b'Strategic report Governance Financial statementsKey observations Based on these procedures, we found the judgements and assumptions used to be materially appropriate. We note that the valuation methodology applied by management includes a level of prudence in determining the fair value of investment; however we concluded that the overall carrying value of investments in the financial statements is appropriate.5.2 Acquisition of VCT fund management contracts Key audit matter description This is a new key audit matter for 2020 following the acquisition of three VCT fund management contracts by the Group in December 2019, which management have concluded meet the definition of a business under IFRS 3 and have accounted for this as a business combination. Judgement was required to determine the valuation of the intangible assets recognised as part of the business combination, as well as to determine the fair value of contingent deferred consideration related to the acquisition. The three VCT contracts were acquired for an initial cash payment of 12.4million, an initial issue of shares to the value of 4.2million and deferred contingent cash and share payments for which the fair value at the acquisition date has been estimated at 6.2million. A contract intangible asset of 20.3million, a deferred tax liability of 3.9million and 6.3million of goodwill have been recognised on the Group balance sheet. We have included the key audit matter due to the quantum of the balance, its highly judgemental nature, and the fact that it had an impact on our overall audit strategy. Refer to notes 2, 13 and 23 for the Group accounting policy, managements consideration of critical accounting judgements, business combination and deferred consideration notes respectively.How the scope of our auditOur procedures involved:responded to the key auditobtaining an understanding of the key controls over acquisition accounting;matter obtaining the underlying cash flow forecasts used to determine the value of the intangible asset, discussing them with management, and challenging the reasonableness and consistency of the underlying forecasts by comparing to historical results and the impact of changes to the value of funds under management in relation to these contracts;agreeing the value of consideration payable to contractual agreements and to bank statements; assessing the assumptions used to determine the fair value of the contingent deferred consideration; andreviewing the associated disclosures to assess whether they are in accordance with IFRS 3.Key observations We concur that the acquisition has been appropriately accounted for under IFRS 3 and that the assumptions and methodology used in valuing the identified intangible assets are reasonable. 6. Our application of materiality6.1 MaterialityWe define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:Group financial statements Parent Company financial statementsMateriality 2.7million (2019: 2.3million) 1.6million (2019: 1.3million)Basis for2.5% (2019: 2.4%) of the Groups net assets less cash Materiality for the parent Company was capped at 60% of determiningand cash equivalents and short-term liquidity investments. Group materiality on the basis of the relative size of this materiality component to the Group as a whole. This represents 1.3% (2019: 1.3%) of parent Company net assets less cash and cash equivalents and short-term liquidity investments.Rationale for theWe determined net assets less cash and cash equivalents and short-term liquidity investments to be the most appropriate benchmarkbenchmark in determining materiality as this represents the most appropriate measure to assess the performance of the Group applied and the parent Company and which may directly influence decisions made by third-party investors. Net assets includes amounts of cash and short-term liquidity investments, which are significant in value. We do not deem these balances to be direct indicators of the Groups and parent Companys performance and growth. As such, we have determined it appropriate to adjust net assets by removing cash and short-term liquidity investments and use the resulting value as a basis of our materiality determination.Mercia Asset Management PLC 71Annual Report and Accounts 2020'