completeness of management’s assessment of the identification of uncertain tax positions, and (iv) 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./s/ pricewaterhouse coopers llp milwaukee, wisconsin november 21, 2019we have served as the company’s auditor since 1957. | 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.revenue - contracts recognized over time - refer to notes 2 and 5 to the financial statements critical audit matter description as of december 31, 2019, net sales were $1,299.1 million, of which $530.4 million was recognized over time. for contracts that contain language that transfers control to the customer over time, revenue is recognized as the company satisfies the performance obligations by an allocation of the transaction price to the accounting period computed using input methods such as costs incurred. the input method measures progress toward the satisfaction of the performance obligation by multiplying the transaction price allocated to the performance obligation by the percentage of incurred inputs as of the balance sheet date to the total estimated inputs at completion after giving effect to the most current estimates.f-2we identified revenue associated with in-process contracts recognized over time as a critical audit matter because of the judgments necessary for management to estimate total inputs used to recognize revenue for these contracts. management’s estimates of total inputs are subjective in nature resulting in a higher degree of audit effort and judgment. changes in estimated inputs could have a significant impact on the timing of revenue recognition.how the critical audit matter was addressed in the audit our audit procedures related to estimates of total inputs used to recognize revenue for contracts over time included the following, among others: •we tested the effectiveness of controls over certain revenue contracts recognized over time, including management’s controls over the estimates of total inputs,•we selected a sample of in process revenue contracts recognized over time and performed the following:•tested the accuracy and completeness of the inputs incurred to date.•evaluated the estimates of total inputs by: ▪comparing estimates of total inputs to the original project budget and understanding changes in estimates.▪evaluating management’s ability to achieve the estimates of total inputs by performing corroborating inquiries with the company’s project managers, engineers, and/or other relevant site personnel to understand the progress to date and the estimate of total inputs.▪comparing management’s estimates for the selected contracts to inputs of similar contracts, when applicable. •we evaluated management’s ability to estimate total inputs accurately by comparing actual inputs to management’s historical estimates for contracts that have been fulfilled. business combinations - refer to notes 2 and 13 to the financial statements critical audit matter description the company completed the acquisition of air-x-changers (“axc”) for $599.7 million on july 1, 2019. the company accounted for this acquisition under the acquisition method of accounting for business combinations. accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including customer relationships of $139.1 million, trademarks and trade names of $55.0 million, and unpatented technology of $42.1 million. the determination of fair value of these assets involved management making significant estimates and assumptions related to future cash flows, discount rate, and royalty rate. we identified the initial valuation of the customer relationship, trademarks and trade names, and unpatented technology intangible assets for axc as a critical audit matter. a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, was required when performing audit procedures to evaluate the reasonableness of management’s forecasts of future cash flows and the selection of the discount rate and royalty rate used in determining the fair value of these assets. how the critical audit matter was addressed in the audit our audit procedures related to the forecasts of future cash flows and the selection of the discount rate and royalty rate for these assets included the following, among others:•we tested the effectiveness of controls over the valuation of the customer relationship, trademarks and trade names, and unpatented technology, including management’s controls over forecasts of future cash flows and selection of the discount rate and royalty rate for these assets.•we assessed the reasonableness of management’s forecasts of future cash flows by comparing the projections to historical results, certain peer companies, and industry projections. •with the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) valuation assumptions, including discount rate and royalty rate by:•testing the source information underlying the determination of the discount rate and royalty rate and testing the mathematical accuracy of the calculation.•developing a range of independent estimates and comparing those to the discount rate and royalty rate selected by management.•we evaluated whether the estimated future cash flows were consistent with evidence obtained in other areas of the audit.f-3goodwill - refer to notes 2 and 9 to the financial statements critical audit matter description the company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value annually in the fourth quarter or whenever events or changes in circumstances indicate that an evaluation should be completed. the company determines the fair value of its reporting units using the income and market approaches. the determination of the fair value using the income approach requires management to make significant estimates and assumptions related to forecasts of future cash flows and discount rates. the determination of the fair value using the market approach requires management to make significant assumptions related to pricing multiples derived from similar companies. changes to the assumptions and estimates may result in a significantly different estimate of the fair value of the reporting units, which could result in a different assessment of the recoverability of goodwill. the goodwill balance was $844.9 million as of december 31, 2019, of which $117.0 million, $152.1 million, $176.2 million, and $399.6 million was allocated to the distribution and storage eastern hemisphere (“d&s east”), distribution and storage western hemisphere (“d&s west”), energy and chemicals cryogenics (“e&c cryogenics”), and energy and chemicals fin fans (“e&c fin fans”) reporting units, respectively. the fair values of d&s east, d&s west, e&c cryogenics, and e&c fin fans reporting units exceeded their carrying values as of the measurement date and, therefore, no impairment was recognized. we identified goodwill for d&s east,, e&c cryogenics, and e&c fin fans as a critical audit matter because of the significant estimates and assumptions management makes to estimate the fair value of each reporting unit and the sensitivity of valuations to changes in the assumptions specifically related to forecasts of future revenue and cash flows and selection of the discount rate used in the income approach, and the selection of pricing multiples for similar companies used in the market approach. this required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of these assumptions. how the critical audit matter was addressed in the audit our audit procedures related to the forecasts of future revenues and cash flows (“forecasts”) , and the selection of pricing multiples and discount rate included the following, among others: •we tested the effectiveness of controls over management’s impairment evaluation, including those over the determination of the fair value of each reporting unit, such as controls related to management’s forecasts and selection of the pricing multiples and discount rate.•we evaluated management’s ability to accurately forecast by comparing actual results to management’s historical forecasts. •we evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) internal communications to management and the board of directors, and (3) forecasted information included in the company press releases as well as in analyst and industry reports of the company and companies in its peer group.•we considered the impact of changes in the industry on management’s forecasts.•with the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) valuation assumptions, including discount rate and pricing multiples by:•testing the source information underlying the determination of the discount rate and pricing multiples and testing the mathematical accuracy of the calculation.•developing a range of independent estimates and comparing those to the discount rate and pricing multiples selected by management./s/ deloitte & touche llp atlanta, georgia february 14, 2020 we have served as the company's auditor since 2019. | 2 |
critical audit matter thecritical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicatedor required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financialstatements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit mattersdoes not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical auditmatter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. critical audit matter description asdisclosed in notes 4 and 5 to the consolidated financial statements, the company had various debt instruments which included conversionfeatures requiring bifurcation and separate accounting. management evaluated the required accounting, significant estimates, and judgementsaround the valuation for these embedded derivatives. these embedded derivatives were initially measured at fair value and have subsequentlybeen remeasured to fair value at each reporting period. thereis no current observable market for these types of features and, as such, the company determined the fair value of the embedded derivativesusing an option pricing model to measure the fair value of the bifurcated derivative. as a result, a high degree of auditor judgmentand effort was required in performing audit procedures to evaluate the conclusions reached by management as well as the inputs to the companys option pricing model. howthe critical audit matter was addressed in the audit ourprincipal audit procedures performed to address this critical audit matter included the following: -we obtained an understanding of the controls and processes surrounding the evaluation, initial measurement and revaluation of the bifurcated derivatives. -we evaluated managements assessment and the conclusions reached to ensure these instruments were recorded in accordance with the relevant accounting guidance. -we evaluated the fair value of the bifurcated derivatives that included testing the valuation models and assumptions utilized by management. we reviewed and tested the fair value model used, significant assumptions, and underlying data used in the model. turner,stone & company, l.l.p.pcaobid: 76wehave served as the companys auditor since 2017. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.allowance for loan losses as described in notes 1 and 5 to the consolidated financial statements, the company’s consolidated allowance for loan losses balance was $100.6 million at december 31, 2019. the allowance for loan losses is maintained to provide for estimated inherent losses based on evaluating risks in the loan portfolio and is based upon the company’s analysis of the factors underlying the quality of the loan portfolio. these factors include, among others, changes in the size and composition of the loan portfolio, delinquency rates, actual loan loss experience, current economic conditions, analysis of individual loans for which full collectability may not be assured, and determination of the existence and realizable value of the collateral and guarantees securing the loans. we identified management’s risk ratings of loans and the estimation of qualitative and environmental factors, both of which are used in the allowance for loan losses calculation, as a critical audit matter. the company uses credit quality indicators, including internally determined risk ratings, to classify loans into pools and to estimate inherent loss rates for each of the loan pools, which are used in the calculation of the allowance for loan losses. determination of the risk rating involves significant management judgement. the qualitative and environmental factors are used to estimate losses related to factors that are not captured in the historical loss rates, and are based on management’s evaluation of available internal and external data and involves significant management judgement. auditing management’s judgments regarding the determination of risk ratings and qualitative and environmental factors applied to the allowance for loan losses involved a high degree of subjectivity. the primary procedures we performed to address this critical audit matter included:•testing the design, implementation, and operating effectiveness of controls relating to management’s calculation of the allowance for loan losses, including controls over the accuracy of risk ratings of loans and the determination of the qualitative and environmental factors used.•testing a risk-based targeted selection of loans to gain substantive evidence that the company is appropriately rating these loans in accordance with its policies, and that the risk ratings for the loans are reasonable.•obtaining management’s analysis and supporting documentation related to the qualitative and environmental factors, and testing whether the environmental and qualitative factors used in the calculation of the allowance for loan 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 losses, and testing the calculation itself, including completeness and accuracy of the data used in the calculation, application of the loan risk ratings determined by management and used in the calculation, application of the environmental and qualitative factors determined by management and used in the calculation, and recalculation of the allowance for loan losses balance.•performing an independent sensitivity analysis to evaluate the reasonableness of the qualitative and environmental factors used by management to account for inherent losses that are not captured in the calculation of the allowance for loan losses based on historical loss rates alone./s/ moss adams llp spokane, washington february 21, 2020we have served as the company’s auditor since 2004. | 3 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) are especially challenging, subjective, or complex judgements. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. revenue recognition – refer to notes a and b of the consolidated financial statements description of the matter the company’s revenues are generated pursuant to written contractual arrangements to provide software licenses and/or hardware and to provide related maintenance and support services or professional services. the company’s performance obligations are either satisfied at a point in time when the customer obtains control of the hardware or is granted the software license or satisfied over time for maintenance revenue over the contractual period. software licenses may be sold as perpetual licenses or subscription licenses. contracts may include multiple performance obligations. significant judgment is exercised by the company in determining revenue recognition for these contractual arrangements, 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 and/or optional purchases). ●determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately. 38 how the critical audit matter was addressed in the audit our audit procedures included: ●we obtained an understanding of the company’s revenue recognition process including the various product and service offerings; ●we reviewed management’s assessment of the terms and conditions of contracts with customers which included an analysis of the distinct performance obligations and a review of the conclusion as to whether revenue from such performance obligations should be recognized over time or at a point in time; ●we selected a sample of contracts with customers and performed the following: o obtained and read customer sales orders and/or sales invoices and other documents that are part of the agreement. o tested management’s process for identifying distinct performance obligation(s) in the contract; o tested the allocation between software revenue and maintenance revenue including testing any carve out of maintenance from subscription based software and maintenance sales. the outcome of the audit procedures resulted in determining the amounts of revenue and the application of asc 606 is reasonable. pistol star, inc. acquisition – refer to note c of the consolidated financial statements description of the matter on june 30, 2020, the company acquired pistol star, inc. the total purchase price included a cash payment of $2,000,000 and the issuance of a $500,000 promissory note. the company accounted for the acquisition under the acquisition method of accounting for business combinations. the promissory note component of the purchase price was adjusted to fair value of $464,000, resulting in total purchase consideration of $2,464,000. the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. management utilized the services of an outside business valuation and advisory firm to assist with determining the fair values of the purchase consideration, deferred revenue and identified intangible assets. the fair values of the identified intangible assets and deferred revenue were estimated by the outside firm using discounted cash flow analysis including the relief-from-royalty method for proprietary software and trade names, excess earnings method for customer relationship, and cost to recreate methodology for assembled workforce, the latter of which is included with residual goodwill. determining the fair value of the identified intangible assets acquired requires significant judgment, including the amount and timing of expected future cash flows and the selected discount rate. we identified the assumptions related to estimating the amount and timing of the expected future cash flows and discount rate to be a critical audit matters given the inherent judgement involved in estimating these amounts. performing audit procedures to evaluate the reasonableness of these estimates and assumptions require 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 included: ●we obtained an understanding of the company's process to determine the fair value of the net assets acquired. ●we read the stock purchase agreement; ●we evaluated the reasonableness of the following: o valuation methodologies utilized by the outside business valuation and advisory firm in estimating fair values of assets acquired and liabilities assumed; o the discount rates utilized, including testing the source of information underlying the determination of the discount rates, testing the mathematical accuracy of the calculation, and developing a range of independent estimates and comparing those to the discount rates used by management. the outcome of the audit procedures resulted in determining that the values recorded by management and provided by the outside business valuation and advisory firm are reasonable. /s/ rotenberg meril solomon bertiger & guttilla,p.c. rotenberg meril solomon bertiger & guttilla, p.c. we have served as the company's auditor since 2010. | 3 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the 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.impairments – real estate — refer to notes 2 and 6 to the financial statements critical audit matter description the company’s evaluation of impairment of real estate involves an assessment of the carrying value of real estate assets and related intangibles (“real estate assets”) when events or changes in circumstances indicate that the carrying value may not be recoverable. auditing the company’s process to evaluate real estate assets for impairment was complex due to the subjectivity in determining whether impairment indicators were present. additionally, for real estate assets where indicators of impairment were determined to be present, the determination of the future undiscounted cash flows involved significant judgment. in particular, the undiscounted cash flows were forecasted based on significant assumptions such as lease-up periods, lease rates, operating expenses, revenue and expense growth rates, etc., and included judgments around the intended hold period and terminal capitalization rates. given the company’s evaluation of impairment indicators, future cash flows and forecasted sales price of a long lived asset requires management to make significant estimates and assumptions related to market capitalization rates, comparable market transactions, and/or forecasted cash flow streams, performing audit procedures required a high degree of auditor judgment and an increased extent of effort.63table of contents how the critical audit matter was addressed in the audit our audit procedures related to real estate asset impairment included the following, among others: •we tested the effectiveness of controls over impairment of real estate assets, including those over impairment indicators and the determination of future undiscounted cash flows and forecasted sales price for real estate assets.•we performed an independent search for impairment indicators through the evaluation of several factors including an analysis of industry and market data, a comparison of property implied capitalization rates to market capitalization rates, and trends in financial performance. •for real estate assets where indicators of impairment were determined to be present, we subjected a sample of undiscounted cash flow models to testing by (1) evaluating the source information used by management, (2) testing the mathematical accuracy of the undiscounted cash flow models, (3) evaluating management’s intended hold period, and (4) performing an independent recoverability test based on market data./s/ deloitte & touche llp costa mesa, california february 9, 2022we have served as the company's auditor since 2010. | 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.fair value in connection with business combination. refer to note 3 to the consolidated financial statements critical audit matter description on july 1, 2020, the company completed its merger of hartman income reit, inc. and hartman short term income properties xix, inc. for total consideration of approximately $199 million. the transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged was recorded at their estimated fair values on the date of acquisition.we identified management’s determination of fair values of the real estate assets, investments in affiliates, and intangibles acquired, as well as the consideration exchanged as a critical audit matter. subjective and challenging auditor judgement was required to evaluate certain assumptions used in determining the fair values of the assets acquired and consideration exchanged. management’s determination of fair values was significant to our audit because the amounts are material to the consolidated financial statements. auditing management’s determination of fair value is complex and involves significant judgment with respect to the valuation approach applied and market data available, which can be impacted by various economic conditions.how we addressed the matter in our audit we obtained an understanding of the design and implementation of management’s controls with respect to business combinations and evaluated the inputs used and significant assumptions underlying the determination of fair values. f-2our testing of the company's determination of fair value of the real estate assets, investments in affiliates, and intangibles acquired, as well as the consideration exchanged included, among other procedures, evaluating the work of company specialists, reading the merger agreements, evaluating the measurement of the consideration given, and evaluating the significant assumptions and operating data used in developing the fair value estimates. with the assistance from an auditor specialist, we evaluated, among other things, whether (1) the assets and liabilities were properly identified, and (2) the significant assumptions, including the market data for similar assets, expected future cash flows of the properties, discount rates, and capitalization rates used in valuing the real estate assets and investments in affiliates, as well as the consideration exchanged were supportable.evaluation of real estate assets for potential impairment. refer to note 2 to the consolidated financial statements critical audit matter description the company evaluates, on at least an annual basis, its real estate assets for potential impairment whenever changes in circumstances indicate that the value of real estate assets may not be recoverable. an impairment loss is recognized if the carrying amount of an asset is not recoverable and exceeds its fair value.our testing of the company's impairment analysis included, among other procedures, evaluating the methods and underlying significant assumptions used to develop the fair value estimates, testing the accuracy and completeness of operating data used in the calculation, assessing the reasonableness of the market-specific assumptions, and performing a sensitivity analysis of the underlying significant assumptions to evaluate the potential changes in the fair value estimates. we also utilized an auditor specialist to assist in estimating the fair values based upon performing an independent discounted cash flow model utilizing independent market data.how we addressed the matter in our audit we obtained an understanding of the design and implementation of management’s controls with respect to impairment analysis and evaluated the inputs used and underlying significant assumptions. our testing of the company's impairment analysis included, among other procedures, evaluating the methods and underlying significant assumptions used to develop the fair value estimates, testing the accuracy and completeness of operating data used in the calculation, identifying capitalization rates by geographic market, assessing the reasonableness of the market-specific capitalization rates, and performing a sensitivity analysis of the underlying significant assumptions to evaluate the potential changes in the fair value estimates. we also utilized an auditor specialist to assist in estimating the fair values based upon recent market comparable transactions./s/ weaver and tidwell, l.l.p.weaver and tidwell, l.l.p.we have served as the company’s auditor since 2019. | 1 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.revenue – refer to note 3 to the financial statements critical audit matter description revenue is recognized 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 processing and recording of certain revenue requires a manual process, and therefore the company uses a complex set of procedures to generate complete and accurate data to record its revenue transactions. for the year ended december 31, 2021, total revenue was $354.3 million, which includes the manually processed revenue.94we identified manually processed revenue as a critical audit matter as the company has a significant volume of manually processed revenue and a complex set of manual procedures to generate complete and accurate data to process and record revenue. this required an increased extent of effort to audit these manually processed revenue transactions.how the critical audit matter was addressed in the audit our audit procedures related to manually processed revenue included the following, among others: •we tested the effectiveness of controls over the recognition of manually processed revenue. •we obtained an understanding of the nature of the manually processed revenue through inquiry with the company personnel responsible for the invoice as well as review of the contract with the customer. •for a sample of manually processed revenue transactions, we recalculated the manually processed revenue and evaluated the accuracy of the data used in our recalculation of manually processed revenue by comparing key attributes utilized in our recalculation to source information and documents, including usage, bandwidth, and other services provided. we compared our recalculation of manually processed revenue transactions to the company’s recorded revenue and evaluated any differences.stock subject to revest – refer to notes 5, 11 and 15 to the financial statements critical audit matter description on october 1, 2020, the company completed the acquisition of signal sciences. in connection with the acquisition, a restriction was placed on 896,499 shares belonging to the three co-founders of signal sciences to make them subject to revesting on a quarterly basis over a 2-year period. during the quarter ended september 30, 2021 and the quarter ended december 31, 2021, 186,771 and 149,417 unvested shares were sold prior to vesting, respectively. as the holders of these shares were not entitled to the benefit of unvested shares, the company requested the return of the proceeds for the unvested shares as of december 31, 2021. subsequent to december 31, 2021, the company entered into an agreement with the holders of restricted stock which resulted in a modification of the terms of the original awards and received a total of $10.7 million from these founders.auditing the company’s accounting for stock subject to revest required complex auditor judgment. in particular, judgment was required to evaluate the appropriate accounting for the cash received by founders subsequent to december 31, 2021, as well as to assess the timing and type of modifications.how the critical audit matter was addressed in the audit our audit procedures related to stock subject to revest included the following, among others:•we read the applicable agreements, recalculated the unvested shares sold prior to vesting, and compared the key terms from the agreements to management’s analysis.•we obtained supporting evidence for legal conclusions reached by the company. •with the assistance of professionals in our firm having expertise in accounting for stock compensation, we evaluated the company’s conclusions regarding the treatment of cash received by founders and the timing and type of modifications in accordance with accounting principles generally accepted in the united states of america.•we also evaluated the adequacy of the company’s disclosures included in notes 5, 11 and 15 in relation to these matters./s/ deloitte & touche llp san francisco, california march 1, 2022we have served as the company's auditor since 2014. | 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.68 revenue recognition— refer to note 2 to the financial statements critical audit matter description the company primarily generates revenue from fees paid for subscriptions to tax compliance solutions and fees paid for services performed in preparing and filing tax returns on behalf of its customers. the company’s subscription revenue consists of a significant volume of transactions, sourced from multiple systems, databases, and other tools. the processing and recording of revenue, including interfaces between systems and databases, is both manual and automated, and therefore the company uses a complex set of procedures and systems to generate complete and accurate data to process and record its revenue transactions. for the year ended december 31, 2019, subscription revenue was $355.2 million. we identified subscription revenue as a critical audit matter as the company has a significant volume of subscription revenue transactions and a complex set of manual and automated procedures and systems to generate complete and accurate data to process and record revenue. this required an increased extent of effort to audit the subscription revenue transaction data and the need for us to involve professionals with expertise in data analytics. how the critical audit matter was addressed in the audit our audit procedures related to the company’s significant transaction volume and complex procedures and processing of subscription revenue transactions included the following, among others: •with the assistance of our data analytics specialists, we performed a recalculation of subscription revenue recorded through the company’s relevant systems utilizing key attributes of subscription revenue transaction data, including the transaction price, standalone selling price, and subscription revenue recognition timing. we compared our recalculation of subscription revenue to the company’s recorded subscription revenue and evaluated significant differences. •for a sample of subscription revenue transactions, we evaluated the accuracy of the data used in our recalculation of subscription revenue by comparing key attributes utilized in our recalculation to source documents.•we tested the completeness of the subscription revenue transaction data by selecting transactions from multiple independent sources and evaluating whether those transactions were included in the subscription revenue transaction data. /s/ deloitte & touche llp seattle, washington february 28, 2020 we have served as the company'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. future policy benefit reserves and amortization of deferred policy acquisition costs for life insurance contracts — refer to notes 1 and 4 to the consolidated financial statements critical audit matter description the company’s management sets assumptions used in (1) recording a liability for policy benefit payments that will be made in the future (future policy benefit reserves), (2) amortization of deferred policy acquisition costs, (3) december 31, 2020 | 10-k 73table of contents citizens, inc. deferred policy acquisition costs recoverability testing and (4) loss recognition testing. the most significant assumptions include mortality, lapse and interest rate. assumptions are based upon the company’s experience, modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviations. management’s estimate of future policy benefits for life insurance contracts was $1.25 billion as of december 31, 2020. total amortization of deferred policy acquisition costs for life insurance contracts was $24 million for the year ended december 31, 2020.given the inherent uncertainty in selecting the mortality, lapse and interest rate assumptions and sensitivity of these significant assumptions, auditing the development of such assumptions involved especially subjective judgment and the involvement of our actuarial specialists. how the critical audit matter was addressed in the audit our audit procedures related to management’s judgments regarding the mortality, lapse and interest rate assumptions used in the development of future policy benefit reserves, the amortization of deferred policy acquisition costs, and performing annual deferred policy acquisition costs recoverability testing and loss recognition testing included the following, among others:•we tested the operating effectiveness of the company’s controls over the assumption development process, the valuation of future policy benefit reserves and amortization of deferred policy acquisition costs. •we tested the underlying data of management’s experience studies used in the development of the assumptions. •with the assistance of our actuarial specialists, we evaluated management’s selected actuarial assumptions, including consideration of management’s process, methodologies and judgments used to develop the assumptions. •with the assistance of our actuarial specialists, we evaluated whether the assumptions used for future policy benefit reserves and amortization of deferred policy acquisition costs calculations were consistent with assumptions determined by management in their experience studies and assumption setting process.•with the assistance of our actuarial specialists, we evaluated loss recognition and deferred policy acquisition costs recoverability projections for consistency with assumptions determined by management in their experience studies and assumption setting process. goodwill — refer to note 1 to the consolidated financial statements critical audit matter description the company’s evaluation of goodwill for impairment involves the comparison of the estimated fair value of the reporting unit to its carrying value. the company’s determination of the estimated fair value of the reporting unit incorporates significant judgments, including discounted cash flow calculations based on assumptions that market participants would make in valuing the reporting unit, including discount rate and projections of production levels and profitability of new business. changes in these assumptions could have an impact on either the fair value, the amount of any goodwill impairment charge, or both. the goodwill balance was $12.6 million as of december 31, 2020, all of which was allocated to the life insurance segment reporting unit. the fair value of the life insurance segment exceeded its carrying value by 8% as of the measurement date and, therefore, no impairment was recognized. given the significant judgments made by management to estimate the fair value of the reporting unit, and the difference between its fair value and carrying value, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to selection of the discount rate and projections of production levels and profitability of new business required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists and actuarial specialists. december 31, 2020 | 10-k 74table of contents citizens, inc. how the critical audit matter was addressed in the audit our audit procedures performed to evaluate the reasonableness of management’s estimates and assumptions related to the discount rate and production levels and profitability of new business used by management to estimate the fair value of the reporting unit, included the following, among others:•we tested the operating effectiveness of the company’s controls related to its goodwill impairment assessment, including controls related to management’s selection of the discount rate and projections of production levels and profitability of new business.•with the assistance of our fair value specialists, we evaluated the discount rate, which included developing a range of independent estimates of discount rate assumptions and comparing those to the discount rate selected by management.•we evaluated the reasonableness of management’s projections of production levels and profitability of new business by comparing the projections to internal communications to management and the board of directors and sales targets included in compensation plans approved by the board of directors.•with the assistance of our actuarial specialists, we evaluated whether mortality, lapse and interest rate assumptions used in the projections of production levels and profitability of new business were consistent with assumptions determined by management in their experience studies and assumption setting process. •we tested the underlying data used in the discounted cash flow calculations and the mathematical accuracy of the discounted cash flow calculations./s/ deloitte & touche llp austin, texas march 10, 2021 we have served as the company’s auditor since 2017. | 4 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.guide asset acquisition – contingent consideration liabilities— refer to notes 2, 4, and 8 to the financial statements critical audit matter description in february 2021, the company completed the acquisition of guide therapeutics, inc. (“guide”) and the transaction was accounted for as an asset acquisition. the company may be required to make milestone payments to the former stockholders and optionholders of guide in the form of the company’s common stock based on the achievement of certain product and technology milestones. as of december 31, 2021 the company has recorded a liability for the acquisition-related contingent consideration, which is recorded at fair value using unobservable inputs by applying a probability-based valuation model.the key assumptions management used in the valuation model are the probability and timing of achievement of the product and technology milestones, which are not observable in the market, thus representing level 3 measurements within the fair value hierarchy. given that the valuation of the guide contingent consideration liability is based on unobservable inputs and is sensitive to changes in the probability and timing of achievement of the milestones, auditing these key assumptions 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 guide contingent consideration liability included the following, among others: •we tested the effectiveness of controls over management’s review of the inputs and assumptions used in the valuation of the guide contingent consideration liability, including the probability and timing of achievement of the product and technology milestones.f-2 •we inquired of management and the company’s scientific personnel to understand each milestone and the underlying assumptions, including current progress of development and underlying data associated with development efforts and timing of the related milestones.•we read the guide acquisition agreements to understand the terms of the contingent consideration obligation and compared the contract terms to the valuation model to evaluate consistency.•with the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology. •we also evaluated the reasonableness of management’s assumptions of the probability and timing of achievement of the product and technology milestones by reviewing (1) internal communications to management and the board of directors, (2) external communications made by management to analysts and investors, and (3) other external sources.•we evaluated whether management’s assumptions used for the technology and product milestones were consistent with evidence obtained in other areas of the audit. /s/ deloitte & touche llp boston, massachusetts february 28, 2022we have served as the company’s auditor since 2017. | 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.accounts receivable and net operating revenues— refer to notes 1, 3 and 15 to the financial statements critical audit matter description management reports net patient service revenues and accounts receivable at the amounts that reflect the consideration to which they expect to be entitled for providing patient care. as of and for the year ended december 31, 2020, the balances for accounts receivable and net patient service revenues are $2,690 million and $15,690 million, respectively. this transaction price is based on gross charges for services provided, reduced by contractual adjustments provided to third-party payers, discounts provided to uninsured patients in accordance with the company’s compact with uninsured patients, and implicit price concessions provided primarily to uninsured patients. the implicit price concessions are estimates developed by management based on their historical collection experience with these classes of patients using a portfolio approach. given the judgments necessary to estimate the implicit price concessions to determine the amount of net revenues recognized and the value of patient accounts receivable as a result of inherent subjectivity in collection trends from changes 82table of contentsin the economy, patient volumes, amounts to be paid by patients with insurance and other factors, auditing such estimates involved especially subjective judgments.how the critical audit matter was addressed in the audit our audit procedures related to management’s estimates of the implicit price concessions used to determine the value of net patient service revenues and accounts receivable included the following, among others:•we tested the effectiveness of controls over net patient service revenues and the valuation of accounts receivable, including those over the historical collections data and management’s analysis of their historical collection experience and judgments applied to develop their assumptions for implicit price concessions.•we evaluated the methods and assumptions used by management to estimate the implicit price concessions by: ◦testing the underlying data that served as the basis for the implicit price concession rates developed by management, including the historical collections data within the classes of patients, to evaluate whether the inputs to management’s estimate were reasonable.◦comparing management’s prior-year expectation to actual amounts recorded during the current year.•we developed an independent estimate using historical collection data for each class of patients. we then compared the result to the implicit price concession estimate developed by management to evaluate the reasonableness of accounts receivable and revenues. property and professional and general liability insurance – professional and general liability reserves — refer to notes 1 and 16 to the financial statements critical audit matter description management records an accrual for the portion of their professional and general liability risks, including incurred but not reported claims, for which they are self-insured and that are probable and can be reasonably estimated. as of december 31, 2020, the accrual for professional and general liability is $978 million. this accrual is estimated based on internal and third-party modeled estimates of projected payments using case-specific facts and circumstances and the company’s historical claim loss reporting, claim development and settlement patterns, reported and closed claim counts, and a variety of hospital census information.given the subjectivity of estimating the projected liability of reported and unreported claims, auditing the professional and general liability reserves involved especially subjective judgment.how the critical audit matter was addressed in the audit our audit procedures related to the professional and general liability reserves included the following, among others:•we tested the effectiveness of controls related to the professional and general liability reserves, including those over the estimation of the projected liability of reported and unreported claims.•we evaluated the data used by management to estimate the professional and general liability reserves by:◦testing the underlying data that served as the basis for the internal and third-party actuarial analyses, including historical claims, to evaluate that the inputs to the actuarial estimates were reasonable.◦comparing management’s prior-year recorded balance to actual losses incurred during the current year.with the assistance of our internal actuarial specialists, we developed an independent range of estimates of the professional and general liability reserves, using loss data, historical and industry claim development factors, among other factors, and compared our estimates to management’s estimates./s/ deloitte & touche llp dallas, texas february 19, 2021we have served as the company’s auditor since 2007. | 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. acquisition of taylor company description of the matter as described in note 2 of the consolidated financial statements, the company completed its acquisition of taylor company for net consideration of approximately $1.0 billion on june 22, 2018. the transaction was accounted for as a business combination.auditing the company's accounting for its acquisition of taylor company was complex due to the significant estimation uncertainty in determining the fair value of identified intangible assets of approximately $604 million, which principally consisted of the taylor trade name and 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 business. the company used a discounted cash flow model to measure the trade name and customer relationship intangible assets. the significant assumptions used to estimate the value of the intangible assets include revenue growth rates, projected profit margins, discount rates, royalty rates, and customer attrition rates. these significant assumptions are forward-looking and could be affected by future economic and market conditions. 47how 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 accounting for the acquisition of taylor company, including controls over the determination of the fair value of the acquired trade name and customer relationships intangible assets, and management's evaluation of the underlying assumptions described above. we also tested management's controls over the completeness and accuracy of the data used in the valuation models. to test the estimated fair value of the trade name and customer relationships 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 the company's valuation specialist, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. we compared the assumptions related to the revenue growth rate and projected profit margin, to the past performance of taylor company, the company's history related to similar acquisitions, and third party industry data. we tested the assumptions related to discount rates and royalty rates to the company’s history related to similar acquisitions and third-party industry data. we involved a valuation specialist to assist with our evaluation of the methodologies used by the company and significant assumptions included in the fair value estimates. impairment tests of indefinite-lived intangible assets description of the matter at december 28, 2019, the company's indefinite-lived intangible assets consist of 69 trademarks and tradenames with an aggregate carrying value of approximately $997 million and represented 19.9% of total assets. as described in note 3 of the consolidated financial statements, trademarks and tradenames with indefinite lives are tested by the company’s management for impairment at least annually, in the fiscal fourth quarter, unless there are indications of impairment at other points throughout the year. if the fair value of the intangible asset is less than its carrying amount, an impairment loss is recognized in an amount equal to the difference. auditing the impairment tests of indefinite-lived intangible assets is complex due to the significant management judgments and estimates required to determine the fair value of the trademarks and tradenames, including assumptions as to forecasted net sales, discount rates and royalty rates, all of which are sensitive to and affected by economic, industry and company-specific qualitative factors. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of the company's controls over the impairment tests of indefinite-lived intangible assets. this included evaluating controls over the company’s process used to develop the forecasts of future net sales and the selection of royalty rates and discount rates used in estimating the fair value of the trademarks and tradenames with indefinite lives. we also tested controls over management’s review of the completeness and accuracy of data used in their valuation models.to test the estimated fair value of the company’s trademarks and tradenames, we performed audit procedures that included, among others, assessing the methodologies, testing the significant assumptions discussed above and testing the completeness and accuracy of the underlying data. we compared the significant assumptions used by management to current industry and economic trends, the company’s historical results and other guideline companies within the same industry and evaluated whether changes in the company’s business would affect the significant assumptions. we assessed the historical accuracy of management’s estimates by comparing them to actual operating results and performed sensitivity analyses of significant assumptions to evaluate the change in the fair value of the trademarks and tradenames with indefinite lives resulting from changes in these assumptions. we involved our valuation specialists to assist in reviewing the valuation methodology and testing the discount rates and royalty rates./s/ ernst & young llp we have served as the company's auditor since 2012. | 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.inventory valuation description of the matter at march 26, 2022, the company’s net inventory balance was $138.4 million. as discussed in note 2 of the financial statements, inventories are stated at the lower of cost or net realizable value, which includes considerations for inventory becoming obsolete or in excess of management’s forecasted customer unit demand. the company writes down inventories to net realizable value based on forecasted customer unit demand while taking into account product release schedules and product life cycles. the company also writes down inventory, as appropriate, based on the age and condition of the inventory.auditing management’s estimate of excess and obsolete inventory involved subjective auditor judgment because management’s determination of whether a write down is warranted is judgmental and the estimate is sensitive to changes in assumptions, including management’s assumptions over forecasted demand which may be impacted by, among other things, future market and economic conditions outside of the company’s control.33table of contents how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls that address the risks of material misstatement relating to the valuation of inventory. for example, we tested controls over management’s review of forecasted demand, the significant assumptions, and the data underlying the excess and obsolete inventory valuation estimate.among other audit procedures performed, we evaluated the significant assumptions discussed above, including the forecasted customer unit demand utilized in the estimate, and tested the completeness and accuracy of the underlying data used in management’s calculation. we evaluated adjustments to forecasted demand for specific product considerations, assessed the historical accuracy of management’s estimates by performing a retrospective analysis comparing prior period forecasted demand to actual historical sales and inspected historical gross margins to assess whether any items were being sold at a loss.uncertain tax positions description of the matter as described in note 19 to the consolidated financial statements, the company has recorded accrued liabilities relating to unrecognized tax benefits resulting from uncertain tax positions of $32.9 million as of march 26, 2022. the company and its subsidiaries are subject to u.s. federal income tax as well as income tax in multiple state and foreign jurisdictions. furthermore, the company’s fiscal years 2017 to 2022 remain open to examination by the major taxing jurisdictions.auditing management’s analysis of the uncertainties in its tax positions was complex and judgmental because the company’s evaluation and measurement of each tax position involves assessing uncertainties with respect to the application of complex tax rules, which are subject to interpretation. the company uses significant judgment in determining whether a tax position is more likely than not to be sustained and measuring the amount of tax benefit that qualifies for recognition.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls that address the risks of material misstatement relating to the existence of uncertain tax positions and measurement of the benefit of those positions. for example, we tested controls over management’s review of the technical merits of tax positions, the events and information that impacted tax positions, the estimate of the most likely outcome, and the data utilized in the estimate. to test the valuation of uncertain tax positions, our audit procedures included, among others, analyzing the company’s assumptions and data used to determine the amount of tax benefit to recognize and testing the accuracy of the calculations. in considering the measurement criteria, 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 used our knowledge of, and experience with, the application of international and local income tax laws by the relevant income tax authorities to evaluate the company’s accounting for those tax positions. we also evaluated the company’s income tax disclosures included in note 19 to the consolidated financial statements in relation to these matters.accounting for acquisitions description of the matter during fiscal year 2022, the company completed the acquisition of lion semiconductor inc. (“lion”) for a purchase price of $312.8 million, as disclosed in note 8 to the consolidated financial statements. the transaction was accounted for as a business combination.auditing the company's accounting for its acquisition of lion was complex due to the significant estimation uncertainty in the company’s determination of the fair value of the developed technology intangible asset ($144 million). 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 business and the limited historical data and market data on which those assumptions were based. the company used a discounted cash flow model to measure the existing developed technology intangible asset. the significant assumptions used to estimate the value of the intangible asset included certain assumptions that form the basis of the forecasted results (e.g., revenue growth rates and obsolescence curves). these significant assumptions are forward looking and could be affected by future economic and market conditions.34table 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 for acquisitions. this included testing controls over the estimation process supporting the recognition and measurement of the developed technology intangible asset, including the valuation models and underlying assumptions used to develop such estimates.to test the estimated fair value of the developed technology 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 used by the company, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. for example, we compared the significant assumptions to current industry, market and economic trends and to the company's budgets and forecasts. 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./s/ ernst & young llp we have served as the company’s auditor since 1984. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. indefinite-lived intangible asset impairment assessment for tradenames in the cabinets segment where fair value exceeds carrying value by less than 10% as described in notes 2 and 6 to the consolidated financial statements, the company’s consolidated indefinite-lived intangible asset balance was $635.6 million as of december 31, 2019. the carrying values of the three tradenames in the cabinets segment where fair value exceeds carrying value by less than 10% are $38.6 million, $85.0 million and $39.1 million, after impairment charges of $12.0 million, $29.5 million and zero recorded during the year to the tradenames, respectively. management reviews indefinite-lived tradename intangible assets for impairment annually in the fourth quarter and whenever market or business events indicate there may be a potential impairment of that intangible. impairment losses are recorded to the extent that the carrying value of the indefinite-lived intangible asset exceeds its fair value. fair value is measured by management using the standard relief-from-royalty approach. management’s fair value calculation included estimates and assumptions relating to forecasted revenue growth rates, the assumed royalty rates and the market-participant discount rates. the principal considerations for our determination that performing procedures relating to the indefinite-lived intangible asset impairment assessment for tradenames in the cabinets segment where fair value exceeds carrying value by less than 10% is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the tradenames. this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s fair value calculation and significant assumptions, including the forecasted revenue growth rates, the assumed royalty rates, and the market-participant 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 indefinite-lived intangible asset impairment assessments, including controls over the relief-from-royalty valuation of the company’s indefinite-lived intangible assets. these procedures also included, among others, (i) testing management’s process for developing the fair value estimates of tradenames in the cabinets segment where fair value exceeds carrying value by less than 10% using the relief-from-royalty approach, (ii) evaluating the appropriateness of the relief-from-royalty approach, (iii) testing the completeness, accuracy, and relevance of underlying data used in the relief-from-royalty approach, and (iv) evaluating the significant assumptions used by management, including the forecasted revenue growth rates, the assumed royalty rates, and the market-participant discount rates. evaluating management’s assumptions related to the forecasted revenue growth rates involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the tradenames, (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 relief-from-royalty approach and certain significant assumptions, including the assumed royalty rates and market-participant discount rates. /s/ pricewaterhouse coopers llp chicago, illinois february 26, 2020we have served as the company’s auditor since 2011. | 1 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. evaluation of revenue recognition as described in notes 2 and 12 to the financial statements, and disclosed in the consolidated statements of operations, the company recorded $329.3 million of total revenues for the year ended december 31, 2021, of which $315.9 million related to the fluent operating segment. the company's performance obligation is typically to (1) deliver data records, based on predefined qualifying characteristics specified by the customer or (2) generate conversions, based on predefined user actions and subject to certain qualifying characteristics specified by the customer. we identified revenue recognition as a critical audit matter. f-2 the principal considerations for our determination that revenue recognition is a critical audit matter are (1) the significant level of audit effort required to evaluate the sufficiency and appropriateness of audit evidence when examining the company’s customer confirmations in combination with cash receipts and other supporting evidence; and (2) evaluating the nature and extent of audit evidence obtained for new revenue contracts or amendments to existing contracts, which require subjective auditor judgement because of the nature of the company’s revenue contracts and the extent of reliance of third-party evidence. our audit procedures related to the evaluation of revenue recognition included the following, among others: • with the assistance of our information technology professionals with specialized skills and knowledge, we identified the significant systems, automated controls, and tools used to capture third party customer confirmations, including testing of user access controls and change management controls. • we evaluated the design and tested the operating effectiveness of key controls over the company’s revenue recognition process including controls related to revenue estimates and evaluation of customer confirmations. •for a sample of revenue transactions, we performed detailed transaction testing by (1) agreeing the amount recognized to source documentation; (2) comparing the amount of revenue recognized to third party customer confirmations obtained by the company; and (3) comparing the amount of revenue recognized to subsequent cash remittance advice. recoverability of the carrying value of goodwill of the fluent reporting unit as described in notes 2 and 7 to the financial statements, goodwill is tested at least annually for impairment, or when events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. goodwill as of december 31, 2021 was $160.9 million for the fluent reporting unit. the company estimates the fair value of its reporting units using a weighting of fair values derived from the income and market approaches. we identified management’s evaluation of the recoverability of the carrying value of the fluent reporting unit goodwill as a critical audit matter. the principal considerations for our determination that management’s evaluation of the recoverability of the carrying value of goodwill of the fluent reporting unit is a critical audit matter is that the estimate of the fair value requires significant estimates and judgments made by management related to assumptions such as forecasted revenue growth, profitability, discount rate, and the identification of comparable publicly traded companies and market multiples. our audit procedures related to the evaluation of the recoverability of the carrying value of goodwill for the fluent reporting unit included the following, among others: • we evaluated the design and tested the operating effectiveness of key internal controls over the determination of the assumptions used to estimate the fair value of the fluent reporting unit. • we assessed the company’s ability to forecast revenue and operating income by comparing: (1) historical revenue and operating income projections to actual results; and (2) comparing current forecasted projections to historical trends, industry data and underlying business strategies. •with the assistance of valuation professionals with specialized skills and knowledge: (1) we reviewed the valuation methodology and tested weighted average cost of capital, including company specific risk premiums for the reporting unit; and (2) we reviewed the reconciliation of the fair value of the fluent and all other reporting units to the market capitalization of the company, including assessing the implied control premium. our valuation specialist also reviewed the multiples and underlying calculations utilized in the market approach valuation. /s/ grant thornton llp we have served as the company’s auditor since 2015. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.provision for income taxes as described in notes 1 and 17 to the consolidated financial statements, the company’s consolidated deferred tax assets were $54.6 million, net of a valuation allowance of $15.1 million, as of december 31, 2020, and income tax expense was $72.5 million for the year ended december 31, 2020. as a global organization, the company files income tax returns in the u.s. federal jurisdiction and various state and foreign jurisdictions. as disclosed by management, management estimates income tax payable based upon current domestic and international tax legislation. deferred income taxes are recognized by applying enacted statutory tax rates to tax loss carryforwards and temporary differences between the tax basis and financial statement carrying values of assets and liabilities. the enacted statutory tax rate applied is based on the rate expected to be applicable at the time of the forecasted utilization of the loss carryforward or reversal of the temporary difference. valuation allowances on deferred tax assets are established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. the realizability of deferred tax assets is subject to estimates of future taxable income, generally at the respective subsidiary company and the country level. the principal considerations for our determination that performing procedures relating to the provision for income taxes is a critical audit matter are the significant judgment by management in determining the income tax provision due to the company’s global footprint and complexity in the various tax laws applicable in determining the company’s effective tax rate. this in turn led to a high degree of auditor judgment, effort, and subjectivity in performing procedures and in evaluating audit evidence related to the income tax provision. also, the audit effort involved the use of professionals with specialized skill and knowledge. 85addressing 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 income taxes, including controls over the determination of the income tax provision. these procedures also included, among others, (i) testing the income tax provision, including testing the company’s rate reconciliation, return to provision adjustments, permanent and temporary differences, and financial data used in the income tax provision calculation, and (ii) testing the accuracy of the income tax rates utilized in the provision. professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of management’s application of relevant income tax law in certain jurisdictions. /s/ pricewaterhouse coopers llp philadelphia, pennsylvania february 23, 2021 we have served as the company’s auditor since 1963. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the 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 from collaborative and licensing arrangements description of the matter the company recognized revenue from collaboration and licensing agreements of $73.4 million for the year ended december 31, 2019. as described in note 1, collaboration payment structures may include many elements such as up-front fees, milestones, royalties, expense reimbursement, and/or profit sharing. furthermore, collaborations may include the delivery of various goods or services to the collaborative partner such as licenses to intellectual property or research and development services. in some circumstances, management is required to use judgment to determine whether analogies to the revenue accounting literature is appropriate for elements of collaboration arrangements. of the $73.4 million recognized as revenue, collaboration revenue of 74table of contents$31.1 million was recognized for the research and development services under the agreement with janssen biotech, inc. (the “janssen agreement”). performance is measured based on the company’s efforts toward satisfying the performance obligation relative to the total expected efforts or inputs to satisfy the performance obligation (e.g., costs incurred compared to total budget). auditing the company’s accounting for revenues from collaboration arrangements was especially challenging due to the complex and highly judgmental nature of evaluating the terms of the related agreements, identifying performance obligations, evaluating whether analogies to the revenue accounting guidance are appropriate, determining and allocating the transaction price to the performance obligations, evaluating estimates of the expected efforts to complete performance obligations and measuring efforts toward satisfying those performance obligations, especially as such measuring of efforts relates to the janssen agreement. 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 for assessing the accounting treatment of any new collaboration agreements or modifications to existing collaboration agreements, establishing an estimated budget of costs, assessing the effort to satisfy performance obligations, and recording actual costs incurred including controls over the completeness and accuracy of data used in the underlying analyses. to test the accounting for revenue from collaboration arrangements we tested and evaluated, among other things, the performance obligations identified, the estimates and assumptions used to determine transaction price, and the allocation of transaction price to performance obligations. we assessed whether management’s analogies to the revenue literature was a consistent and rational application of accounting policy. to test the measurement of efforts toward satisfying performance obligations, our audit procedures included, among others, reviewing management’s analysis for accuracy and completeness by agreeing data to underlying agreements, and inspecting communications with collaboration partners. our audit procedures specific to the recording of revenues under the janssen agreement focused on evaluating the measure of progress based on costs incurred including performing corroborative inquiries with those outside of the finance department, performing sensitivity analyses of key inputs, evaluating the historical accuracy of management’s budgeted cost estimates, and inspecting evidence of actual costs incurred./s/ ernst & young llp we have served as the company’s auditor since 2013. | 4 |
critical audit matter the critical audit matter communicated below is a matter arising from the current‐period audit of the financialstatements that was communicated or required to be communicated to the audit committee and that (1) relatesto 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 ouropinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matterbelow, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which itrelates.report of independent registered public accounting firmf-3investment in securities—valuation—refer to notes 3 and 6 to the consolidated financial statements critical audit matter description certain investments in residential mortgage‐backed securities issued or guaranteed by a united statesgovernment‐sponsored entity or a government agency are classified as available‐for‐sale and are reported at fairvalue in the financial statements. the company’s evaluation of investment impairment on available‐for‐salesecurities is performed at each reporting period or more frequently when economic or market concerns warrantsuch evaluation. an investment is impaired if the fair value of the investment is less than its cost. the companyconsiders an impairment to be other‐than‐temporary if there is (1) an intent to sell the securities, (2)a belief that it is more likely than not that there will be a requirement to sell the securities before recovery (forexample, because of liquidity requirements or contractual obligations), or (3) a determination that a credit lossexists.auditing management’s considerations and conclusions in determining whether an other‐than‐temporaryimpairment exists involved especially subjective judgment as it pertained to evaluating management’s intent.how the critical audit matter was addressed in the audit our audit procedures related to the evaluation of management’s intent to sell the securities included thefollowing, among others:•we tested the effectiveness of control over identifying whether a credit loss exists.•we inspected the population of available‐for‐sale securities that were in an unrealized loss position at each reporting date and performed an evaluation of whether a credit loss existed by considering:–the nature of the underlying securities–management’s rationale supporting their judgments regarding their intent to sell or hold securities in a continuous unrealized loss position while considering the severity and duration of the securities’ decline in fair value we evaluated securities sales subsequent to the reporting period to determine if such sales contradicted ourunderstanding of management’s intent./s/ deloitte & touche llp miami, florida february 17, 2021we 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) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. f-2table of contents operating lease right of use assets and operating lease liabilities - refer to note 8 to the consolidated financial statements. the consolidated balance sheet at december 31, 2021 includes right of use assets (and operating lease liabilities) in the amount of $2,693,984. we were advised by the company that the $2,693,984 carrying value of these assets and liabilities at december 31, 2021 represented the discounted (at a 4.75% estimated incremental borrowing rate) value of the future minimum lease payments of $3,257,773 at december 31, 2021. the principal considerations for our determination that performing procedures relating to the valuation of the right of use assets and the operating lease liabilities is a critical audit matter are (i) the significant judgement by management when developing the valuation and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures relating to the valuation methodology. 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 other things, evaluating the appropriateness of the assumptions used and the estimation methodology applied in the valuation. /s/ michael t. studer cpa p.c. michael t. studer cpa p.c. freeport, new york april 15, 2022 we have served as the company’s auditor since 2020. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.94table of contents valuation of goodwill as discussed in notes 1 and 7 to the consolidated financial statements, the goodwill balance as of december 31, 2020 was $2.3 billion, of which $1.9 billion related to the commercial banking and wealth reporting unit, $136 million related to the retail banking reporting unit, and $262 million related to the corporate and investment banking reporting unit. the company performs goodwill impairment testing on an annual basis and more frequently if events or circumstances indicate a potential impairment may exist. during the three months ended march 31, 2020, the company determined that a triggering event had occurred due to the impact of covid‑19 pandemic and its impact on the economic environment and the company’s financial performance. the company elected to perform a quantitative impairment test which indicated a goodwill impairment of $164 million within the corporate and investment banking reporting unit, $729 million within the commercial banking and wealth reporting unit, and $1.3 billion within the retail banking reporting unit resulting in the company recording a goodwill impairment charge of $2.2 billion. a test of goodwill for impairment consists of comparing the fair value of each reporting unit with its carrying amount, including goodwill. if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. the estimated fair value of the reporting unit is determined using a blend of the income approach and market approach, inclusive of both the guideline public company method and the guideline transaction method.we identified the interim evaluation of the goodwill impairment measurement for the commercial banking and wealth, retail, and corporate and investment banking reporting units as a critical audit matter. the degree of subjectivity associated with the assessment of certain assumptions to estimate the fair value of the reporting units required a high degree of auditor judgment. specifically, subjective auditor judgment was required to assess the estimated future cash flow assumptions, discount rates, and long‑term growth rates used in the income approach and market multiples used in the market approach. minor changes to those assumptions could have had a significant effect on the company’s measurement of the fair value of the reporting units and goodwill impairment. additionally, the audit effort associated with this estimate required specialized skills and knowledge.the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls related to the measurement of goodwill impairment for the reporting units, including controls over the:•development of future cash flow assumptions by reporting unit•development of the long term growth rates, discount rates, and market multiple assumptions by reporting unit. we evaluated the company’s analysis to assess potential goodwill impairment for compliance with u.s. generally accepted accounting principles. we evaluated the reasonableness of the company’s future cash flows for the reporting units, by comparing the future cash flow assumptions to historic projections and internal analysis and external data. we compared the company’s previous cash flow projections to actual results to assess the company’s ability to accurately forecast. in addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:•evaluating the discount rates and long term growth rates by comparing the inputs to the development of the assumptions to publicly available data•evaluating market multiples by comparing the market multiples to publicly available data for comparable entities and assessing the resulting market multiples •assessing the results of management’s goodwill impairment measurement considering the income and market approach by reviewing and evaluating the work and documentation of the specialist engaged by the company.allowance for loan losses evaluated on a collective basis as discussed in note 1 to the consolidated financial statements, the company adopted asc 326 as of january 1, 2020. the total allowance for loan losses as of january 1, 2020 was $1.1 billion, which included the allowance for loan losses evaluated on a collective basis (the january 1, 2020 collective all). as discussed in note 3 to the consolidated financial statements, the company’s allowance for loan losses was $1.7 billion, which included the allowance for loan losses evaluated on a collective basis (the december 31, 2020 collective all) as of december 31, 2020. the january 1, 2020 collective all and the december 31, 2020 collective all (together, the collective all) includes the measure of expected credit losses on a collective basis for those loans that share similar risk 95table of contentscharacteristics. the company estimated the collective all using (1) discounted cash flows, and (2) default probabilities and loss severities, which are based on relevant internal and external available information that relates to past events, current conditions, and reasonable and supportable economic forecasts. the company disaggregates the portfolio into segments; incorporating obligor risk ratings for commercial loans and credit scores for consumer loans. the company estimates the present value of cash shortfalls resulting from the sum of the marginal losses occurring in each time period, over the remaining life of the loan. the marginal losses are derived from the projection of principal balance, inclusive of principal cash flow and prepayment estimates, and parameters reflecting the severity of losses (lgd) in the case of default that is given by the marginal probability of default (pd) for each period of the portfolio’s lifetime. the company estimates a point in time pd and lgd utilizing recent historical data per portfolio, which are then transformed via macroeconomic models using correlated macroeconomic variables included in the forecasted scenarios. after the forecast period, the company reverts to long run historical average default probabilities and loss severities using a linear function, with reversion speeds that differ by portfolio. a portion of the collective all is comprised of adjustments, based on qualitative factors, to the loss estimates described above when it is determined that expected credit losses may not have been captured in the loss estimates.we identified the assessment of the january 1, 2020 collective all and the december 31, 2020 collective all as a critical audit matter. a high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the collective all due to significant measurement uncertainty. specifically, the assessment encompassed the evaluation of the collective all methodology, including the methods and models used to estimate (1) the pd and lgd, and their significant assumptions, including portfolio segmentation, the economic forecast scenario and macroeconomic variables, the reasonable and supportable forecast periods, and obligor risk ratings for commercial loans, and (2) the qualitative factors, principally the alternative economic forecast scenarios. the assessment also included an evaluation of the conceptual soundness and performance of the pd and lgd models. in addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls related to the measurement of the collective all estimates, including controls over the:•development of the collective all methodology•development of the pd and lgd models and forecasts• identification and determination of the significant assumptions used in the pd and lgd models•development of obligor risk ratings for commercial loans•development of the qualitative factors, including the alternative economic scenarios• performance monitoring of the pd and lgd models for the december 31, 2020 collective all.we evaluated the company’s process to develop the collective all 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. we involved credit risk professionals with specialized skills and knowledge who assisted in:•evaluating the company’s collective all methodology for compliance with u.s. generally accepted accounting principles•assessing the conceptual soundness and performance of the pd and lgd models by inspecting the model documentation to determine whether the models are suitable for their intended use•evaluating judgments made by the company relative to the development and performance testing of the pd and lgd models by comparing them to relevant company-specific metrics and trends and the applicable industry and regulatory practices•evaluating the methodology used to develop the economic forecast scenarios and underlying assumptions by comparing it to the company’s business environment and relevant industry practices•assessing the economic forecast scenario through comparison to publicly available forecasts 96table of contents•testing the long run historical average default probabilities and loss severities and reasonable and supportable forecast periods to evaluate the length of each period by comparing them to specific portfolio risk characteristics and trends•determining whether the loan portfolio is segmented by similar risk characteristics by comparing to the company’s business environment and relevant industry practices•testing individual obligor risk ratings for a selection of commercial loans by evaluating the financial performance of the borrower, sources of repayment, and any relevant guarantees or underlying collateral•evaluating the methodology used to develop the qualitative factors and the effect of those factors on the collective all compared with relevant credit risk factors and consistency with credit trends and identified limitations of the underlying quantitative models.we also assessed the sufficiency of the audit evidence obtained related to january 1, 2020 collective all and the december 31, 2020 collective all estimates 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 2016. | 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. business combination, s-fdf as discussedin note 4, the company acquired s-fdf, llc in an acquisition accounted for as a business combination, which required asset and liabilitiesassumed to be measured at their acquisition date fair values. significant judgment is exercised by the company in determining the fairvalue of assets acquired. management engaged specialists, and the work of management’s specialists was used in performing the proceduresto evaluate the reasonableness purchase price allocation. given these factors and due to significant judgements made by management, therelated audit effort in evaluating management's judgments in determining accounting for the business combination required a high degreeof auditor judgment. as a basisfor using this work, the specialists’ qualifications were understood and the company’s relationship with the specialists wasassessed. the procedures performed also included evaluation of the methods and assumptions used by the specialists, tests of the dataused by the specialists and an evaluation of the specialists’ findings. we evaluated and tested the company’s significantjudgments that determine the recognition of goodwill. m&k cpas, pllc we have served as the company’s auditor since 2010. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the 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 as of december 31, 2019, the company’s goodwill balance was $3.1 billion. the company’s goodwill is initially assigned to its reporting units as of the acquisition date. as discussed in note 2 of the consolidated financial statements, goodwill is tested for impairment at the reporting unit level. the company evaluated goodwill for impairment as of october 1, 2019. a quantitative goodwill impairment assessment was completed for all reporting units. 61table of contents auditing management’s goodwill impairment analysis was complex and judgmental due to the estimation required in determining the fair value of the reporting units. in particular, the fair value estimates included significant assumptions such as the long-range forecasts, the selection of the discount rates, and the estimation of the multiples or long-term growth rates used in valuing the terminal year which are affected by expectations about future market or economic conditions. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the company’s goodwill impairment review process. for example, we tested controls over management’s review of the data used in their valuation models and reviewed significant assumptions discussed above used in determining the reporting unit fair values. to test the estimated fair value of the company’s reporting units, with the assistance of our valuation specialists, our audit procedures included, among others, assessing fair value methodologies and testing the significant assumptions discussed above. we compared the significant assumptions used by management to current industry and economic trends, the company’s historical trends with consideration given to changes in the company’s business, customer base or product mix and other relevant factors. we assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions. we also evaluated the reconciliation of the estimated aggregate fair value of the reporting units to the company’s market capitalization. income taxes – uncertain tax positions description of the matter as discussed in note 7, at december 31, 2019, the company had approximately $117.6 million of unrecognized tax benefits associated with uncertain tax positions. 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. auditing the recognition and measurement of tax positions related to uncertain tax positions involved significant auditor judgment and use of tax professionals with specialized skills and knowledge because both the recognition and measurement of the tax positions are complex, highly judgmental and based on interpretations of tax laws and legal rulings. 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 to record the reserve for uncertain tax positions. for example, we tested controls over management’s evaluation of the technical merits of tax positions and identification of uncertain tax positions and the controls to measure the benefit of those tax positions, including management’s review of the inputs and calculations of unrecognized tax benefits resulting from uncertain tax positions. to test the amounts recorded as uncertain tax positions we involved our tax professionals to evaluate the technical merits of the company’s tax positions. our procedures included, among others, inspecting correspondence, assessments and settlements from the relevant tax authorities and evaluating income tax opinions or other third-party advice obtained by the company. we also applied our knowledge and experience with the application of federal, foreign and state income tax laws to evaluate the company’s accounting for those tax positions. 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 also evaluated the company’s income tax disclosures included in note 7 in relation to these matters. /s/ ernst & young llp we have served as the company's auditor since 2005. | 2 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.goodwill impairment assessment – aviation and land reporting units as described in notes 1 and 7 to the consolidated financial statements, the company’s consolidated goodwill balance was $861.9 million as of december 31, 2021, which is allocated among the aviation and land reporting units. management conducts an impairment assessment as of december 31 of each year, or more frequently if events or circumstances indicate that the carrying value of the goodwill may be impaired. to determine whether goodwill is impaired, management compares the fair value of the reporting units to which goodwill was assigned to their respective carrying values to measure if any amount of goodwill should be impaired. in calculating fair value, management uses a combination of both an income and market approach. as disclosed by management, under the income approach, management calculates the fair value of a reporting unit based on the present value of estimated future cash flows, which include assumptions related to expected growth rates, profitability, and a discount rate that corresponds to a weighted-average cost of capital. under the market approach, management uses a selection of global companies that correspond to each reporting unit to derive a market-based multiple.the principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the aviation and land reporting units is a critical audit matter are the significant judgment by management when developing the fair value of the reporting units, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to expected growth rates, profitability, and the discount rates. in addition, the audit effort involved the use of professionals with specialized skill and knowledge.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the determination of the reporting units and significant assumptions used in the estimated future cash flows. these procedures also included, among others, testing management’s process for developing the fair value of the aviation and land reporting units, which included evaluating the appropriateness of the income and market approaches; testing the completeness and accuracy of underlying data used in the income and market approaches; and evaluating the reasonableness of significant assumptions related to expected growth rates, profitability, and the discount rates. evaluating management’s assumptions related to expected growth rates and profitability involved evaluating whether the assumptions used 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 income and market approaches and evaluating the reasonableness of the discount rate assumptions./s/ pricewaterhouse coopers llp hallandale beach, florida february 25, 2022we 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 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, depreciation and amortization expense and impairment of oil and gas properties impacted by the company’s estimation of proved reserves as described further in note 1 to the financial statements, the company uses the full cost method of accounting for oil and gas operations. this accounting method requires management to make estimates of proved reserves and related future net cash flows to compute and record depletion, depreciation and amortization, as well as to assess potential impairment of oil and gas 55table of contents index to financial statementsproperties (the full cost ceiling test). to estimate the volume of proved oil and gas reserve quantities, management makes significant estimates and assumptions including forecasting the production decline rate of producing 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 reserves is also impacted by management’s judgments and estimates regarding the financial performance of wells associated with those proved reserves to determine if wells are expected to be economical under the appropriate pricing assumptions that are required in the estimation of depletion, depreciation and amortization expense and potential ceiling test impairment assessments. we identified the estimation of proved reserves as it relates to the recognition of depletion, depreciation and amortization expense and the assessment of potential impairment 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 that are necessary to estimate the volume and future cash flows of the company’s proved reserves could have a significant impact on the measurement of depletion, depreciation and amortization expense and/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 internal controls relating to management’s estimation of proved reserves for the purpose of estimating depletion, depreciation and amortization expense and assessing the company’s oil and gas properties for potential ceiling test impairment.•we evaluated the independence, objectivity, and professional qualifications of the company’s reserves specialist, made inquiries of those reservoir engineers regarding the process followed and judgements made to estimate the company’s proved reserve volumes and read the report prepared by the company’s reserve specialist.•we evaluated sensitive inputs and assumptions used to determine proved reserve volumes and other cash flow inputs and assumptions that are derived from the company’s accounting records, such as historical pricing differentials, operating costs, estimated future development costs, and ownership interest. we tested management’s process for determining the assumptions, including examining the underlying support, on a sample basis where applicable. 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 pricing differentials, where applicable;◦tested the model used to estimate the operating costs at year end and compared to historical operating costs;◦tested the model used to determine the future development costs and compared estimated future development costs used in the reserve report to amounts expended for recently drilled and completed wells, where applicable;◦tested 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 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’s reserve report. valuation of oil and natural gas properties in association with fresh start accounting as described further in notes 1, 2 and 3 to the financial statements, on may 17, 2021, the company emerged from chapter 11 bankruptcy. in connection with its emergence, the company qualified for and applied fresh start accounting. management calculated a reorganization value, which represents the estimated fair value of the successor's assets before considering liabilities and allocated the value to its individual assets based on their estimated fair values with the assistance of third-party valuation advisors. we identified the valuation of oil and natural gas properties associated with fresh start accounting to be a critical audit matter.56table of contents index to financial statements the principal considerations for our determination that the valuation of oil and natural gas properties associated with fresh start accounting are that there were significant management judgements made with respect to assumptions used to estimate the fair value of the oil and natural gas properties, including the cash flows related to recoverable reserves, production rates, future operating and development costs, future commodity prices, discount rate and risk adjustments. these inputs and assumptions involved increased auditor subjectivity in evaluating the appropriateness of those assumptions.our audit procedures related to the valuation of oil and natural gas properties in association with fresh start accounting included the following, among others.•we tested the design and operating effectiveness of controls for management's review of the significant assumptions used in the third-party valuation report and valuation methodologies applied.•we evaluated the qualifications and objectivity of the company’s third-party valuation advisors.•with the assistance of valuation professionals with specialized skills and knowledge, we evaluated the methodology used by management to develop oil and natural gas reserve quantities and discounted future net cash flows and key assumptions including the risk adjustment factors applied to reserves, the discount rate and income tax rate.•we performed procedures similar to those described above on the estimated oil and gas reserves that were a key input to the valuation of proved and unproved oil and natural gas properties./s/ grant thornton llp we have served as the company's auditor since 2005. | 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 and risk 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 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 -50-northrop grumman corporation 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 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 -51-northrop grumman corporation 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 26, 2022we have served as the company’s auditor since 1975. | 2 |
critical audit matters thecritical audit matters to be communicated, are matters arising from the current period audit of the financial statements that were communicatedor required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financialstatements and (2) involved our especially challenging, subjective, or complex judgments. valuationand impairment of intangible assets descriptionof the matter duringthe year ended december 31, 2021, the company recorded intangible assets including goodwill, trade name and website from two acquisitionswhich occurred during the year. the fair values recorded were based on independent valuations obtained by the company. as discussed in note 2 to the consolidated financial statements, intangible assets including goodwill are tested for impairment on an annual basis, ormore frequently if the company believes indicators of impairment exist. the company measured the fair value of these intangible assetsbased on projected cash flows and combined with other qualitative factors the company determined the intangible assets to be fully impairedas of december 31, 2021. auditingthe company’s annual impairment test related to these intangible assets was complex due to the estimation uncertainty in determiningtheir fair values. the significant assumptions used to estimate the fair value of these intangible assets included forecasted sales anddiscount rates. these assumptions are forward-looking which can vary significantly and depend on market forces and events outside ofthe company’s control. how we addressed the matter in our audit totest the estimated fair value of these intangible assets, our audit procedures included, among others, evaluating the valuation methodologyused, the significant assumptions discussed above, and the underlying data used by the company. such data includes historical sales andprojections. we reviewed the assumptions and data provided by management and concluded that the impairment recorded was reasonable. /s/ assurance dimensions we have served as the company’s auditor since 2022. | 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.89table of contents inventory - valuation description of the matter the company’s inventory, net totaled $517.2 million as of march 28, 2020, representing approximately 8% of total assets. as explained in note 1 to the consolidated financial statements, the company assesses the valuation of all inventories including manufacturing raw materials, work-in-process, and finished goods each reporting period. obsolete inventory or inventory in excess of management’s estimated demand forecasts is written down to its estimated net realizable value if less than cost by recording an inventory reserve at each reporting period. auditing management’s estimates for inventory reserves involved subjective auditor judgment because the assessment considers a number of factors, including estimated customer demand forecasts, technological obsolescence risks, and possible alternative uses that are affected at least partially by market and economic conditions outside the company’s control. 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 inventory reserve process. this included testing controls over management's review of the assumptions and data underlying the inventory reserves, such as demand forecasts and consideration of how factors outside of the company’s control might affect the valuation of obsolete and excess inventory.our audit procedures included, among others, evaluating the significant assumptions (e.g., customer demand forecasts, technological and/or market obsolescence, and possible alternative uses) and the accuracy and completeness of underlying data used in management’s assessment of inventory reserves. we evaluated inventory levels compared to forecasted demand, historical sales and specific product considerations. we also assessed the historical accuracy of management’s estimates for both the forecast assumptions and the reserve estimate.90table of contents business combinations description of the matter as explained in note 5 to the consolidated financial statements, the company completed acquisitions of active-semi international, inc. (“active-semi”), cavendish kinetics limited (“cavendish”), custom mmic design services, inc. (“custom mmic”), and decawave limited (“decawave”) during the fiscal year ended march 28, 2020. the acquisitions were each accounted for as business combinations. the company recorded intangible assets from these acquisitions, primarily consisting of customer relationships and developed technology. the company used the income approach to estimate the preliminary fair values of the customer relationships and developed technology, each of which are based on management’s estimates and assumptions.auditing the company's accounting for its acquisitions of active-semi, cavendish, custom mmic, and decawave was complex and subjective due to the significant estimation uncertainty in determining the fair value of the above identified intangible assets, which was primarily due to the sensitivity of the respective fair values to underlying assumptions. the fair value estimate of the customer relationships intangible asset included significant assumptions in the prospective financial information (including revenue growth, ebitda margin, and customer attrition) and the discount rate. the fair value estimate of the developed technology intangible asset included significant assumptions in the prospective financial information (including revenue growth, ebitda margin, technology migration rates, royalty rates, and expected economic life) and the discount rate. these significant assumptions for each of the identified intangible assets 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 accounting for the acquisitions. our tests included controls over the estimation process and models to calculate the fair value estimates of the above identified intangible assets, as well as controls over management’s review of the valuation methodologies and significant assumptions discussed above.to test the estimated fair values of the developed technology and customer relationship intangible assets, we performed audit procedures that included, among others, evaluating the company's selection of the valuation methodologies, testing the significant assumptions and the completeness and accuracy of the underlying data. for example, we compared the significant assumptions in the prospective financial information, including, but not limited to, the forecasted revenue growth rates, ebitda margin, expected annual customer attrition, technology migration rates, and the estimated economic life, as appropriate for each calculation to current industry trends, as well as to the historical performance of the acquired businesses. with the assistance of our valuation specialists, we evaluated the reasonableness of the valuation methodology, and significant assumptions, including royalty rates and discount rates. this included understanding and validating the source information underlying the determination of the royalty rates and discount rates and testing the mathematical accuracy of the calculations. in addition, we developed a range of independent estimates for the discount rates using publicly available market data for comparable entities and comparing those to the discount rates selected by management./s/ ernst & young llp we have served as the company’s auditor since 2018. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.goodwill — refer to notes 1 and 8 to the consolidated financial statements critical audit matter description the company has goodwill of $430 million as of december 26, 2020, which is allocated among twelve reporting units. the company evaluates its twelve reporting units for goodwill impairment during the third fiscal quarter of each year, or when events or changes in circumstances indicate the carrying value may not be recoverable. reporting units are evaluated using after-tax cash flows from operations (less capital expenses) discounted to present value. the solar tracking structure reporting unit was also evaluated using a multiple of earnings before interest, taxes, depreciation and amortization valuation using other 44industrial companies with similar product lines. these valuation methods require management to make significant estimates and assumptions related to projected cash flows. the estimated fair value of all reporting units exceeded their respective carrying value, except the access systems reporting unit for which a $13 million impairment was recognized in the year ended december 26, 2020.we identified goodwill for certain reporting units as a critical audit matter because of the significant estimates and assumptions made by management to estimate fair value, including the impact of forecasted growth, and the difference between the fair values and the carrying values of certain reporting units as of december 26, 2020. this required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to certain assumptions within the projected cash flows. how the critical audit matter was addressed in the audit our audit procedures related to the goodwill impairment assessment for certain reporting units included the following, among others: •we tested the effectiveness of internal controls over management’s goodwill impairment evaluation, including those over the projected cash flows.•we evaluated management’s ability to accurately forecast cash flows by comparing actual results to management’s historical forecasts. •we evaluated the reasonableness of management’s projected cash flows by comparing to (1) historical results, (2) internal communications to management and the board of directors, (3) industry reports and (4) information included in company press releases to analysts and investors. •with the assistance of our fair value specialists, we evaluated the certain reporting units’ valuation compared to its peer companies.•we evaluated the impact of changes in management’s forecasts from the annual measurement date to december 26, 2020./s/ deloitte & touche llp omaha, nebraska february 24, 2021 we have served as the company's auditor since 1996. | 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, 65 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.u.s. pension annuitizations as described in notes b and o to the consolidated financial statements, the company had a projected benefit obligation related to its defined pension plans of $4,594 million as of december 31, 2021, including $2,712 million of benefit obligations in the u.s. in the fourth quarter of 2021, the company purchased group annuity contracts to transfer the obligation to pay remaining retirement benefits of certain retirees and beneficiaries from its u.s. defined benefit pension plans and transferred approximately $1,540 million in both benefit obligations and plan assets. as a result, the company remeasured its u.s. defined benefit pension plans and recorded an $848 million settlement charge. as disclosed by management, the remeasurement of its u.s. defined benefit pension plans was performed using actuarial methodologies and incorporated significant assumptions, including the discount rate, expected long-term rate of return on plan assets, and several assumptions relating to the employee workforce (salary increases, retirement age, and mortality rate). the principal considerations for our determination that performing procedures relating to the u.s. pension annuitizations is a critical audit matter are (i) the significant judgment by management in determining the valuation of the u.s. pension annuitizations, as well as their consideration of the accounting for the non-recurring nature of the u.s. pension annuitizations; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to the accounting for the u.s. pension annuitizations, participants transferred, and significant assumptions related to the discount rate, expected long-term rate of return on plan assets, and mortality rate used in determining the valuation of the u.s. pension annuitizations; 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 accounting for and valuation of the u.s. pension annuitizations, including controls over management’s methodology and significant assumptions. these procedures also included, among others, (i) testing management’s process for determining the valuation of the u.s. pension annuitizations; (ii) testing the participants transferred, the settlement charge recorded, and the completeness and accuracy of the underlying data used in the valuation of the u.s. pension annuitizations; and (iii) the involvement of professionals with specialized skill and knowledge to assist in (a) evaluating the appropriateness of the actuarial methodology used by management; and (b) evaluating the reasonableness of the discount rate, expected long-term rate of return on plan assets, and mortality rate assumptions. /s/ pricewaterhouse coopers llp pricewaterhouse coopers llp pittsburgh, pennsylvania, united states february 24, 2022we have served as the company’s auditor since 2015. | 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 separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. accounting for sales taxes critical audit matter description the company previously conducted a review of its sales tax positions and related accounting, with the assistance of outside consultants. as a result of the review, it was determined that certain services and products sales were subject to sales tax and that the company had not assessed sales tax on sales of those services and products to customers. the company then undertook a process to obtain documentation from significant customers to determine if any was exempt from sales tax assessments during the applicable periods. the company accrued the estimated sales taxes due in the amounts of $1,007,000 and $1,011,000, and interest and penalties of $313,000 and $244,000, as of december 31, 2021 and 2020, respectively. for certain customers, the company expects to bill and collect the related sales taxes that are due. the company has estimated such amounts to be $135,000 and $266,000 as of december 31, 2021 and 2020, respectively. the company was required to apply judgment regarding the determination of the tax status of the customers that did not respond to management’s inquiries, as well as in the estimation of sales tax rates, interest and penalties accruals, and of the sales tax amounts expected to be billed and collected. the accounting for sales taxes is complex as each state has specific rules and regulations regarding the taxability of products and services. the company’s evaluation of the estimated sales taxes accrual required the use of a complex model and the assistance of outside professionals that are experienced in accounting for sales taxes. there is significant judgment involved in determining the specific strategy to apply for estimating the accrual for sales taxes, including the judgment of taxability of customers who did not respond to the company’s requests for documentation of the customers’ taxability, sales tax rates in each jurisdiction, and estimated interest and penalties. judgment is also required to determine the company’s ability to bill and collect from certain customers past sales taxes that are due. how we addressed the matter in our audit the primary procedures we performed to address this critical audit matter included: ·testing the accuracy and completeness of the products and services sales transactions that were included in the sales tax analysis.·testing a sample of customer responses received by the company to validate the completeness of the accrual.·evaluating the process management used to estimate the sales tax liability for customers who did not respond to management’s inquiries regarding taxability.·involving internal sales tax professionals to assist in assessing each type of product and service to determine whether or not it is taxable, as well as the sales tax rates utilized and related interest and penalty calculations.·evaluating the process that management used to estimate the sales tax liability and the estimate regarding the collectability related to proposed billings to customers of sales tax by reviewing underlying documentation analyzed by the company to support its estimates.·testing the mathematical accuracy of the model used by management to calculate estimated sales tax, interest and penalties. /s/ baker tilly us, llp we have served as the company's auditor since 2011. | 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 required tobe communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financialstatements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit mattersdoes not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating thecritical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which theyrelate. 43 table of contents income tax provision as discussed in note 10 to theconsolidated financial statements, the company’s income tax expense includes u.s. and state income taxes. deferred tax assets andliabilities are recognized for the consequences of temporary differences between the financial reporting basis and the tax basis of existingassets and liabilities. the tax rate used to determine the deferred tax assets and liabilities is based on the enacted tax rate for theyear and the manner in which the differences are expected to reverse. valuation allowances are recorded to reduce deferred tax assetsto the amount that will more likely than not be realized. we identified management’scalculation of income tax expense and deferred tax assets and liabilities (net of valuation allowance) as a critical audit matter becauseof the significant judgments and estimates management makes to determine these amounts. performing audit procedures to evaluate the reasonablenessof management’s interpretation of tax law in its estimate of the associated provisions and tax charges required a high degree ofauditor judgment and increased effort. our audit procedures consisted of 1) evaluating historical tax filings, 2) assessing the reasonablenessof the valuation allowance. business combination and goodwill as discussed in note 4 to theconsolidated financial statements, the company’s consolidated financial statements include the acquisition of vital behavioral health,llc. the valuation of the associated goodwill related to this acquisition and was determined as the excess funds paid in relation to thenet assets acquired. we identified management’scalculation of the fair market value of identifiable assets and liabilities and the associated calculation of goodwill as a critical auditmatter because of the significant judgements and estimates management makes to determine these amounts. performing audit procedures toevaluation the reasonableness of management’s assessment of estimates required a high degree of auditor judgement and increasedeffort. our audit procedures consisted of 1) evaluating the fair market value of identifiable assets, (2) assessing the appropriatenessof non-cash consideration (3) independently recomputing the valuations determined by management. accounting for embedded derivative liabilities related to convertible notes payable as described in note 2 to thefinancial statements, the company had convertible debentures that required accounting considerations and significant estimates. the company determined thatvariable conversion features issued in connection with certain convertible debt required derivative liability classification. these variableconversion features were initially measured at fair value and subsequently have been remeasured to fair value at each reporting period.the company determined the fair value of the embedded derivatives using the black-scholes-merton option pricing model. we identified the accountingconsiderations and related valuations, including the related fair value determinations of the embedded derivative liabilities of suchas a critical audit matter. the principal considerations for our determination were: (1) the accounting consideration in determining thenature of the various features (2) the evaluation of the potential derivatives and potential bifurcation in the instruments, and (3) considerationsrelated to the determination of the fair value of the various debt and equity instruments and the conversion features that include valuationmodels and assumptions utilized by management. auditing these elements is especially challenging and requires auditor judgement due tothe nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed. our audit procedures relatedto management’s conclusion on the evaluation and related valuation of embedded derivatives, included the following, among others:(1) evaluating the relevant terms and conditions of the various financings, (2) assessing the appropriateness of conclusions reached bythe company with respect to the accounting for the convertible debt, and the assessment and accounting for potential derivatives and (3)independently recomputing the valuations determined by management. we have served as the company’sauditor since 2019. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.revenue recognition - contract estimates at completion as described in note 1 to the consolidated financial statements, the vast majority of the company’s revenues of $29.2 billion for the year ended december 31, 2019 are from long-term contracts associated with the design, development, manufacture or modification of complex aerospace or defense equipment or related services. the company generally recognizes revenue over time as it performs on its contractual performance obligations because of continuous transfer of control to the customer. because of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. due to the nature of the work required to be performed on many of the company’s performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment by management on a contract by contract basis. these variables and significant judgments may include assumptions related to the estimated award fees, incentive fees, or other provisions that can either increase or decrease the transaction price, outstanding key contract matters, progress toward completion and the related program schedule, identified risks and opportunities including the ability and cost to achieve the schedule (e.g., the number and type of milestone events) and technical requirements (e.g., a newly-developed product versus a mature product), labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation (e.g., to estimate increases in wages and prices for materials and related support cost allocations), execution by the company’s subcontractors, the availability and timing of funding from the customer, overhead cost rates, the estimated cost of satisfying the company’s industrial cooperation agreements required under certain contracts and the likelihood of obtaining required regulatory approvals based upon all known facts and circumstances.the principal considerations for our determination that performing procedures relating to revenue recognition - contract estimates at completion is a critical audit matter are there was significant judgment by management in developing their estimates of total revenue and total costs at completion, including significant judgments and assumptions related to the applicable aforementioned variables on a contract by contract basis. this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and in evaluating audit evidence relating to management’s estimates of total revenue and total cost at completion for contracts.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 revenue and total costs at completion. these procedures also included, among others, testing management’s process for developing the estimated total revenue and total costs at completion for selected contractual performance obligations. this included evaluating the reasonableness of certain significant judgments and assumptions made by management by understanding the nature and status of the selected contract 85 table of contentsand related performance obligations, in certain instances performing retrospective reviews of contract estimates and changes in estimates over time, evaluating evidence to support selected estimated costs to complete, and inquiring of program management as to the reasonableness of the significant judgments and assumptions made by management related to the applicable aforementioned variables to support the estimates of total revenue and total costs at completion used to determine revenue recognized for the contracts selected for testing. pensions - long-term return on plan assets and discount rate assumptions as described in notes 1 and 14 to the consolidated financial statements, the total projected benefit obligation of the company’s pension plans was $29.0 billion as of december 31, 2019 and the total net periodic pension benefit cost was $1.1 billion for the year then ended. the company’s long-term return on plan assets and discount rate assumptions are the key variables in determining the net periodic pension benefit cost and the projected benefit obligation of the company’s pension plans. to establish the long-term return on plan assets assumption, management employs a “building block” approach. management then annually considers whether it is appropriate to change its long-term return on plan assets assumption by reviewing the existing assumption against a statistically determined reasonable range of outcomes. the building block approach and the reasonable range of outcomes are based upon management’s asset allocation assumptions and long-term capital market assumptions. the discount rate represents the interest rate that should be used to determine the present value of future cash flows currently expected to be required to settle the company’s pension obligations. the discount rate assumption is determined by using a theoretical bond portfolio model consisting of high-quality bonds for which the timing and amount of cash flows approximate the estimated benefit payments for each pension plan. the principal considerations for our determination that performing procedures relating to the long-term return on plan assets and discount rate assumptions for pensions is a critical audit matter are there was significant judgment by management in determining the net periodic pension benefit cost and projected benefit obligation of the company’s pension plans including the expected long-term return on plan assets and the discount rate assumptions. this in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and in evaluating audit evidence relating to management’s long-term return on plan assets and discount rate assumptions. 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 determination of the net periodic pension benefit cost and the projected benefit obligation of the company’s pension plans, including controls over the expected long-term return on plan assets and the discount rate assumptions. these procedures also included, among other, testing management’s process for developing the expected long-term rate of return on plan assets and discount rate assumptions. this included utilizing professionals with specialized skill and knowledge to assist in the evaluation of the reasonableness of management’s long-term return on plan assets and discount rate assumptions by evaluating the appropriateness of the building block approach used by management as well as assessing the appropriateness of the bond portfolio model and data used in management’s bond portfolio models. this also included comparing management’s capital market expectations to the company’s historical returns, testing of management’s asset allocation assumptions, evaluating the reasonableness of management’s expectations of future investment performance and comparing associated discount rates determined by management with the bond portfolios used by management to independent yield curves./s/ pricewaterhouse coopers llp boston, massachusetts february 12, 2020 we have served as the company’s auditor since 1961. | 3 |
critical audit matter.basis for opinion these financial statements are the responsibility of the company's management. our responsibility is to express an opinion on the company’s financial statements based on our audits. we are a public accounting firm registered with the pcaob and are required to be independent with respect to the company in accordance with the u.s. federal securities laws and the applicable rules and regulations of the securities and exchange commission and the pcaob. we conducted our audits in accordance with the standards of the pcaob. those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. we believe that our audits provide a reasonable basis for our opinion. 89table of contents 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. estimated contract costs at completion description of the matter as discussed in note 2 of the consolidated financial statements, revenue for certain of the company’s contracts with its customers is recognized over time as work progresses toward completion and is measured based on the ratio of cumulative costs incurred to date to the estimated total contract costs at completion. for the year ended october 3, 2020, the company recognized revenue of $1.9 billion or 65% of total revenue on this basis. in addition, contract loss reserves are recorded for open contracts for which total estimated contract costs are expected to exceed total contract revenues. auditing management’s estimated contract costs at completion was complex and highly judgmental due to the significant judgments applied by management including the application of significant assumptions such as estimated direct labor hours, direct material costs, and other direct costs. a significant change in an estimate on one or more contracts could have a material effect on the company’s results of operations. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls over management’s review of estimated contract costs at completion, including the determination of the underlying significant assumptions described above. to test the estimated contract cost at completion, we performed audit procedures that included, among others, inspecting the approved contract and inquiring of program managers regarding the nature of the contract and the scope of work to be performed, testing the actual costs incurred through inspection of source documentation and testing the significant assumptions described above. our testing of each of these assumptions included a combination of inquiries of finance directors and program managers, inspection of source documentation to support the future estimated costs and analytical procedures comparing profit rates to similar contracts, as applicable. we also assessed the historical accuracy of management’s estimated costs at completion. long-lived asset impairment description of the matter as reflected in the company’s consolidated financial statements, at october 3, 2020, the company’s net property, plant and equipment balance was $600.5 million. as discussed in note 1 of consolidated financial statements, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. the company uses undiscounted cash flows to determine whether impairment exists and measure any impairment loss using discounted cash flows, or with another comparable method. during 2020, the company recorded an impairment loss of $37.8 million. these charges primarily related to long-lived assets that experienced a significant decline in value due to economic impacts of the covid-19 pandemic within the aircraft controls segment. these charges are included in long-lived asset impairment in the consolidated statement of earnings. auditing the company’s impairment measurement involved a higher degree of subjectivity as estimates underlying the determination of fair value were based on assumptions regarding future market and economic conditions. significant assumptions used in the company’s fair value estimate included production volume forecasts, future pricing, cost escalations, economic life of property, plant and equipment, and replacement costs for certain property, plant and equipment primarily within the aircraft controls segment. 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 to determine the fair value of the impacted asset groups and measure the long-lived asset impairment, including controls over management’s review of the significant assumptions underlying the fair value determination. our testing of the company’s impairment measurement included, among other procedures, evaluating the reasonableness of the significant assumptions and operating data used to estimate the fair value. for example, we obtained support to evaluate the data used within the calculation and utilized our valuation specialists to perform a comparative calculation of the long-lived intangibles impairment valuation to determine if management’s selected impairment was within a reasonable range.90table of contents change in pension accounting description of the matter as discussed above and in note 1 of the consolidated financial statements, the company changed its method of accounting for the determination of the market-related value solely for the fixed income funds asset class representing approximately 80% of the assets within the qualified u.s. defined benefit plan (the plan). the company’s previous method of accounting was to calculate the market-related value of assets for all the plan’s assets recognizing investment gains and losses ratably over a five-year period. the company elected to use the fair value of the fixed income funds to determine the market-related value of the assets beginning in the first quarter of fiscal 2020. the recognition of gains and losses on this class of assets affects net periodic pension cost in the period in which they occur. auditing the change in accounting involved especially challenging auditor judgment due to limited authoritative guidance for determining whether a method is preferable. 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 its pension liability and related costs, including controls over management’s review and approval of the change in the application of the accounting principle. to test the justification for the change in accounting principle, we performed audit procedures that included, among others, evaluating management’s determination that the change was rational and the accounting method to be applied was supportable and widely recognized in practice. experienced members of the audit team, as well as subject matter professionals, were involved in analyzing whether the change in accounting principle was preferable. /s/ ernst & young llp we have served as the company’s auditor since 2003. | 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.quantitative goodwill impairment assessment as described in notes 1 and 6 to the consolidated financial statements, the company’s consolidated goodwill balance was $955 million as of december 31, 2021. goodwill is subject to impairment testing on an annual basis, in the second quarter, or more frequently if an event or change in circumstances indicates that the fair value of a reporting unit has been reduced below its carrying value. as disclosed by management, the option to first assess qualitative factors to determine whether it is necessary to perform the step 1 quantitative goodwill impairment test is utilized. if management determines that the step 1 quantitative impairment test is required, management estimates the fair value of the reporting unit primarily using the income approach, which reflects management’s cash flow projections. inherent in management’s development of cash flow projections are assumptions and estimates, including those related to future earnings, growth rates, and the weighted average cost of capital. the principal considerations for our determination that performing procedures relating to the quantitative goodwill impairment assessment is a critical audit matter are (i) the significant judgment by management when developing the fair value measurement of any reporting units where a quantitative test was performed, (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to future earnings, growth rates, and the weighted average cost of capital, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s quantitative goodwill impairment assessment, including controls over the valuation of any reporting units for which a quantitative test was performed. these procedures also included, among others, testing management’s process for developing the fair value estimates; evaluating the appropriateness of the income approach; testing the completeness and accuracy of underlying data used in the estimates; and evaluating the significant assumptions used by management, related to future earnings, growth rates, and the weighted average cost of capital. evaluating management’s assumptions related to future earnings and growth rates 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 the evaluation of the company’s income approach and reasonableness of the weighted average cost of capital. /s/ pricewaterhouse coopers llp hartford, connecticut february 22, 2022we have served as the 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 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 accrued landfill retirement obligations description of the matter at december 31, 2019, the carrying value of the company’s accrued landfill retirement obligations totaled $264.2 million. as discussed in note 2 of the consolidated financial statements, the company assesses the appropriateness of the estimates used to develop its recorded balances annually, or more often if significant facts change.auditing accrued landfill asset retirement obligations is complex due to the highly judgmental nature of the assumptions used in the valuation process. these assumptions included the timing or extent and estimate of future costs associated with the capping, closure and post-closure activities at each landfill, airspace consumed to date in relation to total estimated airspace, which determines estimated remaining capacity.how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of controls that address the risks of material misstatement relating to the valuation of the company’s accrued landfill retirement obligations. for example, we tested controls over management’s review of the timing or extent and estimate of the future costs and remaining capacity. to test the accrued landfill retirement obligations, we performed audit procedures that included, among others, assessing the methodology used by the company, testing the completeness of activities included in the estimate, and testing the significant assumptions discussed above, inclusive of the underlying data used by the company in its development of these assumptions. we evaluated the competency of management’s external consulting engineers charged with developing the cost estimates, remaining capacity, and underlying assumptions. we involved ey engineering specialists to assist us with these procedures. specifically, we utilized the ey engineering specialists to evaluate the projection of costs for future capping, closure and post-closure activities and the estimation of remaining capacity. we also performed a hindsight analysis by comparing prior year projections to current year actual costs. amortization of landfill assets description of the matter at december 31, 2019, the net book value of the company’s landfill assets totaled $796.0 million, and the associated amortization expense for 2019 was $105.9 million. as discussed in note 2 of the consolidated financial statements, the company updates the assumptions used to calculate individual landfill amortization expense annually, or more often if significant facts change. amortization expense is recorded on a units-of-consumption basis, applying expense as a rate per ton.auditing the landfill asset amortization expense is complex due to the highly judgmental nature of determining the assumptions used in the calculation of the expense. significant assumptions included estimated remaining permitted and deemed permitted expansion airspace and the amount of expected future settlement (density), which determines estimated remaining capacity.how we addressed the matter in our audit we obtained an understanding, evaluated the design, and tested the operating effectiveness of controls that address the risks of material misstatement relating to the measurement of the company’s landfill asset amortization expense. for example, we tested controls over management’s review and recalculation of the current period amortization rates, amortization expense, accumulated amortization, and the significant assumptions including permitted and deemed permitted expansion airspace and density. to test the landfill asset amortization expense, we performed audit procedures that included, among others, assessing the methodology used by the company and testing the significant assumptions discussed above inclusive of the underlying data used by the company in its development of these assumptions. we evaluated the competency of management’s external consulting engineers charged with developing these assumptions. we involved ey engineering specialists to assist us with procedures to test the methodology and certain assumptions determined by management’s external consulting engineers regarding the estimate of remaining permitted capacity. we also evaluated that the company’s determination of deemed permitted airspace met the criteria for inclusion in remaining airspace in accordance with the company’s policy./s/ ernst & young llp we have served as the company’s auditor since 2012. | 2 |
critical audit matter the critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. 114table of contents allowance for credit losses description of the matter the company’s loan portfolio totaled $6.2 billion as of december 31, 2019, and the associated allowance for credit losses was $51.6 million. as discussed in note 1 and note 10, determining the amount of the allowance requires significant judgment and estimates about the collectability of loans and the factors that deserve consideration in estimating probable credit losses. management relies on qualitative analysis of certain factors related to portfolio risks and economic conditions and adjusts the actual historical loss rates to reflect the impact these factors may have on probable losses in the portfolio. qualitative factors considered by management include employment trends, macroeconomic trends, commercial real estate trends, lending practices, ability and experience of the credit staff, the overall lending environment and external factors such as the regulatory environment and competition. management makes estimates for the qualitative factors using assumptions and information that is often subjective and changing rapidly.auditing management’s estimate of the allowance for credit losses involved a high degree of subjectivity due to the judgment and estimates required in evaluating management’s determination of the qualitative factors to the allowance for credit losses. management’s identification and measurement of the qualitative factor adjustments is highly judgmental and could have a significant effect on the allowance for credit losses. how we addressed the matter in our audit we obtained an understanding of the company’s process for establishing the allowance for credit losses, including the qualitative factor adjustments made to the allowance for credit losses. we evaluated the design and tested the operating effectiveness of controls over the company’s allowance for credit losses process, which included, among others, management’s review and approval controls designed to assess the need and level of qualitative factor adjustments to the allowance for credit losses and the completeness and accuracy of the data utilized to support management’s assessment. to test the qualitative factor adjustments, we performed audit procedures that included, among others, evaluating the appropriateness of management’s methodology and assessing whether all relevant risks were reflected in the allowance for credit losses and the basis for the need to consider qualitative factor adjustments. regarding the measurement of the qualitative factors, we evaluated the completeness, accuracy and relevance of the underlying internal and external market data utilized in management’s estimate and considered the existence of new or contrary information. we corroborated the data by comparing it to the company’s historic loan performance and third-party macroeconomic data. we also compared the overall allowance for credit losses to those established by peer banks as a way to evaluate that the total allowance for credit losses inclusive of the qualitative factor adjustments is appropriately reflecting losses incurred in the portfolio and analyzed the change in the components of the qualitative reserves relative to the changes in the company’s loan portfolio./s/ ernst & young llp we have served as the company’s auditor since 2019. | 3 |
critical audit matter the critical audit matter communicatedbelow is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicatedto the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involvedour especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way ouropinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separateopinion on the critical audit matter or on the accounts or disclosures to which it relates. critical audit matter description during the year ended december31, 2021, the company issued performance shares and warrants to employees including key management personnel as well as to consultantswhich were accounted for as share based compensation. the company’s valuation of share-based compensation is complex and subjectto significant management estimates and judgement. the company used black-scholes model to evaluate the fair value of the warrants issuedwhich requires management to make significant assumptions related to input of the pricing model. f-2 critical audit matter description during the year ended december31, 2021, the company issued performance shares and warrants to employees including key management personnel as well as to consultantswhich were accounted for as share based compensation. the company’s valuation of share-based compensation is complex and subjectto significant management estimates and judgement. the company used black-scholes model to evaluate the fair value of the warrants issuedwhich requires management to make significant assumptions related to input of the pricing model. how the critical audit matter was addressed in the audit our audit procedures included but were not limited to: ·evaluating management’s assessment of the valuation and recognition of the options.·obtaining an understanding of the key terms and conditions of the performance shares and options by inspecting relevant agreements.·holding discussions with management to understand the share based payment arrangements in place·recalculating the estimated fair value of the performance shares and options using the valuation methodology selected, including assessingthe reasonableness of the methodology used and key inputs used in the company’s valuation model.·reviewing the adequacy of the company’s disclosures in respect of the accounting treatment of share-based payments in the financialstatements, including the significant judgments involved, and the accounting policy adopted. /s/ centurion zd cpa & co. centurion zd cpa & co. we have served as the group's auditor since 2020. | 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. provision for excess and obsolete inventory as described in notes 1 and 5 to the consolidated financial statements, on a quarterly basis management assesses the value of inventory and writes down its value for estimated excess and obsolete inventory based upon assumptions about the future demand by reviewing inventory quantities on hand and on order under non-cancelable purchase commitments in comparison to the estimated forecast of product demand to determine what inventory, if any, is not saleable at or above cost. management’s excess and obsolete analysis is based on a demand forecast which takes into account market conditions, product development plans, product life expectancy and other factors. the recorded provision for excess and obsolete inventory was $7.9 million for the year ended december 31, 2020. the principal considerations for our determination that performing procedures relating to the provision for excess and obsolete inventory is a critical audit matter are the significant judgment by management to estimate excess and obsolete inventory, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing audit procedures and in evaluating audit evidence relating to assumption regarding demand forecast. 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 provision for excess and obsolete inventory. these procedures also included, among others, testing management’s process for estimating excess and obsolete inventory, evaluating the appropriateness of the method, testing the completeness, accuracy, and relevance of underlying data used in the estimate, and reasonableness of the assumptions related to the demand forecast. evaluating the reasonableness of the excess and obsolete assumption of demand involved considering (i) the accuracy of historical demand forecasting and (ii) historical sales trends. /s/ pricewaterhouse coopers llp san jose, california february 16, 2021we have served as the company’s auditor since 2002. | 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.valuation of loss and loss adjustment expense reserves as described in notes 1 and 15 to the consolidated financial statements, loss and loss adjustment expense reserves were $6.0 billion as of december 31, 2020. these liabilities are determined using case basis evaluations and statistical analyses of historical loss patterns and represent estimates of the ultimate cost of all losses incurred but not paid. the loss reserve estimation process relies on the basic assumption that past experience, adjusted for the effects of current developments and likely trends, is an appropriate basis for management to predict future outcomes. as part of this process, management uses a variety of analytical methods that consider experience, trends and other relevant factors, as well as considers numerous quantitative and qualitative factors, including the maturity of the accident year, the level of volatility within a particular class of business, the sufficiency or quality of historical reported and paid loss and loss adjustment expenses information, legal and regulatory developments and changes in underwriting, claim handling and case reserving practices. the company’s ultimate incurred but not reported (“ibnr”) reserves are estimated by management and reserving actuaries on an aggregate basis for each line of business or coverage for loss and loss expense liabilities not reflected within the case reserves.the principal considerations for our determination that performing procedures relating to the valuation of loss and loss adjustment expense reserves is a critical audit matter are the significant judgment by management when developing their estimate. this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the various analytical methods and factors used by management in developing the estimate, such as historical loss patterns and other relevant quantitative and qualitative factors, which related to the maturity of the accident year, the level of volatility within a particular class of business, and the sufficiency or quality of historical reported and paid loss and loss adjustment expenses information. also, our audit effort included the involvement of professionals with specialized skill and knowledge to assist in performing procedures and evaluating the audit evidence obtained from these procedures.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to the company’s valuation of loss and loss adjustment expense reserves, including controls over the analytical methods applied and development of qualitative and quantitative factors. these procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in either (i) developing an independent estimate of the reserves using historical loss patterns, and other relevant quantitative and qualitative factors, which related to the maturity of the accident year, the level of volatility within a particular class of business, and the sufficiency or quality of historical reported and paid loss and loss adjustment expenses information, for reserves by line of business or coverage on a test basis, and comparison of this independent estimate to management’s actuarially determined reserves; or (ii) on a test basis for reserves by line of business or coverage, evaluating the appropriateness of management’s analytical methods and reasonableness of factors for determining the reserve balances. performing these procedures involved testing the completeness and accuracy of data provided by management. /s/ pricewaterhouse coopers llp boston, ma february 23, 2021 we have served as the company’s auditor since 1991. | 2 |
critical audit matter the critical audit matter 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. settlement agreement critical audit matter description as described in the notes to the consolidated financial statements, the company entered into a confidential settlement agreement and mutual release to settle all claims and counterclaims associated with a lawsuit over ownership of, among other things, certain plant-based technology (“settlement agreement”). the company evaluated the terms of the f-2table of contents settlement agreement as well as an additional license agreement (“license agreement”) negotiated in conjunction with the settlement agreement in accordance with the requirements of accounting standards codification (“asc”) 450, gain contingencies, and asc 606, revenue recognition. the financial reporting for the terms of the settlement agreement and license agreement was identified as a critical audit matter because of the significant judgments made by management in assessing the substance of the components of the payments required under the settlement agreement, the likelihood of collectability of the future payments due under the settlement agreement as well as the consideration due under the license agreement and the determination of whether a gain had been realized or is realizable. the assessment of the financial reporting for the terms of the settlement agreement and license agreement required auditor judgement, subjectivity and significant audit effort in performing audit procedures to evaluate the reasonableness of management’s conclusions on the settlement agreement. how the critical audit matter was addressed in the audit our principal audit procedures related to the company’s financial reporting for the settlement agreement and license agreement included, among others: •we obtained an understanding of and evaluated the design and implementation of the controls that address the risk of material misstatement for the financial reporting for gain contingencies and revenue recognition. •we evaluated the terms of the settlement agreement and license agreement, inquired of management as to their considerations by agreeing to the terms of the settlement agreement and license agreement and performed legal inquiries, including written responses from the company’s external legal counsel and independent confirmation procedures. •we evaluated the company’s considerations of collectability of amounts under the settlement agreement and license agreement through the evaluation of the support for the standby letter of credit that supports the remaining amounts to be paid under the settlement agreement and the evaluation of the credit considerations of the party obligated to make payments to the company under the license agreement. •we evaluated the reasonableness of the company’s conclusion that the gain contingency had been realized or is realizable. •we evaluated the company’s financial statement disclosures for consistency with our knowledge of the terms of the settlement agreement and license agreement and in accordance with asc 450 and asc 606. •we consulted with our national office resources in the evaluation of the financial reporting associated with the settlement agreement and license agreement. /s/ cohn reznick 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 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-1 revenue from contracts with customers description of matter the company had $40.69 million in revenues for the year ended june 30, 2021. as disclosed in note 4 to the consolidated financial statements, the company disaggregates revenue from contracts with its patients by reportable operating segments and payors. revenues are based upon billed amounts to patients and contractually agreed-upon amounts or rates with third-party payors, including governmental insurance plans and private insurers. revenues are recorded net of contractual allowances and implicit price concessions for insured and self-pay patients. management estimates the contractual allowances based upon the specified terms in the related contractual agreements or as mandated under government payer programs, which are subject to change based on changes in federal laws and regulations. implicit price concessions are based upon management’s assessment of historical write-offs and expected net collections, business and economic conditions, trends in federal, state and private employer health care coverage and other collection indicators. auditing management’s estimate of contractual allowances and implicit price concessions was complex and judgmental due to the significant data inputs and subjective assumptions utilized in determining related amounts. how we addressed the matter in our audit based on our knowledge of the company, we determined the nature and extent of procedures to be performed over revenue, including the determination of the revenue streams over which those procedures were performed. our audit procedures included the following for each revenue stream where procedures were performed: •obtained an understanding of the internal controls and processes in place over the company’s revenue recognition. •assessed the recorded revenue and accounts receivable by selecting a sample of transactions, analyzed the related third-party payer information, tested management’s identification of distinct performance obligations, and compared the amounts recognized for consistency with underlying documentation, including cash collections. •performed predictive analytical estimates of accounts receivable at year-end and revenue for the year utilizing underlying operating metrics and compared to reported balances. •performed substantive analytical procedures over contractual allowances and allowances for doubtful accounts receivable. we have served as the company’s auditor since 2004. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the 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.identification of performance obligations in the company’s revenue agreements with customers as discussed in notes 2 and 4 to the consolidated financial statements, the company derives revenue from two sources, products and services. the company’s agreements with customers often include multiple performance obligations. management must apply judgment in determining whether the individual promises represent multiple performance obligations, or a single, combined performance obligation. the company reported product revenue and service revenue of $56.6 million and $28.8 million, respectively, for the year ended december 31, 2021.we identified the evaluation of the company’s identification of performance obligations as a critical audit matter. evaluating whether the company’s promise to transfer a good or service is separately identifiable and constitutes a performance obligation required subjective and complex auditor judgment due to the varying nature and number of the promises and the underlying contractual terms.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 revenue recognition process. this included a control related to the company’s review of customer contracts for the identification of performance obligations. for a sample of the company’s revenue contracts, we (1) read the agreement to understand the contractual terms and conditions, (2) evaluated the identification of performance obligations in each arrangement by considering the nature of the promises within the contract, and (3) evaluated whether they were separately identifiable from other promised goods and services.85table of contents estimate of expected costs at completion for certain strategic partnership and services agreements as discussed in notes 2 and 4 to the consolidated financial statements, the company enters into strategic partnership and services agreements whereby the company provides services for the development of customized workflows, screening capabilities, or for customized consumables or advanced automation systems to meet a specific customer’s needs. the company generally recognizes revenue from these contracts over time, using either an input measure of progress based on costs incurred to date relative to expected costs at completion or on a time and materials basis. the company reported service revenue of $28.8 million for the year ended december 31, 2021, which included revenue from strategic partnership and services agreements.we identified the evaluation of the company’s estimate of expected costs at completion for strategic partnership and services agreements when using a cost-based input measure of progress to recognize revenue as a critical audit matter. the assumptions used in estimating the costs at completion include the amount of future labor costs and platform usage. subjective auditor judgment was required because of the estimation uncertainty associated with these assumptions.the following are the primary procedures we performed to address this critical audit matter. we evaluated the design and tested the operating effectiveness of certain internal controls related to the company’s process for estimating expected costs at completion, including controls relating to future labor costs and platform usage assumptions. we evaluated the estimate of future labor costs and platform usage for a selection of open strategic partnership and services projects by (1) inspecting the most recent updated approved project budgets and evaluating changes from the previous period, (2) interviewing project personnel to gain an understanding of the status of project activities, and (3) obtaining and analyzing underlying documentation for a selection of costs in the expected costs at completion, including future labor costs and platform usage./s/ kpmg llp we have served as the company’s auditor since 2015. | 2 |
critical audit matters the critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. contingent liabilities and other matters — large power projects in south africa — refer to notes 2 and 15 to the financial statements critical audit matter description since 2008, dbt technologies (pty) ltd (“dbt”) (a south african subsidiary of the company) has been executing contracts on two large power projects in south africa. dbt has experienced delays, cost overruns, and various other challenges associated with a complex set of contractual relationships among the end customer, prime contractors, subcontractors (including dbt and its subcontractors), and suppliers. these matters resulted in various claims and disputes between dbt and other parties involved with the projects, including allegations that dbt provided defective product and failed to meet certain project milestones. it is the company’s policy to accrue for estimated losses from legal actions or claims when events exist that make the realization of the losses probable and they can be reasonably estimated. the company does not believe it has probable losses associated with these claims and disputes. we identified the south african power project claims and disputes as a critical audit matter because the evaluation of the probability of potential outcomes of these various claims and disputes and related disclosures involves significant judgment by management. this required a high degree of auditor judgment and an increased extent of effort when evaluating the company’s legal and accounting positions and related disclosures. 49how the critical audit matter was addressed in the audit our audit procedures related to the south african power project claims and disputes included the following, among others:•we tested the effectiveness of controls related to the south african power project claims and disputes.•we obtained and evaluated legal confirmations from the company’s internal and external counsels.•with the involvement of professionals with expertise in legal and contractual claims and disputes, we held discussions with the company’s internal and external counsels to determine the status of the south african power project legal claims and disputes, the contractual provisions for settlement or other legal resolution, and their awareness of any pending or threatened litigation, claims, and assessments omitted. •we read minutes of meetings of the board of directors and its committees and conducted public domain searches for evidence of unrecorded loss contingencies or contradictory evidence related to the company’s positions related to the south african power project claims and disputes.•we evaluated the accuracy and completeness of the company’s disclosures in the financial statements for consistency with our knowledge of matters related to the south african power projects claims and disputes.contingent liabilities and other matters — asbestos product liabilities and insurance recovery assets — refer to notes 2 and 15 to the financial statements critical audit matter description the company maintains liabilities for asbestos-related claims. these claims are largely offset by insurance recovery assets. recorded asbestos product liabilities are based on a number of assumptions, including historical claims and payment experience, and actuarial estimates of the future period during which additional claims are reasonably foreseeable. insurance recovery assets are based on certain assumptions, including the continued solvency of the insurers and legal interpretation of rights for recovery under the insurance policies. we identified asbestos product liabilities and insurance recovery assets as a critical audit matter given the subjectivity of estimating projected claims, the projected settlement values of reported and unreported claims, as well as the complexity of determining the associated insurance recovery assets. this required a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial and insurance specialists, when performing audit procedures to evaluate the reasonableness of the asbestos product liabilities and the associated insurance recovery assets. how the critical audit matter was addressed in the audit our audit procedures related to asbestos product liabilities and insurance recovery assets included the following, among others:•we tested the effectiveness of controls related to asbestos product liabilities and insurance recovery assets.•we evaluated the methods and assumptions used by management to estimate the asbestos product liabilities by testing the underlying data that served as the basis for the actuarial estimates, including historical claims and payment experience, to test that the inputs to the actuarial estimates were complete and accurate.•with the assistance of our actuarial specialists, we developed independent estimates of the asbestos product liabilities and compared our estimates to management’s estimates.•with the assistance of our insurance specialists, we assessed the ongoing financial solvency of insurance carriers and the recoverability of the recorded insurance recovery assets.•we independently confirmed a selection of insurance policies directly with insurance carriers.•we developed an independent expectation of the insurance recovery assets and compared our estimates to management’s estimates./s/ deloitte & touche llp charlotte, north carolina february 13, 2020we have served as the company’s auditor since 2002. | 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. goodwill impairment test – pump reporting unit as described in notes 1 and 6 to the consolidated financial statements, the company’s consolidated goodwill balance was $1,196.5 million as of december 31, 2021, and the goodwill associated with the pump reporting unit was approximately $467 million. the value of goodwill is tested for impairment as of december 31 each year or whenever events or circumstances indicate goodwill may be impaired. if the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is impaired and an impairment loss is recorded equal to the excess of the carrying value over its fair value. fair value is estimated using a discounted cash flow analysis, which requires management to make various judgmental assumptions about future sales, operating margins, growth rates and discount rates.the principal considerations for our determination that performing procedures relating to the goodwill impairment test of the pump reporting unit is a critical audit matter are (i) the significant judgment by management when estimating the fair value of the reporting unit; (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumption related to the discount rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls relating to management’s goodwill impairment test, including controls over the valuation of the pump reporting unit. these procedures also included, among others (i) testing management’s process for estimating the fair value of the pump reporting unit, (ii) evaluating the appropriateness of the discounted cash flow analysis, (iii) testing the completeness and accuracy of underlying data used in the analysis, and (iv) evaluating the significant assumption used by management related to the discount rate. professionals with specialized skill and knowledge were used to assist in the evaluation of the company’s discounted cash flow analysis and assumption related to the discount rate./s/ pricewaterhouse coopers llp dallas, texas february 23, 2022we have served as the company’s auditor since 2000. | 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 the 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. auto liability and workers’ compensation claims reserve accrual as described further in notes 1 and 7 to the consolidated financial statements, the company is self-insured for a portion of its risk related to auto liability and workers’ compensation. self-insurance results when the company insures itself by maintaining funds to cover possible losses rather than by purchasing an insurance policy. the company accrues for the cost of the self-insured portion of unpaid claims by evaluating the nature and severity of individual claims and by estimating future claims development based upon historical development trends. the actual cost to settle self-insured claim liabilities may differ from the company’s reserve estimates due to legal costs, claims that have been incurred but not reported, and various other uncertainties. we identified the estimation of auto liability and workers’ compensation claims accruals subject to self-insurer insurance retention of $2.0 million and $1.0 million, respectively, as a critical audit matter. auto liability and workers’ compensation unpaid claim liabilities are determined by projecting the estimated ultimate loss related to a claim, less actual costs paid to date. these estimates rely on the assumption that historical claim patterns are an accurate representation for future claims that have been incurred but not completely paid. the principal considerations for assessing auto liability and workers’ compensation claims as a critical audit matter are the high level of estimation uncertainty related to determining the severity of these types of claims, as well as the inherent subjectivity in management’s judgment in estimating the total costs to settle or dispose of these claims. our audit procedures related to this critical audit matter included the following, among others:•we tested the effectiveness of controls over auto liability and workers’ compensation claims, including the completeness and accuracy of claim expenses and payments.f-1•we tested management’s process for determining the auto liability and workers’ compensation accrual, including evaluating the reasonableness of the methods and assumptions used in estimating the ultimate claim losses with the assistance of an actuarial specialist. •we tested management's claim reserve estimates by inspecting source documents to test key attributes of the claims data./s/ grant thornton llp we have served as the company’s auditor since 2018. | 3 |
critical audit matters the critical audit matter communicated below is amatter arising from the current period audit of the financial statements that was communicated or required to be communicated to the auditcommittee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especiallychallenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on thefinancial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinionon the critical audit matter or on the accounts or disclosures to which it relates. valuation and accounting for stock-based compensation description of the matter as described in notes 8 and 11 to the financial statements,the company awarded a total of 1,000,000 options to employees and 250,000 warrants to nonemployees during 2020. the company also enteredinto separation and severance agreements with two employees during the year ended december 31, 2020 and agreed to accelerate the vestingperiod of their options. the company recognized an aggregate stock-based compensation of $20.8 million during the year ended december31, 2020, which includes the above instruments. auditing management’s valuation and accountingfor stock-based compensation required subjective judgement to analyze the terms within the stock-based agreements to determine that weconcurred with management’s valuation and calculations. how we addressed the matter in our audit our audit procedures included, amongst others: we tested the option and warrant agreements to determinewhether management appropriately evaluated such agreements on the date of grant.we reviewed the vesting terms of the option and warrantagreements to determine the stock-based compensation is recorded in the proper period.we reviewed the terms of the separation and severance agreements to determinethat any modifications related to the options thereto were appropriately recorded.we tested the underlying expenses and other informationthat served as the basis for valuation and tested inputs and terms used in the valuation to determine completeness and accuracy.we evaluated the reasonableness of the valuationmethod and assumptions used by management to calculate the values on the date of grant by developing an independent estimate of the volatilityby utilizing third party historical data of closing prices./s/ marcum llp marcum llp we have served as the company’s auditor since 2014. | 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.f-2table of contents goodwill - refer to notes 2 and 10 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 determines the fair value of its reporting units using the discounted cash flow model and the market approach, as applicable. the determination of fair value using the discounted cash flow model requires management to make significant judgments and estimates, which include assumptions related to long-term future growth rates and estimated future cash flows, discounted at an appropriate risk-adjusted rate. the determination of fair value using the market approach requires management to make significant assumptions related to market multiples of revenues and earnings derived from comparable publicly-traded companies with characteristics similar to the reporting unit.the goodwill balance was approximately $350 million as of december 31, 2019, of which approximately $164 million has been allocated to the sci oinspire holdings, inc. (scio) reporting unit. the scio reporting unit was formed as a result of the scio acquisition in july 2018 and its fair value was set at that time. as a result, the fair value of this reporting unit was not substantially in excess of its carrying value. significant estimates and assumptions are used by management to determine fair value and, thus, sensitivity in fair value may result from changes in these estimates. this requires a high degree of auditor judgment and an increased extent of efforts, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions. ______________________________________________________________________________________________________how the critical audit matter was addressed in the audit our audit procedures related to the assumptions for long-term future growth rates and estimated future cash flows, and the selection of discount rates for the scio reporting unit included the following, among others: •we tested the effectiveness of controls over the company’s goodwill impairment evaluation, including those over the determination of fair value of the scio reporting unit, such as controls related to management’s forecasts and selection of discount rates. •we evaluated management’s ability to accurately forecast by comparing actual results to management’s historical forecasts, reviewing internal communications between management and the board of directors, and reviewing forecasted information included in company press releases, and analyst and industry reports of the company and companies in its peer group.•with the assistance of our fair value specialists, we evaluated the growth rates and discount rates, including testing the underlying source information and the mathematical accuracy of the calculations.•with the assistance of our fair value specialists, we evaluated revenue and earnings 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 also evaluated all of the significant assumptions in the aggregate to determine if there is any indication of management bias. /s/ deloitte & touche llp new york, new york february 27, 2020we have served as the company's auditor since 2018. | 1 |
critical audit matters thecritical audit matters communicated below are matters arising from the current period audit of the consolidated financial statementsthat were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures thatare material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. the communicationof 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 accountsor disclosures to which they relate. f-1 valuationof derivative liabilities descriptionof the matter asdisclosed in note 8 to the consolidated financial statements, the company has issued several convertible notes which are outstanding.the note holders have the right to convert principal and accrued interest outstanding into shares of common stock at a discountedprice to the market price of our common stock. the conversion feature is recognized as an embedded derivative and is valued usinga binomial option pricing model. in addition, as disclosed in note 9, the company has issued shares of series c convertible preferred shares, with an annual accruing dividend, for cash. the preferred shares provide the holder with the opportunity to redeem theshares at various dates. the holders may convert the series c shares into registrant’s common shares, commencing on the6-month anniversary of the closing at a discount to the public market price. the company values such liability based on the binomial option pricing model. auditing the company’s valuation of its derivatives is challenging as the company uses complex valuationmethodologies that incorporate significant assumptions which include the discount rate and forecasted volatility of the company’scommon stock price. the valuation includes assumptions about economic and market conditions with uncertain future outcomes. how we addressed the matter in our audit totest the valuation of the derivative liability, our audit procedures included, among others, evaluating the methodologies usedin the valuation model and testing the significant assumptions. for example, we compared the forecasted volatility of the company’scommon stock price to its historical volatility. we also assessed the completeness and accuracy of the underlying data. we involvedour external valuation specialists to assist in our evaluation of the significant assumptions and methodologies used by the company.we also evaluated the company’s financial statement disclosures related to these matters included in note 8 and 9 to the consolidated financial statements. collectabilityof amounts due from lessees descriptionof the matter asdescribed in note 4 to the consolidated financial statements, at december 31, 2021, the company had amounts outstanding from itssublessee, and the company subleases two properties in colorado to royal asset management at december 31, 2021. at december 31,2021, the outstanding receivables from the subleases approximated $1,200,000 and during the year ended december 31, 2021, the company’s subleases with ram accounted for 100% of the company’s revenues. asc 842 requires the company to assessthe probability of collecting substantially all of the contractual lease payments. if collectability of substantially all of thelease payments through maturity is not probable, all or a portion of the straight-line rent receivable and other lease receivablesmay be written off, and the rental income recorded during the period would be limited to lesser of the income that would havebeen recognized if collection were probable, and the lease payments received. auditing the company's collectability assessmentis complex due to the judgment involved in the company’s determination of the collectability of future lease payments fromits operators. the determination involves consideration of experience with the lessee, including the lessee’s payment history,if any, an assessment of the financial strength of the lessees, future contractual rents, and the timing of expected payments. how we addressed the matter in our audit totest the rental income recognized, we performed audit procedures that include, among others, confirming the amounts receivablebalance, evaluating the data and assumptions used in determining whether substantially all of the future lease payments were probablebased on the lessee’s payment history, underlying collateral and status of repayment. in addition, we tested the completenessand accuracy of the data used in management’s collectability analysis. macias gini & o’connell llp april15, 2022 wehave served as the company’s auditor since 2019 | 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. recognition and disclosure of research and development costs description of the matter as described in note 2 of the consolidated financial statements, research and development costs are expensed as incurred. significant estimates include assessment of work in progress of multiple third-party contracts and evaluation whether the research and development costs are properly accrued for and disclosed in the reporting period. recognition and disclosure of research and development costs was considered a critical audit matter due the material impact on disclosures in the consolidated financial statements and the nature and extent of audit effort required to evaluate the results of audit procedures. how we addressed the matter in our audit we examined third-party contracts, statements of work and purchase orders, and discussed with personnel to determine the progress or stage of completion of services, the agreed-upon fee to be paid for such services, and probability of milestones and contingent payments. /s/ friedman llp we have served as the company’s auditor since 2019. | 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. accrued clinical trial and manufacturing activities description of the matter as discussed in note 1 to the consolidated financial statements, the company has recorded $33.9 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. 75 valuation of royalty financing obligation description of the matter as described in note 3 to the consolidated financial statements, the company entered into a royalty purchase agreement (“rpa”) in december 2020 with a third party. pursuant to the rpa, the company received proceeds of $125.0 million in exchange for the right to receive royalty payments based on future net revenues of the company’s drug, orladeyo. the company recorded the financing as a non-current liability instrument (royalty financing obligation) on the balance sheet at its carrying value of $124.7 million as of december 31, 2020 and imputed interest expense associated with this liability 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. the company evaluates the interest rate quarterly based on its current revenue forecasts utilizing the prospective method. auditing the royalty financing obligation was complex and highly judgmental due to the estimation uncertainty in determining the effective interest rate. the company’s effective interest rate model includes revenue projections for which royalties will be paid, which are sensitive to significant assumptions (including population, penetration and sales price) 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 obligation, including controls over management’s review of the revenue projections within the model. to evaluate the royalty financing obligation, our audit procedures included, among others, assessing the underlying data and assumptions used by the company in its effective interest rate model. 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 schedule and estimate of royalties using the effective interest method, and performed sensitivity analyses to evaluate the changes in the effective interest rate, and associated interest expense, that would result from changes in the assumptions. /s/ ernst & young llp 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, finance, risk, and cybersecurity 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 pension and other post-retirement benefit obligations description of the matter at september 30, 2021, the company’s pension benefit obligation was $4.2 billion and the company’s other post-retirement benefit obligation was $498 million. the company updates certain actuarial assumptions used to measure the pension benefit and other post-retirement benefit obligations at september 30 or upon a remeasurement event, as more fully described in note 22 to the consolidated financial statements.auditing the pension benefit and other post-retirement benefit obligations was complex due to the judgmental nature of the assumptions, including the discount rates, future compensation levels, mortality rates, healthcare cost trends, and cost of living adjustment, used in the company’s measurement process. these assumptions have a significant effect on the projected benefit obligations.161table 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 for the measurement of pension benefit and other post-retirement benefit obligations. for example, we tested controls over management’s review of the pension benefit obligation and other post-retirement benefit obligation calculations, the relevant data inputs and the significant actuarial assumptions described above.to test the pension benefit and other post-retirement benefit obligations, our audit procedures included, among others, evaluating the methodologies used, the significant actuarial assumptions described above, and the underlying data used by the company. we compared the actuarial assumptions used by the company to historical trends and evaluated the pension benefit and other post-retirement benefit obligations. in addition, we involved an actuarial specialist to assist with our procedures. we evaluated the company’s methodology for determining the discount rates that reflect the maturity and duration of the benefit payments and used to measure the pension benefit and other post-retirement benefit obligations. to evaluate the future compensation levels, mortality rates, healthcare cost trends and cost of living adjustment, we assessed whether the information is consistent with publicly available information, and whether any market data adjusted for entity-specific adjustments was applied. we also tested the completeness and accuracy of the underlying data, including the participant data, used in the determination of the projected benefit obligations.composite depreciation rates description of the matter at september 30, 2021, the net book value of the company’s completed plant was $31.7 billion and depreciation expense for the year then ended was $1.4 billion. as discussed in note 1 of the consolidated financial statements, the composite method aggregates assets with similar economic characteristics into groups and depreciates each of these groups as one asset. when using the composite method, an underlying assumption is that each group of assets, as a whole, is used and depreciated to the end of the group’s recoverable life.under the composite method, a depreciation study is completed to review an asset’s service life, salvage value, accumulated depreciation and other factors. a depreciation study is performed at least every five years, with the most recent study performed in 2021. these rates will be the basis of depreciation expense, and therefore will have a significant effect on depreciation expense beginning on october 1, 2021.auditing the 2021 depreciation study rates for assets subject to the composite method was complex due to the nature of the methods used in the depreciation study to determine the useful service lives and salvage values of the company’s assets. 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 related to the depreciation study, including controls over management’s review of the inputs and methods used in the depreciation study. to test the estimated service lives and salvage values of the company’s group-life assets, we performed audit procedures that included, among others, obtaining the depreciation study provided by the company’s third-party engineers and assessing the completeness and accuracy of the data provided to and used by the third-party. we also involved our specialist to evaluate the study. specifically, our specialist assessed the adequacy and relevance of the data; the nature and basis for the adjustments and calculations used in the study; and the methods and assumptions used by the company’s third-party specialist and management in determining the service lives and salvage values of assets to perform the depreciation study. /s/ ernst & young llp we have served as the company’s auditor since 2007c | 5 |
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 – estimated costs at completion as described in note 1 to the consolidated financial statements, the vast majority of the company’s revenues from long-term contracts to develop and deliver complex equipment built to customer specifications are derived from contracts with the u.s. government. a portion of the company’s total revenues of $2.3 billion are from long-term contracts. performance obligations related to developing and delivering complex equipment built to customer specifications under long-term contracts are recognized over time as these performance obligations do not create assets with an alternative use to the company and the company has an enforceable right to payment for performance to date. to measure the transfer of control, revenue is recognized based on the extent of progress towards completion of the performance obligation. the company generally uses the cost-to-cost measure of progress for its contracts because that best depicts the transfer of control to the customer which occurs as the company incurs costs on its contracts. under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. estimating the total costs at completion of a performance obligation requires management to make estimates related to items such as subcontractor performance, material costs and availability, labor costs and productivity, and the costs of overhead. the principal considerations for our determination that performing procedures relating to revenue recognition – estimated costs at completion is a critical audit matter are there was significant judgment by management when developing the estimated costs at completion on individual fixed-price contracts. this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating evidence related to the estimated costs at completion, including the evaluation of management’s judgment as it relates to the subcontractor performance, material costs and availability, labor costs and productivity, and the costs of overhead. f-2 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 completeness and accuracy of estimated costs at completion. the procedures also included, among others, evaluating and testing management’s process for developing estimates of total estimated costs at completion for long-term contracts for a sample of contracts. this included testing the completeness and accuracy of costs incurred to date and evaluating the reasonableness of significant estimates used by management, including subcontractor performance, material costs and availability, labor costs and productivity, and overhead costs, and considering factors that could affect the accuracy of those estimates. evaluating the reasonableness of the significant assumptions used involved assessing management’s ability to reasonably estimate costs at completion by (i) testing samples of third-party quotes or bids for materials and subcontractor services, (ii) assessing the reasonableness of estimates of labor and overhead in comparison to actual labor and overhead costs incurred to date, and (iii) evaluating the timely identification of circumstances that may warrant a modification to estimated costs to complete, including actual costs in excess of estimates. /s/ pricewaterhouse coopers llp san diego, california may 28, 2020 we have served as the company’s auditor since 1992. | 3 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. valuation of acquired right of use assets as described in note 3 to the consolidated financial statements, the company recorded $5 million of finance lease and financing obligation assets, net and $9 million of operating lease assets, net (collectively “right of use assets”) relating to a business combination completed during the year ended march 27, 2021. the right of use assets acquired are recorded at the present value of remaining lease payments adjusted to reflect favorable or unfavorable market terms of the lease. management applied significant judgment in estimating the favorable or unfavorable market terms used to value the acquired right of use assets, which is estimated based on comparable market data. the principal considerations for our determination that performing procedures relating to the valuation of acquired right of use assets is a critical audit matter are the significant judgment by management in estimating the favorable or unfavorable market terms used to value the acquired right of use assets and the comparable market data assumption. this in turn led to a high degree of auditor judgment, effort, and subjectivity in performing procedures related to the favorable or unfavorable market terms used to value the acquired right of use assets and the comparable market data assumption. in addition, the audit effort involved the use of professionals with specialized skill and knowledge. addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. these procedures included testing the effectiveness of controls over the estimation of the value of the acquired right of use assets, including controls over the estimate of favorable or unfavorable market terms. these procedures also included, among others, (i) reading the purchase agreement; (ii) testing management’s process for estimating the value of the acquired right of use assets; and (iii) evaluating the appropriateness of the valuation method and testing the completeness and accuracy of the underlying data. professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of the comparable market data assumption. /s/ pricewaterhouse coopers llp rochester, new york may 26, 2021 we have served as the company’s auditor since at least 1984. | 2 |
critical audit matter.basis for opinion these financial statements are the responsibility of the company’s management. our responsibility is to express an opinion on the company’s financial statements based on our audits. we are a public accounting firm registered with the pcaob and are required to be independent with respect to the company in accordance with the u.s. federal securities laws and the applicable rules and regulations of the securities and exchange commission and the pcaob.we conducted our audits in accordance with the standards of the pcaob. those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. we believe that our audits provide a reasonable basis for our opinion.critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are 51table 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 $422.7 million and $380.0 million as of december 31, 2021 and 2020, respectively. 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 and servicing cost. auditing the valuation of the ms rs was complex and involved a high degree of subjectivity due to the nature of the assumptions. in particular, the valuation of the ms rs was sensitive to assumptions such as discount rate and servicing cost, 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 totaled $113.2 million and $148.3 million, as of december 31, 2021 and 2020, respectively. the company’s allowance for loss-sharing obligations related to the fannie mae dus program totaled $21.7 million and $30.3 million as of december 31, 2021 and 2020, respectively. as explained in note 2 to the consolidated financial statements, management estimated the allowance for credit losses and allowance for loss-sharing obligations related to the fannie mae dus program for the expected life 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 allowance for loss-sharing obligations were sensitive to significant assumptions, such as reasonable and supportable forecast periods, and depending on the nature of the loan, debt service coverage ratio, loan-to-value, capitalization rates, and expected life of the loan or contractual period in which the company is exposed to credit risk. how we addressed the matter in our audit we obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the 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 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. goodwill — refer to notes 1 and 9 to the financial statements critical audit matter description the company’s consolidated goodwill balance was $464 million at december 25, 2021. goodwill is tested for impairment by management at least annually at the reporting unit level, or more often if an indicator of impairment is present, by comparing allocated carrying value of goodwill to the estimated fair value of the respective reporting unit or through a qualitative assessment to determine whether it is not more likely than not that the fair value of the reporting units is less than their respective carrying amounts. the determination of fair value of the reporting units, or events and conditions affecting fair value in the case of a qualitative analysis, require management to make significant estimates and assumptions related to forecasts of future revenues, cost of sales, expenses and the weighted-average cost of capital for each reporting unit. an adverse change in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on the financial statements.during the second quarter of 2021, the company determined that, due to the sustained impacts of the covid-19 pandemic, an indicator of potential impairment existed and performed an interim quantitative goodwill impairment test for its compu com reporting 56 unit. the company used the market and discounted cash flow approaches to determine the fair value of its compu com reporting unit and recognized an impairment charge of $114 million for the compu com reporting unit.as of november 21, 2021, the company performed its annual impairment assessment. the annual impairment assessment was performed using a quantitative assessment for the contract, varis and compu com reporting units. based upon these tests, it was concluded that the fair value of the contract and varis reporting units exceeded their carrying amounts. the margin of passage for the contract reporting unit was 16% and for varis was 35%. the quantitative assessment of the compu com reporting unit was based on the fair value of the compu com division on its date of sale, december 31, 2021. as the sale resulted in a significant loss, the remaining goodwill balance of $112m was written down to $0. given the significant judgments made by management to estimate the fair value of the compu com, contract, and varis reporting units, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to forecasts of future revenues, cost of sales, expenses, and the weighted-average cost of capital, 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 management’s judgments related to forecasts of future revenues, cost of sales, expenses, and weighted-average cost of capital for the compu com, contract, and varis reporting units included the following, among others: •we tested the effectiveness of controls relating to management’s goodwill impairment tests, including those over the forecasts and the weighted-average cost of capital. •we assessed the reasonableness of the various scenarios considered by management, which included multiple scenarios for the compu com, contract, and varis reporting units in which each scenario contained independent assumptions of economic recovery and future cash flow estimates. we then assessed the reasonableness of the weighting applied by management to the various scenarios. once the scenarios had the weighting applied, we then assessed the reasonableness of the forecast selected to be used in the quantitative test. •we evaluated the reasonableness of management’s revenue, cost of sales and expenses forecasts by comparing forecasts to (1) the actual historical results of the compu com and contract reporting units, (2) internal communications amongst management and the board of directors, (3) external communications made by management to analysts and investors, (4) evidence obtained throughout the audit, and (5) industry reports discussing the operating forecasts for the technology services industry. •we evaluated the reasonableness of the determined company-specific risk premium (csrp) added to the weighted-average cost of capital through assessing the de-risked cash flow assumptions for the contract and compu com reporting units. •we developed a range of independent estimates based on the key inputs into the discounted cash flow model and compared those to the assumptions used by management. •with the assistance of our fair value specialists, we evaluated the valuation methodology and assumptions used to determine the fair value of the compu com, contract, and varis reporting units, such as the weighted average cost of capital, by o testing the underlying source information and mathematical accuracy of the calculations o for the weighted-average cost of capital, comparing the amount used by management to the amounts associated with other technology services companies with a similar risk profile; and o evaluating the interaction between the weighted-average cost of capital and the forecasts to understand and sensitize management’s assumptions regarding risk inherent in the forecast. /s/ deloitte & touche llp boca raton, florida february 23, 2022 we have served as the company's auditor since 1990. | 1 |
critical audit matters the critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. the communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.valuation of diagnostics information services (dis) business accounts receivable - contractual allowances as described in note 3 to the consolidated financial statements, management estimates the amount of consideration it expects to be entitled to receive from customer groups, using the portfolio approach, in exchange for providing services. these estimates include the impact of contractual allowances, including payer denials, and price concessions. the portfolio approach includes the following groups of customers: healthcare insurers, government payers, client payers and patients (22%, 11%, 42% and 20% of consolidated net accounts receivable as of december 31, 2019, respectively, as disclosed by management). the dis business accounted for 95% of consolidated net accounts receivable ($1,063 million) as of december 31, 2019. net revenues and accounts receivable recognized from healthcare insurers and government payers consist of amounts billed net of contractual allowances for differences between amounts billed and the estimated consideration the company expects to receive from such payers, which considers historical denial and collection experience and, additionally for healthcare insurers, the terms of the company’s contractual arrangements. as disclosed by management, the process for estimating revenues and the ultimate collection of receivables associated with the dis business involves significant assumptions and judgments.the principal considerations for our determination that performing procedures relating to the valuation of dis business accounts receivable - contractual allowances is a critical audit matter are the estimate of net collectible accounts receivable, specifically contractual allowances, involves significant judgment and estimation on the part of management. this in turn led to significant auditor judgment and effort in performing procedures to evaluate the audit evidence obtained related to the contractual allowances. 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 dis business accounts receivable, which included controls over management’s methodology and data used to estimate contractual allowances. these procedures also included, among others, testing management's process for developing the estimate for contractual allowances, including evaluating the appropriateness of the methodology and testing the historical contractual allowance and collection data from the company’s billing system, which is an input to the methodology. additionally, the reasonableness of management’s assumptions for contractual allowances was evaluated by comparing actual cash collected to the prior year estimate (net accounts receivable)./s/pricewaterhouse coopers llp florham park, new jersey february 20, 2020we have served as the company’s auditor since 1995. | 4 |
critical audit matters the critical audit matters communicated below are matters arising from the current period audit of the 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 2(n) and 21 to the consolidated financial statements, the company recognized revenue from theater systems of $107.9 million which represents a large portion of total revenues of $395.7 million for the year ended december 31, 2019. 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 revenue 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; (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.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 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 70transaction 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 2(m) and 11 to the consolidated financial statements, the company had total tax reserves of $14.7 million as of december 31, 2019 related to uncertain tax positions. the company is subject to ongoing tax 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. as management has further disclosed, tax audits can result in subsequent assessments where the ultimate resolution may result in the company owing additional taxes above what was provided for. tax reserves for uncertain tax positions are adjusted by management to reflect (i) their best estimate of the outcome of examinations and assessments and changing facts and circumstances, such as the completion of a tax audit, expiration of a statute of limitations, the refinement of an estimate, and (ii) 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) there was significant judgment required 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; this in turn led to (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate the recognition and measurement of uncertain tax positions. also, the evaluation of audit evidence available to support the tax reserves for uncertain tax positions required significant auditor judgment as the nature of the evidence is often subjective, 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 the recognition of the tax reserves for uncertain tax positions, and controls addressing the completeness of the uncertain tax positions, as well as 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. /s/ pricewaterhouse coopers llp chartered professional accountants, licensed public accountants toronto, canada february 19, 2020we have served as the company's auditor since 1987, | 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.44 defense segment revenue –refer to note 3 to the financial statements critical audit matter description the company’s defense segment recognized revenue on long-term contracts with the u.s. government for the production of goods, the provision of services, or a combination of both totaling $2,024.7 million for the year ended september 30, 2019. the company’s firm-fixed long-term contracts are typically accounted for as a single performance obligation because the goods and services are generally customized and have complex inter-relationships and the company is responsible for overall management of the contract. the company recognizes revenue on defense segment contracts as performance obligations are satisfied and control of the underlying goods and services is transferred to the customer. the company measures progress based on the ratio of costs incurred to date to total estimated costs for the performance obligation under the cost-to-cost method of percentage-of-completion. the estimated costs to complete for the joint light tactical vehicle (jltv) and family of medium tactical vehicles (fmtv a2) contracts represent the majority of the total estimated costs to complete in the defense segment as of september 30, 2019. given the complexity of these contracts and the length of the contract terms, together with the significant judgments necessary to estimate costs used to measure progress on these contracts, auditing the estimates of costs for these contracts required extensive audit effort and a high degree of auditor judgment, especially given the risks of contract performance, such as labor and material costs, schedule, and duration.how the critical audit matter was addressed in the audit our audit procedures related to the estimated costs for the jltv and fmtv a2 contracts included the following, among others: •we tested the effectiveness of controls over revenue recognized over time, including management’s controls over estimated costs.•we evaluated the appropriateness and consistency of the methods and assumptions used by management to develop the estimates of costs to completion.•we tested the mathematical accuracy of management’s estimates of costs to completion. •we evaluated management’s ability to achieve the estimates of costs to completion by comparing the estimates to management’s work plans, engineering specifications, and supplier contracts, and performing corroborating inquiries with the company’s project managers and engineers.•we evaluated management’s ability to accurately estimate costs to completion by comparing actual results to management’s historical estimates and actual results on similar completed contracts./s/ deloitte & touche llp milwaukee, wisconsin november 19, 2019we have served as the company’s auditor since 2002. | 3 |
critical audit matters manuals and handbooks: absence of written manuals and handbooks is the concern for the audit. since the company is involving experienced professionals for the day to day operations, the need for specialized training was not felt. so also, the need for the written manuals and handbooks. however, the management is aware of the need for standard operating procedures to educate and train its growing general staff. preparation of manuals and handbooks has begun. 21 table of contents item 9a. changes in and disagreements with accountants on accounting and financial disclosure none. item 9b. controls and procedures evaluation of disclosure controls and procedures. with the change in the management, this company is contracting to receive the administrative support and is planning to provide adequate controls and procedures in place in due course. for the current quarter, the company has few transactions. the book-keeping and the financial statement preparations were handled by qualified professionals and hence this management believes that there are adequate controls and procedures for the current period covered by this report which are effective to ensure that the information required to be disclosed by us in reports filed under the securities exchange act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the sec’s rules and forms and (ii) accumulated and communicated to our management, as appropriate to allow timely decisions regarding disclosure. it has been determined by our management that the company has adequate segregation of duties consistent with control objectives and has also adapted various accounting policies in accounting and financial reporting with respect to the requirements and application of gaap and sec requirements. the company has effective controls over the financial disclosure and reporting processes. management’s annual report on internal control over financial reporting the management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in rules 13a-15(f) and 15d-15(f) of the exchange act. the internal control system is 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. the system of internal control over financial reporting prevent or detect misstatements. all projections such as evaluation of effectiveness to future periods, are provided by well experienced professionals, while the same can be subject to inherent risks such as changing conditions, or that the degree of compliance with the policies or procedures may deteriorate. the management conducts quarterly evaluation of the effectiveness of internal control over financial reporting using the criteria set forth by the committee of sponsoring organizations of the treadway commission (coso) in internal control—integrated framework. based on its evaluation, the company is constantly requiring the experts to improve the system so as to remove any material weakness in our internal control over financial reporting. a material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. the material weakness is eliminated by segregation of duties in financial reporting, as our financial reporting and all accounting functions are performed by experts with adequate oversight by a professional with accounting expertise. in general, there have been no changes in our system of internal controls over financial reporting during the current period of reporting, while the management has been constantly reviewing and eliminating any area of material weakness. the management assertion is adequate internal control over financial reporting. however, this company being not a fully reporting company is not required to adhere to detailed and exhaustive procedures. item 9c. other information none. 22 table of contents part iii item 10. directors, executive officers and corporate governance the following table sets forth the names of our current directors and executive officers. also, the principal officers and positions with us held by each person and the date such person became our director, executive officer. our executive officers are appointed by our board of directors. our directors serve until the earlier occurrence of the election of his or her successor at the next meeting of stockholders, death, resignation or removal by the board of directors. sada cumber chairman of the board of directors 1st october, 2019 john s butler director 1st october, 2019 geoffrey s connor director 1st october, 2019 saskya bedoya president 22nd january 2019 murugan venkatchalam secretary 30th june 2019 gabriel blanco controller 10th october, 2019 biographies sada cumber - chairman of the board of directors. for more than the past five years, mr. cumber has been a self-employed entrepreneur focused on a myriad of small and large industries. mr. cumber served as the first u.s. special envoy to the oic, a 57-nation ngo. as a u.s. ambassador he engaged in hard and soft diplomacy, advancing the interests of america and its allies while building new partnerships and keeping pressure on america’s rivals. additionally, drawing on his diplomatic, international, and entrepreneurial experience, he speaks and lectures internationally. he has been written about and quoted in publications including forbes, the wall street journal, and business journal. his editorials have appeared in the hill and daily signal. prior to his appointment as special envoy, mr. cumber was a technology entrepreneur who founded over a dozen companies, some of which were acquired by fortune 500 companies; most notable – chairman and ceo of psionic technologies, inc. (a cybersecurity firm acquired by cisco systems, nasdaq: csco); co-founder of applied science fiction (assets acquired by kodak, nyse: ek); owner of triumph flexo industries (acquired by american greetings, nyse: am). mr. cumber’s current projects include eden llc memory care, plumbrook global consulting company, and tcms, which is developing a digital device that applies cosmetics pixel by pixel on human skin. at the intersection of entrepreneurship with public policy and higher education, mr. cumber has chaired the texas 5-year strategic plan for international business and served on the texas economic development board, the texas emerging technology fund, world congress information technology, the texas business council, the governor’s task force on higher education, and the texas higher education coordinating board. mr. cumber was born in 1951. he holds a bachelor’s degree in commerce and a master’s degree in history, both from the university of karachi. john s butler – director. professor john sibley butler is a globally recognized expert in management, entrepreneurship, sociology, and the interconnectivity between them. his research is in the areas of organizational behavior and new venture development. at the university of texas at austin he holds the j. marion west chair for constructive capitalism in the graduate school of business (department of management) and the darrell k. royal regents professorship in ethics and american society (sociology). from 2002 to 2013 he directed the ic2 institute, an organization dedicated to the creation of new ventures throughout the world, where he continues to serve as research fellow. he is a former director of herb kelleher center for entrepreneurship. professor butler also occupies the distinguished visiting professor position at aoyama gakuin university in tokyo, japan, where he lectures on new venture start-ups and general entrepreneurship and holds the same status at peking university in china. his vision was essential in the emergence of austin, texas as a technology hub. he has served as a consultant for many firms as well as the u.s. military. at this time professor butler is management consultant for state farm insurance companies. he was a distinguished member of the advisory team of governor george bush’s 2000 presidential campaign. professor butler has appeared on over 30 radio and television programs, including eye on america (cbs nightly news), the jim leher news hour, cbs radio talk show, the osgood report, and public radio. his research has appeared in the wall street journal, the new york times, the chicago tribune, time magazine, u.s. news and world report, and other newspapers and magazines across america. his publications include framework for research on leadership, cohesion, and values; entrepreneurship and self-help among black americans: a reconsideration of race and economics; all that we can be: black leadership and racial integration the army way (with charles c. moskos – winner of the washington monthly best book award); and immigrant and minority entrepreneurship: the continuous rebirth of american communities (with george kozmetsky, forthcoming). professor butler was born in 1947. he earned his undergraduate from louisiana state university in baton rouge and his ph.d. from northwestern university in evanston, illinois. he is a decorated vietnam veteran. 23 table of contents geoffrey s. connor – director. geoffrey s. connor is an attorney, businessman, former government official, consultant, scholar and advisor in international, regulatory, environmental, and governmental affairs. mr. connor served as texas secretary of state from 2003 to 2005, after having served as deputy secretary of state 2001 to 2003. he was the first modern texas secretary of state to use the office to promote texas business internationally. as the state’s chief international officer, connor led trade missions to many diverse countries, including china, mexico, brazil, france, japan, trinidad and tobago, vietnam, and ethiopia. he also hosted visiting international dignitaries and investor groups in texas making it one of the leading destinations for foreign investment. during mr. connor’s tenure, texas overtook california as america’s largest exporting state. his previous public service included senior positions in the governor’s office, department of agriculture and texas commission on environmental quality. in the private sector, mr. connor practiced at top-tier law firms in administrative, regulatory and governmental affairs. he cofounded texas global, an international strategic consulting firm that advised clients on government affairs, economic development, and corporate growth. mr. connor was also a cofounder of a boutique investment advisory firm. mr. connor has maintained a strong international focus with ties to a variety of international communities in texas and the united states. he is frequently sought as a speaker on issues of international politics, regulatory law, the world economy, and cross-cultural cooperation. he also serves as a contact and advisor for foreign businesses and organizations seeking to achieve business or policy goals in the u.s., as well as by u.s. entities looking to enhance their performance or impact abroad. his continued work with international clients has taken him to the uae, malta, new zealand, barbados, pakistan and india. mr. connor served as an international election monitor for presidential elections in liberia in 2006, georgia in 2008, and ukraine in 2010. he is a national security fellow with the clements center for national security at the university of texas at austin. he previously worked as director of strategy for the center and helped to organize conferences of leading scholars in the fields of national security, diplomacy, intelligence and defense. mr. connor is active in a number of civic, educational, and professional organizations. he is a member of the board of directors for the asia society of texas, the liberal arts advisory board of texas state university and the austin council on foreign affairs. he is member of the explorers club of new york, the venerable order of st. john, the sovereign military order of the temple of jerusalem, and also serves as a jag officer in the texas state guard. he has a ba in international studies from texas state university, a jd from the university of texas law school, a graduate certificate in intelligence studies from the bush school of texas a&m university, and a ph d in history from the university of texas. he is the author of the rise of houston as a global city, to be published by texas a&m university press in 2020. geoffrey s. connor was born in 1963. saskya bedoya – president, treasurer and director. ms. bedoya has a comprehensive background in account management, operational, regulatory and financial reporting areas. she brings nearly two decades of financial management experience, with responsibility for overseeing treasury, human resources and administrative functions, including more than 15 years at dallas – based jmj development. a special focus of bedoya’s work has been developing policies and procedures which improve performance and productivity. she has been employed exclusively within real estate development, construction, operation and asset management since completing her academic career at texas state university in san marcos. murugan venkat – secretary and director. dr. venkat brings his diverse global executive experience to financial and compliance aspects of corporate governance as well as to the integrity of its framework. venkat has a ph.d. in corporate finance from the university of madras, india and began his career as an associate professor teaching finance, accounting and auditing at imfr in chennai. before moving to the united states, he spent a decade as fa & cao in the construction industry, three years as the chief accountant in a sugar manufacturing company and three years as the controller in an airline. in the beginning of this century, he helped an american aviation company for setting up an airline by adding 10 boeing aircrafts one by one over a period of 3 years. then he was controller for ten years in a manufacturing company in south florida. besides his involvement in carnegie development, he is also teaching online at ctu. gabriel blanco, cpa – controller. gabriel blanco currently serves as a controller, supervising accounting matters such preparation of financials statement and sec filings. he has over 10 years of experience in public accounting and leading accounting departments. prior to joining carnegie development inc gabriel worked for several large public companies, including kpmg, in positions such as tax accountant, controller, and auditor. gabriel holds a bs and ma in accounting from florida international university. he is a certified public accountant and is a member of the american institute of certified public accountants. 24 table of contents section 16(a) beneficial ownership compliance. section 16(a) of the securities exchange act of 1934 requires our executive officers, directors and persons who own more than ten percent of our shares of common stock, to file initial reports of beneficial ownership on form 3, changes in beneficial ownership on form 4 and an annual statement of beneficial ownership on form 5, with the sec. such executive officers, directors and greater than ten percent shareholders are required by sec rules to furnish us with copies of all such forms that they have filed. based solely on our review of the copies of such forms filed with the sec electronically, received by us and representations from certain reporting persons, for the fiscal year ended december 31, 2019, none of the officers, directors and more than 10% beneficial owners have filed form 5 with the sec. broadview holdings llc is the majority shareholder but does not involve in the day to day activities of the company and hence is a passive ownership. code of ethics we have adopted a code of ethics for our principal executive officers. director independence our determination of independence of directors is made using the definition of “independent director” contained in rule 4200(a)(15) of the marketplace rules of the nasdaq stock market (“nasdaq”), even though such definitions do not currently apply to us because we are not listed on nasdaq. we have determined that none of the members of our board of directors as of december 31, 2019 were “independent” within the meaning of such rules. item 11. executive compensation there was no executive compensation for the current year. item 12. certain relationships and related transactions during the accounting year 2019, $66,281 is owed for the related party transactions. item 13. principal accountant fees and services independent public accountants our independent accountants for the fiscal year ended december 31, 2019 and for the fiscal year ended december 31, 2018 was yusufali & associates llc. below is a summary of the fees billed to us by our independent accountants for professional services rendered for 2019 and 2018: fee category 2019 2018 audit fees 17,500 10,000 audit-related fees - tax fees - all other fees - total fees 17,500 10,000 25 table of contents item 14. exhibits. exhibit no. description 31.1 rule 13a-14(a)/15d-14(a) certifications 31.2 certification of principal financial officer pursuant to 18 u.s.c. 1350, as adopted pursuant to section 906 of the sarbanes-oxley act of 2002 32.1 certification of principal executive officer pursuant to 18 u.s.c. 1350, as adopted pursuant to section 906 of the sarbanes-oxley act of 2002 _________ filed herewith 26 table of contents signatures in accordance with section 13 or 15(d) of the exchange act, the registrant has caused this report to be signed on its behalf by the undersigned, there unto duly authorized. dated: 15th april, 2020 /s/ | 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.goodwill impairment assessment for the r2net reporting unit as discussed in note 18 to the consolidated financial statements, due to a sustained decline in the company’s market capitalization, the company determined a triggering event had occurred that required a goodwill impairment assessment. as of the date of the valuation, the company had a goodwill balance of $77.8 million for the r2net reporting unit.we identified the goodwill impairment assessment for the r2net reporting unit as a critical audit matter. a high degree of auditor judgment was required in assessing the estimation of 1) forecasted revenue, 2) forecasted gross merchandise margin growth rates, and 3) reporting unit specific discount rate risk premium assumptions used in the discounted cash flows to estimate the fair value of the r2net reporting unit. changes to these assumptions could substantially impact the amount of impairment charge. this increased the need for subjective auditor judgment in evaluating these assumptions underlying the estimate.the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s goodwill impairment process, which included internal controls over the development of these assumptions. we compared the company’s historical forecasted revenue and gross merchandise margin growth rates to actual results to assess the company’s ability to accurately forecast. we assessed the company’s assumptions related to forecasted revenues and forecasted gross merchandise margin growth rates by comparing them to historical operating results and external factors impacting the business. we involved valuation professionals with specialized skills and knowledge, who assisted in testing the reporting unit specific discount rate risk premium by performing a benchmarking analysis using publicly available data from peer companies. they also assisted in comparing the implied control premium from the company’s market capitalization reconciliation to a range of control premiums determined from publicly available data.evaluation of revenue recognition related to extended service plans as discussed in note 3 to the consolidated financial statements, revenue related to the extended service plans (esp) is recognized in proportion to when the expected costs will be incurred. to determine the amount of revenue to recognize, the company is required to estimate the deferral period and patterns of future claims costs.we identified the evaluation of revenue recognition related to extended service plans as a critical audit matter. subjective auditor judgment was required to evaluate the estimation of the deferral period and patterns of future claims costs used to recognize esp revenue because a change in these estimates could substantially impact revenues. this increased the need for subjective auditor judgment in evaluating the aging of claims by year of contract sale, including estimates of future claims.the primary procedures we performed to address this critical audit matter included the following. we tested certain internal controls over the company’s revenue recognition process, including controls related to the development of the assumptions mentioned above used to estimate the deferral period and patterns of future claims costs. we evaluated the historical claim trends used by the company in estimating the future claims costs on a sample basis by selecting claims and tracing them back to the original proof of sale. we tested the company’s assumption related to the deferral period in which the claims are expected to be incurred by comparing it to the current aging of claim costs incurred by year of contract sale, including estimated future claims. we tested the company’s assumption that historical claim trends are representative of future claims costs by comparing the pattern of claims incurred from recent claims history to the pattern currently in use. we recalculated the company’s determination of esp revenue recognized./s/ kpmg llp we have served as the company’s auditor since 2011. | 2 |
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