b'Mercia Asset Management PLC77Annual Report and Accounts 2021Key audit matter How the scope of our audit addressed the key audit matterValuation of goodwill anddetailsintangible assets We have reviewed Managements impairment assessment ofgoodwill and intangible assets in (note 1 , 15 and 16 to theaccordance with the requirements of the applicable accounting standards. We have considered the financial statements) key assumptions and judgements used in Managements qualitative assessment and whether these The Group is required bywere appropriate and reasonable. These include, but not limited to, profitability of each CGU since applicable accounting standardsinception, underlying management contracts and the investment track records. We corroborated to undertake an annualeach assumption to financial performance of each CGU and those of the underlying funds. impairment review of all assets including goodwill.For amounts recognised as goodwill, we have performed sensitivity analysis (annual cash burn, revenue growth sensitivities) to identify whether there is a suitable amount of headroom before This assessment has beenthe goodwill shows signs of potential impairment. In addition, we have assessed current year included as a key audit matter dueperformance indicators against budgets i.e. profitability, revenue growth and other indicators to the significance of the goodwillsuch as cash on hand, net asset value to ascertain whether there were any signs of impairment.and intangible assets balance at year-end and the level ofFor the intangible asset, we have obtained Managements calculation (discounted cash flow) management judgement inherentused to determine the fair value of the VCT Management Contracts at acquisition. We have in the impairment assessment. assessed the appropriateness of managements assumptions used in the determination of theStrategic report Governancediscount rate through benchmarking with similar comparable transactions. In assessing managements review of impairment indicators, we have performed a qualitative assessment of the performance of the VCTs over the last year based on the divisions year to date results, inquiries with Management and inspection of Board Meeting Minutes. We have further assessed the forecasted cash flows used within the discounted cash flow against the actual and budgeted performance of the VCTs.Key observations Financial statementsBased on the work performed we did not identify any matters to suggest that managements impairment indicator assessment or carrying value of goodwill and intangible assets is inappropriate. Our application of materialityWe apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality level, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole and performance materiality as follows:group financial statements Parent company financial statements2021 2021Materiality 4,300,000 3,800,000Basis for determining materiality 2.5% of net assets 2.5% of net assetsrationale for the benchmark applied In setting materiality, we have focused on the needs of the users of the financial statements and their interests which are likely to be more in the statement of financial position as the purpose of the Group is long-term shareholder value. Therefore net assets was considered to be the most appropriate benchmark as this is the ultimate value of the Group that shareholders would receive.Performance materiality 3,000,000 2,600,000Basis for determining performance70% of materialitymaterialityThe level of performance materiality applied was set after having considered a number of factorsincluding the level of transactions in the year and the fact that this is a first year audit.'